11 December 2019
by Dr. Stephen R. Bowers
Director, West East Open Roads
In 2018, the Romanian Parliament initiated policies to enhance the development of national energy resources. Those policies are likely to address matters such as technical provisions for offshore oil exploration including permits, allocation of royalties and relevant taxes. By working with Bulgaria, Hungary, and Austria in development of the BRUA natural gas pipeline in order to create a new Black Sea export route, there is a realistic expectation that Romania will become one of world’s few energy independent countries.
On 6 December 2019, at the conclusion of the meeting of the 14 member OPEC cartel and its allies, known as OPEC +, OPEC officials announced that in the first quarter of 2020 there would be an oil production cut of 500,000 barrels a day. Combined with previous announced cuts, this would mean a total reduction of 1.7 million barrels a day. (www.cnbc.com/2019/12/06/oil-moves-lower-as-traders-await-details-of-the-final-opec-decision.html) The OPEC objective, of course, is to maintain high oil prices during a time when U.S. production has increased.
While the announcement had a dramatic impact, some qualifications undermine the drama of the event. First, details about the allocation of the cuts have yet to be determined. A second qualification relates to compliance. Russia, Iraq, and Nigeria have shown little inclination to support such moves and continue to overproduce, thus raising serious issues about imposition of penalties. Finally, there is uncertainty about how long the productions cuts might remain in effect. With this as an unknown, it is difficult to determine what the long term impact might be. Moreover, in view of the global abundance of petroleum as well as the frequent cheating on whatever agreements may be in place, many analysts are not convinced prices will increase significantly. (www.nytimes.com/2019/12/05/business/opec-oil-production-cuts.html) Consequently, the impact on Romania’s energy sector is unclear although some in the Romanian industry still anticipate lower prices in 2020.
While OPEC meetings normally take place every six months, OPEC announced that their next meeting would be on 5 & 6 March, much sooner than is usually the case. This early date suggests a possibility that the cuts are short term and less likely to change the global market in any meaningful way.
While the long term impact cannot be known, the short term impact was an increase in the price of petroleum with speculation about whether the cost per barrel would stabilize well above $60. U.S. West Texas Intermediate crude futures immediately rose by 1.3% and posted a 7% gain for the week. (www.cnbc.com/2019/12/06/oil-moves-lower-as-traders-await-details-of-the-final-opec-decision.html)
Getting past the headlines, an examination of OPEC’s situation indicates that there is less than unanimity regarding production cuts. Just before the OPEC+ meeting, Qatar, a relatively small oil producer, announced that it was leaving OPEC. Its most important energy product is liquefied natural gas rather than crude oil. While Quatar’s move is mostly a product of its disagreements with Saudi Arabia, it does signify an OPEC weakening and raises the prospect that other members might follow this path. (www.pri.org/stories/2018-12-03/qatar-leaving-opec-other-countries-could-follow)
More significant are the divergent interests of Saudi Arabia and Russia. Russia wants production quotas to remain the same and has been to advocating the elimination of gas condensates as a determinant of production quotas. By excluding gas condensates from its oil quota, Russia can claim to be following the new standards while actually increasing its gas production and utilizing it new fields in Eastern Siberia and the Arctic. This is an attractive option in both economic and political terms even though it undermines the overall Saudi objectives.
Saudi interest in higher crude oil prices is clearly a reflection of a major supplier’s routine desire for greater profit. More importantly Aramco is preparing to announce the final price for its initial public offering and that valuation will be helped by an increase in the price of crude oil. (www.investors.com/news/opec-meeting-dec-2019-production-deal-crude-oil-prices/)
A final factor weakening OPEC”s position is the dramatic increase in shale production in the United States, something which has helped make the U.S. a net exporter of oil products. Thus, while crude inventories are rising shale production is at an all-time high creating a serious dilemma for the Saudis. An increase in the price of crude oil, rather than helping the OPEC members will actually hurt them as buyers turn to shale producers who will be able to increase their output. This is a long term challenge that will overshadow OPEC initiatives well into the future.
As a result, it is difficult to envision the sort of price increases that might affect Romania’s energy industry. While they would certainly benefit by increased revenue from the sale of their products, they do not require such increases in order to consolidate their position as an energy independent country. Higher OPEC prices would benefit US production and perhaps Romanian production as well. More importantly, as major petroleum states like Saudi Arabia, Russia, and Iraq fight among themselves, the Romanians are free to pursue the policies that are doing so much to ensure they maintain their strong position.
