Will OPEC make headways in respect to oil output cuts?

As the world market on oil and Gas industries looks forward to the meeting of the organisation of the Petroleum exporting countries in Vienna Austria end of this month a lot is expected as the outcome of the meeting will shape the global oil and gas industry.

Let’s look at the most probable outcome, according to information gathered by Ahmad Ghaddar of Reuters , Iraq would have to compensate international oil companies for limits placed on their production, according to industry sources and documents seen by Reuters, further reducing the prospect it will join any OPEC deal to curb the group’s output.

The compensation – stipulated in contracts – would compound the financial hit of losing much-needed revenue from crude sales, if the cash-strapped country were to yield to OPEC entreaties to curtail national production.

OPEC member Iraq pays developers a fixed dollar-denominated fee for every barrel of oil produced in the south of the country – home to its biggest reserves – under technical service contracts agreed between the international firms and the state-owned South Oil Company (SOC).

“Immediately after (an) SOC notice of … production curtailment, the parties shall agree … a mechanism to promptly fully compensate (the) contractor as soon as possible,” according to an excerpt of the contract the ministry signed with BP in 2009 for the company to develop the 20-billion-barrel Rumaila field.

The compensation, “may include, amongst other things, a revised field production schedule or an extension to the term or payment of all or part lost income to contractor”. A senior oil official with SOC told Reuters the country would not have to worry about curtailment clauses because it had no plans to limit production.

“On the contrary, we’re encouraging the foreign companies to raise production as much as they can,”. Iraq has asked to be exempted from output curbs, arguing it is still trying to regain market share lost when sanctions were imposed in the 1990s during the Saddam Hussein era, and that it needs to keep up a costly battle against Islamic State.

So where does this place the Iraq on the global arena and the OPEC involvement, There is little logic to this in the short-term. While they could make less than they would if all the other members made a cut and they did not, their revenue would certainly be higher than today if they participated. The percentage increase in oil prices would be greater than their percentage drop in production. This should be true even if we factor in some higher per barrel costs due to Iraq’s production contract structure.