Market Watch EOG 1

The Unlikelihood of an Oil Freeze Plan
Author: Salma Essam
Editor: Nataša Kubíková
Issue 1 - November, 2016
EOG MARKET WATCH
/EgyptOilandGas /EgyptOilandGas /EgyptOilandGas/Egypt-Oil-&-Gas
www.egyptoil-gas.com

Fluctuation in global crude prices has always been in the focus
of economic and financial news. Introducing the idea of cap-
ping oil production, as OPEC recently agreed upon in Algeria in
September, emerged from the need to lift oil prices. The Algiers
meeting gave industry leaders some hope as it signaled a slight
shift in Saudi’s previously intransigent strategy to pump crude
oil flat out to maintain the country’s lion’s market share. Howev-
er, some indications throw to the fact that OPEC members may
revert to take this decision and that the oil freeze plan will be
unlikely to take effect before the end of 2016.
• INTRODUCTION
• CONTEXTUAL ANALYSIS
• FACTORS IN THE GAME
A. Market Share
B. International Oil Supply
C. International Oil Demand
• OIL FREEZE PLAN NARRATED
• CONCLUSION
CONTENT
SUMMARY

THE UNLIKELIHOOD OF AN OIL FREEZE PLAN
EOG MARKET WATCH - ISSUE 1
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INTRODUCTION
As the oil industry has witnessed significant fluctuation and
unprecedented fall in oil prices, OPEC members have been
involved in discussions to curb oil production in an attempt
to rebalance the market. They have recently agreed upon a
preliminary plan to cap oil output, a plan that was concluded
at the International Energy Forum held in Algeria in Septem-
ber 2016.
The analysis at hand puts forward the motives of oil produc-
ing countries hampering a deal and the market conditions
that makes the plan less realistic to come about in a foresee-
able future. Global oil market share, oil demand and supply
calculus, and oil prices are key variables to consider, which
up until now indicate that the unlikelihood of an oil freeze
plan is growing.
Currently, there are growing indications that OPEC will not
be able to succeed in the projected oil freeze deal. One of
possible indications is the inconsistency in what has been
concluded at the September meeting in Algiers and several
other OPEC debates prior to that, and what came out of fol-
low-up informal talks between OPEC and non-OPEC coun-
tries held in Istanbul in October.
Furthermore, the reluctance of some countries to actively
contribute to the oil freeze plan poses another conundrum.
Several OPEC members such as Iraq and Iran clearly stated
they were not to participate in these negotiations. Riyadh’s
position has also turned into a headache.
In addition, although OPEC members agreed on the need
to limit oil production, the amount of oil that each country
will be allowed to produce has not been decided, nor even
suggested. This remains on the agenda for the next formal
OPEC meeting to be held in Vienna, which is scheduled on
30th November, 2016.
Given the past failures to reach similar arrangements, little
can be expected to happen before the year break. Just like
the May preliminary freeze plan agreement was discarded,
the initial road-map-setting accord from Algiers appears to
eventually get torn to pieces.
A binding agreement over curbing oil output, as many may
wish for, is thus unlikely to become a reality by the end of
2016. Yet, a possible success story in this matter in 2017 will
still depend on a series of cardinal factors; one of them is the
outcome of the Vienna meeting.
3

CONTEXTUAL ANALYSIS
In September 2016, OPEC members discussed the propo-
sition of curbing global oil production after four hours of talks
at a meeting held in Algeria. Despite that the oil freeze plan
suggested last April was not agreed upon, OPEC committed
itself to reducing output to between 32.5mb/d and 33mb/d, in
the recent negotiations. This has prompted prices to go up in
the first week of October. Brent crude jumped $2.84 a barrel
to $48.85, an increase that pointed to a coordinated action to
bolster oil prices since the oil crisis has begun in mid-2014.
Hence, the meeting gave hope to the industry leaders that
a curb in production could boost oil prices. It also signaled
another change in Saudi’s strategy to pump crude oil flat out
to maintain the country’s lion’s market share.
Meanwhile, OPEC members have reached out to non-OPEC
countries to cooperate in putting Algeria’s accord in action.
In early October 2016, OPEC and non-OPEC members held
talks on limiting production in the Turkish city of Istanbul. On
its side, Russia pledged that it will comply with an awaited
OPEC deal.
Yet, neither the talk in Algeria nor that in Istanbul had set
straight any concrete details of the accord that is expected
to be binding for all members participating in the agreement.
For example, it did not set the output quotas of each country,
which makes the agreement likely to fail had the output lim-
its been inconvenient for some. Energy Analyst and Pulitzer
Prize-winning author, Dan Yergin, told CNBC’s Squawk Box
program: “OPEC’s track record on adhering to production
cuts to quotas is ridiculously poor … if not nonexistent. You
can’t believe they’re going to come through on this one ei-
ther.”
Moreover, the talks held at both meetings have not been
sealed via any official document. Even more so, a negative
track record of abiding by previous agreements concluded
between OPEC and non-OPEC players strongly suggests
that any future ones will also remain unfulfilled over each
country’s national interest. Former OPEC Head of Research,
Hassan Qabazard, said in a phone interview with Bloomb-
erg following the talks in Istanbul: “I was in Oran, Algeria in
2008 when Russia pledged a cut of 400,000 barrels a day
and Azerbaijan pledged 150,000, but they didn’t deliver their
promises.”
In all cases, even if the circle is broken and OPEC does
come with any arrangements, the current state of affairs
raises concerns over if and how a solid agreement can be
implemented. According to Bloomberg, Strategists at Mor-
gan Stanley, led by Adam Longson, said that “this is not the
only OPEC agreement to limit production in this downturn,
and thus skepticism on finalization is warranted. Even with
an agreement at the November 30th meeting, actual reduc-
tions in OPEC production probably won’t be fully in place
until sometime in 2017.”
The motives of some OPEC countries to avoid freezing
crude output hamper future agreements and the current
market conditions and forecast seem to provide them with
sufficient rationale and justification to do so.
Goldman Sachs forecast that Brent crude oil prices will av-
erage $39 per barrel in 2016 and $60 per barrel in 2017. It
further estimates that WTI’s crude oil price will average $38
per barrel in 2016 and $58 per barrel in 2017.
In Q2 of 2016, almost two years since oil prices tumbled,
OPEC members considered the decline as temporary. They
expected a rise in crude oil demand, which would help to
re-balance crude prices, already in Q3 and Q4 of 2016. On
August 8th, OPEC stated in a meeting: “This expectation of
higher crude oil demand in third and fourth quarters of 2016,
coupled with decrease in availability is leading the analysts
to conclude that the current bear market is only temporary
and oil prices would increase during the later part of 2016.”
As this has not yet come into effect and there is no tangible
outcome of month-long negotiations among industry giants,
positive economic outlook for petroleum exporters – both
OPEC and non-OPEC - remains at stake and will necessar-
ily frame future development.
4

FACTORS IN THE GAME A. MARKET SHARE
OPEC members produce about 40% of the world’s crude
oil, while oil exports of the 14-nation cartel represent about
60% of the total petroleum traded internationally. OPEC has
a massive oil market share, yet a battle continues among
the organization’s countries who are eager to gain or sustain
their existing shares within OPEC, on one side, and global-
ly, on the other. Struggle for market share, no doubt, repre-
sents the top reason why dominant oil producers like Sau-
di Arabia, Iran, Iraq, Algeria, and Nigeria may refrain from
agreeing on a production freeze plan.
Furthermore, non-member oil producing countries are ex-
pected to be wary of agreeing on any such deal as well if it
does not reflect on the OPEC vs. non-OPEC market dispo-
sition globally. In attempts to sustain their part in the interna-
tional oil game, non-OPEC oil producers have played an ac-
tive role in the global freeze plan negotiations; nevertheless,
their concerns over revenue losses, which are implied in the
deal, are likely to prevail and prevent them from agreeing on
a potential agreement.
In 2015, the oil industry had closed up in turmoil, wrote The
Wall Street Journal in an analysis published in December
2015. The price of oil hovered in the mid-$30 per barrel.
More significantly, supplies swamped the market. Yet, OPEC
and non-OPEC oil producers achieved little if any progress
on how to tackle the emerging dynamics. The current year,
2016, is no different. Top oil producing countries have been
continuously railing towards market share, striving to main-
tain and in some cases further boost their production capac-
ity regardless of the trade balance.
Market share has remained the most important metrics
through which a country can gauge the efficiency of its oil
production; including export levels, scale of foreign invest-
ments, and other revenue generating capacities. This vari-
able has pre-defined policy moves by both OPEC and non-
OPEC countries.
Geopolitical rivalries have played a decisive role in setting
oil policy agenda of involved states and thus shaping the
market conditions. Rivalries have remained critical for future
prospects.
SAUDI-IRANIAN COMPETITION
World’s largest crude oil exporter, Saudi Arabia, has been
boosting its production beyond previously established lev-
els for years in an attempt to maintain a huge market share
within OPEC countries. The Saudis focused primarily on
crushing the shale industry of the United States since the
American production increased by 4 million b/d from 2009
to 2014, whereas Riyadh’s production increased only 1.64
million b/d in the given period.
More recently, the kingdom has started to shift attention
away from the US, as another player jumped into the game,
namely The Islamic Republic of Iran. To date, Saudi Arabia
and Iran have sparked an unprecedented competition in the
oil market after the latter has been freed from the long-im-
posed international sanctions. Riyadh perceives Iran as a ri-
val that is trying to become a new regional power. Saudis’ oil
foreign policy thus appears to be reflecting upon the newly
defined geopolitical ambitions of Iran. Hence, a Saudi-Ira-
nian ‘struggle for hegemony over the region and beyond’
bears some explanation about their competition for oil mar-
ket share.
As it has been made clear during OPEC negotiations, the
Saudis may not be ready to halt their crude oil production for
many reasons, but Tehran is undoubtedly a crucial one. It is
highly unlikely that Riyadh will easily let go of its predomi-
nant position within OPEC and globally, least of all to grant
space to this particular assertive actor in the Persian Gulf
region and allow it to expand.
On the other hand, Tehran has been recently the only player
capable of significantly boosting its oil production at a fast
pace. Iran has recorded the crude production levels rising
from 3,611 thousand b/d in 2013 to 3,920 thousand b/d in
2015, according to BP Statistical Review of World Energy
2016 (Graph 1). Meanwhile, Saudi Arabia produced 11,393
thousand b/d in 2013 with a slight increase to 12,014 thou-
2014 2013 2015
Graph 1:
CRUDE OIL PRODUCTION IN IRAN AND SAUDI ARABIA
(2013-2015)
Data: BP Statistical Review of World Energy 2016
Graph: Egypt Oil&Gas
5

sand b/d in 2015. Even though the crude output level of the
Saudi kingdom is double what Iran produces at present, the
Iranian production trajectory is clearly having a fast upward
tendency.
Both Iran and Saudi Arabia are eager to keep pumping at
full tilt. On his side, Saudi Oil Minister, Khalid El Falih, has
stated that the kingdom is not going to shock the market
with a sudden cut in its production. Equally resolute was the
statement by Iran’s Oil Minister, Bijan Zanganeh, that the
country will not agree to limit oil production as the discussion
over an oil freeze plan were brought in at the Doha sum-
mit in May 2016. Zanganeh stressed that such a plan would
be a “self-sanctioning” one for Iran. It is difficult to imagine
how the two countries would be able to strike such a deal
smoothly.
The rhetoric of the Iranian officials, nonetheless, slight-
ly toned down in September 2016, when Iran’s Deputy Oil
Minister, Amir Zamaninia, said that the country will support
any measures to revive prices, yet it will strive “to preserve
its national interests.” Furthermore, in an interview with The
Washington Post earlier in September 2016, Director for In-
ternational Affairs at state-run National Iranian Oil Co, Mo-
hsen Ghamsari, clarified that “the country will be ready to
decide on capping production once output reaches the level
it was before international sanctions were imposed on the
country.” Iran’s National Oil Company had stressed that it
was too early for the country to discuss freezing crude out-
put in Algiers. The upcoming official OPEC meeting in Vien-
na will hardly present a sufficient time and space for Iran to
markedly alter its position.
Saudi-Iranian market share rivalry is not limited to the two
oil players. In fact, it strongly showcases a global dilemma
as other OPEC and non-OPEC countries have also adopted
the same market-share rationale diminishing prospects for
attempts to curb production and thus re-balance oil prices.
The predicament is voiced even stronger by OPEC oil de-
pendent economies.
OPEC OIL DEPENDENT ECONOMIES
OPEC-members whose economies depend on oil produc-
tion have necessarily cited the market share rationale as
well, stressing the necessity to accommodate their position
in the global industry. Among them are other three MENA
countries - Iraq, Libya, Algeria - and Nigeria, which has re-
cently lost its position as the prime crude producer in Af-
rica. Iraq and Libya have been engaged in internal fights
with ISIS militants that had had a gigantic damaging effect
on their oil producing capacities. Nigeria, on its side, has
witnessed militant attacks from the Niger Delta Avengers
group. Algeria has been seeking to contain its deteriorating
economy through new investments that seem to have failed
to occur as originally envisioned. Each of the four countries
is thus taking steps to lift its oil industry upwards and main-
tain a position among other OPEC members.
Iraq
Iraq, whose economy depends on oil sales for 95% of its
public spending, rejects to take part in negotiations over the
current oil freeze proposal. In late August, Iraqi’s Prime Min-
ister, Haidar Al-Abadi, affirmed that the government will not
restrain its crude output as part of any OPEC agreement
to lift oil prices. The reason is that the country, despite its
increasing crude and petroleum products exports, has not
yet reached its full oil market share. Al-Abadi stated: “We
are not open to that because Iraq is still below what it should
produce.” Iraq is, therefore, set to continue boosting produc-
tion, which currently stands at around 4.6 million b/d.
Furthermore, ongoing disruption in oil production, that the
country has suffered from due to ISIS militant attacks, has
strengthened Baghdad’s willpower to compensate for in-
curred losses without the consent of others. Even reaching a
progress on the national level came to become difficult. De-
cision-making processes that are critical for the country to be
able to formulate its oil policies have been hampered. Most
recently in March 2016 when a dispute between Al-Abadi’s
government and the authorities in the autonomous Kurdish
region over control of oil resources stopped Iraq’s oil flow.
The government of Baghdad has meanwhile resumed par-
tial pumping from fields in Kirkuk operated by state-run
North Oil Company (NOC) and the oil is to be shipped to
Turkey via a Kurdish pipeline, as the Iraqi Oil Ministry stated.
But the incident indicates that Iraq’s willing participation in
an OPEC agreement on curbing oil production may stumble
over internal political disputes.
Algeria
Nor Algeria is to be expected to shock its oil-dependent
economy with a cut in crude production. The country’s gov-
ernment has been determined to boost oil output in an at-
tempt to rebalance its deteriorating economy, given that it is
dependent mainly on revenues gained from oil and gas re-
sources. As a result of the economic stagnation and a deep
slide in oil prices, the North African country has thus been
exerting efforts to compensate for recent losses in oil reve-
nues and to preserve its market share.
Indicatively, Algerian Energy Minister, Nouredine Bouterfa,
6

has declared that the country’s number one priority is to
boost oil production 30% by 2020. In line with that, Algeria
has been seeking to attract fresh foreign investments.
In late May 2016, Algeria’s Sonatrach announced that it will
shift its strategy to offer foreign firms direct negotiations to
buy stakes in 20 oil and gas fields. Algeria’s parliament ap-
proved a new investment law in mid-July 2016, stipulating
tax cuts and reducing bureaucracy. Furthermore, the new
law states that all imported goods and services intended for
investment projects will be exempted from customs duties
and value-added tax. But these attractive propositions did
not lead to significant inflow of foreign capital. In fact, as it
appears, the law failed to address one of the main obstacles
cited by would-be foreign investors: a rule requiring local
partners to hold a majority stake in new investment projects.
This may be one of the reasons why Algeria’s prospect for
bringing in new capital has not generated any tangible oil
deals.
Hence, giant state-owned Algerian company, Sonatrach,
was forced to opt for domestic solutions. It started using
technology to maximize oil output at major oil fields. Located
southeast of the capital city of Algiers, Sonatrach boosted
production at Hassi Massoud oil field where production rose
from 420,000 b/d to 470,000 b/d of oil in mid-July 2016. In-
crease in production at Ourhoud oil field hit 125,000 b/d up
from 100,000 b/d.
Algeria thus remains imprisoned in its economic dilemma
with harshly felt absence of foreign capital. This would most
likely not allow the Algerian government to restrain itself by
any freeze plan propositions designed by OPEC. All what
Algeria is willing to offer at this stage is the country’s com-
mitment to merely “stabilize the market,” as Algerian Ener-
gy Minister revealed in a Bloomberg interview prior to the
Algiers meeting. If this approach will be sufficient for other
OPEC parties to accept and incorporate into a new plan is
rather doubtful.
Libya
Libya represents a similar case. Libya’s state officials an-
nounced in mid-September 2016 that the North African
country will not curb its oil production regardless of an OPEC
deal. A country that depends on oil for 95% of its national
revenues and is currently intensively dealing with post-civil
war state building could have adopted only a singular strat-
egy; to boost crude output and secure national income from
crude exports.
Libyan officials have thus embarked upon a plan to increase
oil output by up to 1 million b/d by the end of 2016 and grad-
ually hit the previous levels of 1.6 million b/d of the Gaddafi
era. Chairman of the Libyan National Oil Company (NOC),
Mostafa Sanallah, said that the production in the first nine
month of 2016 increased to about 390,000 b/d, up from less
than 290,000 b/d before oil ports conflict between eastern
and western governments had been resolved.
Before the Algiers meeting, Libya’s Envoy to OPEC, Mo-
hamed Oun, announced the country’s opposition to the
freeze plan. According to Wall Street Journal, Oun reiterat-
ed in an interview: “Definitely, we will not agree to a freeze
without reaching our quota from before.” In this sense, Libya
becomes one of the few countries that is explicitly outspo-
ken about its opposition to the freeze plan with a focus on
regaining its market share.
There are, however, further obstacles that hinder Libya’s ca-
pacity to produce more oil, including the sporadic fighting
among its militias in the country’s eastern territories that do
not back the presence of an UN-backed unity government
that rules from the capital Tripoli. In addition, the continual
attacks from ISIS militants on the oil ports have caused pro-
duction to decline. The damage incurred on the country’s
pipelines, as well, looms a disruptive production of oil for the
foreseeable future. Libya thus seems to be making one step
forward and two steps back. Agreeing to a freeze in produc-
tion is, therefore, clearly not an option for Libya’s oil agenda.
Nigeria
OPEC member and one of Africa’s top oil exporters, Nigeria,
is also an oil-dependent country that has been struggling to
contain its oil crisis over oil price drop and continual attacks
on its pipelines by militant groups. The country’s oil output
had fallen to 1.56 million b/d as persistent attacks from the
Niger Delta Avengers took out some 700,000 b/d, according
to government’s official statistics.
According to the month-on-month analysis, since January
2016 crude oil output started falling from the level of 66.49
million barrels, which translated to an average of 2.22 million
b/d. In May 2016, the drop in production came as low as
52.34 million barrels, translating to a daily average of 1.74
million barrels. Nigerian-based newspaper, Vanguard, pub-
lished an analysis Nigerian Oil Production to Remain Down
through 2017, which showed the steady decline in the coun-
try’s crude oil output with a negative projection for 2017. The
Energy International Agency (EIA) data also confirmed that
Nigerian oil production would remain depressed throughout
the next year.
Declining oil prospect for the country comes in light of mul-
tiple militant attacks in the strenuous oil price environment.
Four streams of Nigeria’s oil, including the country’s largest,
Qua Iboe, along with Bonny Light, Brass River, and Forca-
dos are currently under force majeure. In the view of the
country’s oil conundrum, Nigerian Oil Minister, Emmanuel
Ibe Kachikwu, cast doubt on any plans by OPEC members
to reduce output. In a speech in Lagos in mid-August he
7

stated it clearly: “I don’t see that happening.”
Hence, Nigeria is unlikely to abide by a possible freeze plan,
given that the country’s current production rates are below
desired and its crude exports is seeing a decline as well. Ac-
cording to OPEC’s Annual Statistics Bulletin 2016 (Table 1),
Nigeria’s crude oil and petroleum products exports reached
2,400 thousand b/d in 2011. The number has been declining
further since. Following the oil price drop in mid-2014, Nige-
ria’s crude exports recorded another drop to 2,132 thousand
b/d in 2015 and there are no convincing signs that the coun-
try would be able to recover from it to be ready to accept oil
freeze plan scheduled in November.
Although Algeria, Iraq, Libya, and Nigeria have witnessed
economic stagnation due to the sluggish oil industry, each
country is striding to lift its economy upwards. Oil industry
has always been a major source of revenue for these coun-
tries, especially in times of price downfalls, economic break-
downs, and political conflicts. Curbing oil output, therefore,
does not seem as a plausible option for Iraq, Algeria, Libya,
and Nigeria.
REGIONAL CRUDE EXPORT RIVALRY
Crude export levels, that countries such as Iran, Iraq, even
Saudi Arabia have been ferociously trying to expand on
most recently, are another indicator that lengthy negotia-
tions about production level caps are unlikely to bring tangi-
ble results already in Vienna. In the regional dynamics, rival-
ry between Iran and Iraq over new consumers and a pricing
war between Saudi Arabia and Iran over new oil shipments
to Asian markets may pose another difficulty to the plan.
As the mentioned countries are boosting their oil output,
their export levels do not seem to have come on the right
track yet or simply, as the case of Riyadh shows, have not
reached desired volumes. This necessarily implies that there
is nothing that could stop these players from adhering to any
crude capping agreement.
According to OPEC’s Annual Statistics Bulletin 2016, the
exports levels of crude oil and petroleum products in Iran
(Table 1) dropped in 2015 to half of what its regional rival
Iraq has exported last year. In 2011, Iran’s exports of crude
oil and petroleum products stood at 2,978 thousand b/d,
slumping to almost 2,560 thousand b/d in 2012. These lev-
els witnessed further decline due to international sanctions
imposed on the country and in 2014, Iranian crude export hit
lower than 1,580 thousand b/d. Following the lifting of sanc-
tions, Iran’s export levels started surging again, yet record-
ing merely a slight increase to above 1,590 thousand b/d
this year. Therefore, from Iran’s national economic perspec-
tive, crude export competition seeks stronger production for
the country to be able to reopen its business with former
customers and reach out to new markets. In early Novem-
ber, Iran’s Oil Minister, Bijan Zanganeh, has announced that
the country’s crude oil exports to international markets have
started rebalancing by reaching as high as 2.56mb/d in Oc-
tober, marking a new record worth more than $80m in direct
payments every day. Yet, another decline in exports of 7.5%
is set occur as the seasonal demand of crude is low in Eu-
rope, and Tehran has so far not yet regained its intended
market share on the Asian continent, with exports not ex-
ceeding 1.93mb/d, as estimates for November show.
On the other hand, Iraq’s crude oil and petroleum products
exports have been steadily increasing (Table 1), despite the
country’s vulnerable economy and continual attacks from
ISIS militants, as OPEC’s 2016 Statistics shows. In 2011, the
country exported 2,166 thousand b/d of crude. This number
increased in 2012, reaching 2,425 thousand b/d to then see
a slight drop to 2,401 thousand b/d in 2013. Iraq’s export
levels stabilized again in 2014 and reached 2,524 thousand
b/d, followed by a thrust in 2015 reaching an overall amount
of 3,018 thousand b/d. Comparatively, the percentage
change in crude and petroleum products export rates from
2014 to 2015 in Iraq recorded a 19.6% boost whereas in Iran
stood at 1%. Even though the volumes of Iran’s exports are
likely to see an upward trajectory, the pace of this trend will
be a decisive factor for Tehran to become competitive with
its regional neighbors.
What we are currently witnessing is a silent Iran-Iraq rivalry
that will gear up the two countries’ exports and make their
submission to an OPEC freeze plan less probable. Bagh-
dad’s and Tehran’s calculations and the choice of their oil
policy have been necessarily pre-determined by their export
volumes and capacities that have been directed to acquire
largest possible share for them in new markets.
The significance of the choice of crude export tactics for
Table 1:
Exports of Crude Oil and Petroleum Products
Year Iran Iraq Nigeria
2011 2,978.6 2,166.8 2,400.6
2012 2,558.0 2,425.5 2,376.2
2013 1,609.4 2,401.9 2,216.1
2014 1,579.1 2,524.8 2,169.4
2015 1,595.5 3,018.6 2,1323.0
Data: OPEC Annual Statistics Bulletin 2016
Table: Egypt Oil&Gas
8

both Iraq and Iran further increased as Saudi Arabia came
to pursue the same plan; i.e. to reach out to new buyers.
The Saudi move to offer discounts for its crude shipments
to Asian markets has brought both Baghdad and Tehran on
alert. It has unleashed a tacit pricing war among the three
crude suppliers from the region and reinforced their produc-
tion-for-export strategy, which will unmistakably play a crit-
ical role in attempts to diminish oil production. Meanwhile,
Saudi Arabia has been reported to have raised pricing for
December sales of all oil grades to Asia in order to take ad-
vantage of a brief increase in demand for Middle Eastern
crude.
Furthermore, bringing other oil dependent countries into the
picture, OPEC leaders have understood that oil export tar-
gets will be strongly imprinted on future success or failure
of freeze plan negotiations in November. Therefore, several
countries were already preliminary exempted from partici-
pating in the freeze deal during the September talks in Alge-
ria. Oil producers that have been mentioned to be freed from
any binding production cap agreements until now are Iran,
Nigeria, and Libya, but this is so far still a fragile, unbinding
proposal for a compromise.
Nonetheless, it sheds some light on the Saudi foreign oil pol-
icy approach that is to play a critical role in OPEC negotia-
tions in November, just as Riyadh’s view on crude production
did back in 2014, when it set straight OPEC’s approach as a
whole. Saudi Arabia had most vocally, vehemently, and re-
currently rejected all mentioned cases of countries that may
be excluded from OPEC oil freeze plan’s obligations. As it is
less predictable that Saudi’s intransigence to a full-fledged
oil freeze plan would change, any compromising deal re-
mains at risk. In fact, OPEC members would be doomed
for yet another round of talks about nothing more than ‘how
to talk oil freeze in the future.’ Necessarily, any attempts to
tackle the crisis of lengthy low oil prices and any agreements
to balance out the global oil market may be easily sidelined
over implicated global market share struggle, regional ex-
port rivalries, and geopolitics of oil.
9

FACTORS IN THE GAME B. INTERNATIONAL OIL SUPPLY
Lack of interest in designing a road map for a freeze plan may
even come as a purposeful strategy in order to preserve organi-
zation’s position globally. The relation between OPEC oil supply
on one side and the volume of global crude glut on the other has
some important bearings for this explanation.
The world has been flooded with crude supply creating a global
oil glut prior to 2014 which squeezed the market and plummeted
oil prices. But since then global oil supply has been decreasing,
most significantly over the past year (Graph 2), from 97.37mb/d
in Q4 of 2015 to 96.61mb/d in Q1 of 2016. It reached the level
of 95.93mb/d in Q2 of 2016, according to International Energy
Agency’s Oil Market Report 2016.
This outcome came as a result of lower production rates in non-
OPEC countries compared to a year ago. As for OPEC, it has
also seen a drop in crude production surplus capacity (Graph 3),
yet, in comparison to other international actors, this decline was
proportionate to the organization’s global market share and rather
related to the identified growing global demand for oil and low oil
prices. The US Energy Information Administration chart indicates
a consistent reduction in OPEC oil glut since 2010 that saw a re-
cord level hitting 3.98mb/d and slurping to 1.3mb/d in 2016. Ris-
ing global demand for oil, as the report explains below, has thus
had a noticeable effect on the organization’s choice of strategy.
What OPEC giants see occurring is that the pressure to curb oil
production and global crude supply “may be easing.” In light of
this, to put it simply, a freeze plan could not be perceived as the
best of possible options that OPEC currently has at its disposal.
Provided that it is majorly interested in preserving its global role,
what, in fact, seems to be happening at present is that OPEC is
striving to opt for a time-buying strategy with some oil freeze di-
plomacy. In light of this, all inconsistencies across narratives that
were noted at diplomatic negotiations and a lack of clarity as to
what a freeze plan may entail in reality come hand in hand with
OPEC’s boosting oil production.
Respectively, OPEC’s oil output set another record high in Octo-
ber, as Nigerian and Libyan output partially recovered from dis-
ruptions, and Iraq boosted exports. According to shipping data
and information from industry sources cited by Reuters, supply
from OPEC has risen to 33.82mb/d in October, up from a revised
33.69mb/d in September. This is 820,000b/d above the top end of
a target output range that OPEC had agreed to adopt in Septem-
ber in order to limit supplies. Even more so it is in fact the highest
rate since 1997. However, production near 34mb/d would likely
prolong the supply surplus weighing on the market, and thus add
skepticism about OPEC’s ability to reach an agreement on a pro-
duction freeze. Much of the above suggests noticeably that little
may be achieved in Vienna.
Even if some proposition catches attention of all participants
in Vienna, analysts from Commerzbank AG and Citigroup Inc.
speaking to Bloomberg rightly warned that simply capping output
at current levels - rather than cutting production - would do little
to tackle the persisting surplus in global markets, provided that
most of the countries involved are already producing as much as
they can.
OPEC has a plethora of scenarios to adopt from freezing produc-
tion to capping output at January 2016 levels to setting production
quotas per country. These options, however, can complicate ne-
gotiations even more.
Graph 3:
OPEC Surplus Crude Oil Production Capacity
Data: International Energy Agency, Oil Market
Report, 2016
Source: Egypt Oil&Gas
10

FACTORS IN THE GAME C. INTERNATIONAL OIL DEMAND
Global demand for crude is another key variable which sig-
nifies the unlikelihood of an oil freeze plan as the slumping
crude prices seem to have led to a considerable increase
in oil demand globally. Analysts expect that this changing
dynamic will reinstall market balance, according to the Inter-
national Energy Agency’s (IEA) Oil Market Report published
in July 2016.
Graph 4 shows that international oil demand has seen a
steady increase from 2013 to 2016. The years 2013 and
2014 saw merely a slight rise in global demand averaging
around 91mb/d to 93mb/d. But following a global oil price
plunge in mid-2014, the pace of oil demand geared up reach-
ing the levels of around 94mb/d in 2015, and up to 95mb/d
in 2016. In Q3 and Q4 of 2016, the oil players have noticed
record levels of oil demand hitting as high as 97mb/d, as
preliminary statistics show. The decrease in oil prices has
evidently been a luring factor for the demand to surge.
Furthermore, the IEA’s report read that the global demand is
forecast to rise by a further 1.3 mb/d to 97.4 mb/d by 2017.
The majority of the projected upside in 2017 is attributed to
Asia, with India’s demand forecast to be the world’s most rap-
idly growing next year, rising by 0.28mb/d, closely followed
by China. Meanwhile, the demand
for OPEC crude is projected to grow
by 1.1 mb/d to an average of 33
mb/d next year, which is consider-
ably more than estimates of US oil
demand rise to 0.035mb/d in 2017,
up from the current 0.025mb/d.
Oil demand in some OPEC coun-
tries has demonstrated a slightly in-
creasing trend in the past two years
(Graph 5) with some variations, yet,
this change seems to be less relat-
ed to oil prices drop as such and
more to increasing consumption
rates, in particular in the MENA re-
gion.
Between 2014 and 2015, crude
demand in the OPEC top oil pro-
ducing country, Saudi Arabia, was
registered at a relatively low level of
4.9%, jumping from 3,163 thousand
b/d in 2014 to 3,318 thousand b/d in
2015. Qatar has recorded the larg-
est hike of 22% and the UAE had
seen second largest upsurge in de-
mand of 8.2%. Algeria ranked third
with a 7.5% hike. The demand of oil
in Kuwait and Iraq showed a slight
increase of 2.6% and 0.8%, respectively.
According to some analysts, the rise in crude demand in
MENA OPEC-members is tied to surging consumption over
the given period of time. Algeria saw an increase in con-
sumption reaching as high as 19.3m tons in 2015, Kuwait’s
oil consumption in 2014 stood at 22.7m tons and rose to
23.6m tons in 2015, and the UAE filed consumption hike
from 37.6m tons in 2014 to 40.0m tons in 2015.
On the other hand, Saudi’s consumption levels’ increase
from 160m tons in 2014 to 168m tons in 2015 does not nec-
essarily correspond with the upsurge in domestic demand
that could be assigned to consumption boost. It rather re-
lates to Riyadh’s crude export strategy that aims to expand
country’s target markets to which the kingdom’s crude would
be shipped. In similar veins, Qatar’s oil consumption hike
from 10m tons in 2014 to 10.9m tons in 2015 is relatively
low compared to the country’s massive hike in domestic de-
mand. Business strategies of these countries focus on pro-
duction that would help to expand their exports, a decisive
variable that would greatly impact on their willingness to ad-
here to an oil freeze plan.
2013 2014 2015 2016
Graph 4:
GLOBAL OIL DEMAND
Data: International Energy Agency, Oil Market Report, July 2016
11

Oil Demand 2014 (1000 b/d)
Oil Demand 2015 (1000 b/d)
Change
Graph 5:
OIL DEMAND IN OPEC COUNTRIES 2014 - 2015
Data: International Energy Agency, Oil Market Report, July 2016
FACTORS IN THE GAME C. INTERNATIONAL OIL DEMAND
Steadily rising global demand for oil thus implies that in-
crease in crude production would inevitably follow, which,
for OPEC, would further lessen the urgency for setting an oil
output cap as initially outlined. As oil demand surge contains
new business opportunities, OPEC countries would less like-
ly conclude upcoming Vienna meeting with a solid oil freeze
agreement. The major oil players have incorporated short-
term revenue losses incurred over low oil prices into their
long-term strategy planning. Hence, they are determined to
keep pumping at full tilt. Establishing one’s position in a vari-
ety of markets worldwide at present, would guarantee better
prospects and higher revenues for decades to come. As the
oil market is projected by some analysts to possibly reach
equilibrium within a couple of years, low profits of today may
easily translate into a larger market share in the future and
hence multiplied profits.
OPEC countries would favor selling oil for any price in the
current market conditions and thus fill a gap that minor play-
ers have left behind when they were forced to reduce their
expenditure and pause temporary unprofitable investments.
OPEC members can afford to grab hold of less profitable
ventures, which allows them to expand their crude market
shares, because from a long term perspective, these assets
may turn into gold mines once oil prices recover. For this to
happen, top oil producers would need to ensure that they
are deeply enrooted in targeted markets, be it in Asia or Eu-
rope. This strategy necessarily calls for assertive policies
both within OPEC and globally under which an OPEC oil
freeze plan becomes a rather blurred vision.
12

OIL FREEZE PLAN NARRATED
Limiting production would, however, bring some indisputa-
ble advantages to the global oil market. For some countries,
the limit is more essential than for others. All oil dependent
economies such as Nigeria and Algeria need a deal to prop
up the price of oil, fearing that the barrel price could decline
to $20 per barrel if a decision is not made. Even for Riyadh,
a freeze plan that would increase oil prices may enhance its
national economy, much needed for a country that faces a
fiscal deficit of 13.5% of its gross domestic product (GDP)
this year. The International Monetary Fund (IMF) says that
Saudi Arabia thus needs to sell oil at $67 per barrel to level
out its economy, since 25% of Saudi Arabia’s GDP relies on
oil revenues.
Saudi Arabia has, nonetheless, been cautious about giving
its consent with renewed negotiations. Initially, in April 2016,
the kingdom had rejected joining a freeze plan, if Iran was to
not to be part of it. According to the latest OPEC talks, some
members were suggested to be exempted from limiting oil
production due to endured violence of civil wars, insurgen-
cy, and sanctions, e.g: Libya, Iraq, and Iran. This proposal
was to ease the debate and seek an alternative plan to al-
low for a possible agreement that would re-bounce crude
prices. The Saudis again counteracted this proposition. Old
disputes between Saudi Arabia and Iran resurfaced, when
OPEC members gathered in late October to work out de-
tails before an official summit. The Saudi kingdom has an-
nounced intentions to raise oil output steeply preventing oil
prices from recovering if Iran refuses to limit its supply. An
OPEC source who attended the meeting told Reuters: “The
Saudis have threatened to raise their production to 11 mil-
lion b/d and even 12 million b/d, bringing oil prices down,
and to withdraw from the meeting.” Saudi intransigence may
get a freeze plan discarded, as many before.
Iran, on the other hand, is still saying the country will con-
sider capping oil output only when it reaches its threshold,
which is 4.2 million b/d. Tehran has countered Saudi ‘should-
freeze-now’ requirement with the argument that Riyadh has
increased production by nearly 1 mb/d since 2014 and it is
now most kindly and generously offering to cut just 400,000
b/d to take one for the team in order to reach a production
deal. The two countries have mastered the game since talks
on production limits were first mentioned, and since, Riyadh
is ferociously seeking to disenable its potential economic
and geopolitical rivals.
The freeze plan narrative has since taken many different
forms. In August, Saudi Energy Minister, Khalid Al-Falih,
spoke about the kingdom’s position towards a freeze plan
in rather vague terms saying that while a freeze would be
“positive” for market sentiment, no “intervention of signifi-
cance” is required, as global market is rebalancing itself.
Similarly, Algeria’s Energy Minister, Bouterfa, has stated in
a Bloomberg interview that the most important thing for the
meeting with OPEC members is to “stabilize the market pric-
es” without making an explicit commitment to support cuts in
oil output directly. Other world oil producing countries seem
to have adopted similar, vaguely formulated approaches to
the proposition. This inconsistency in how major oil players
positioned themselves in the debate seems to have reduced
the concept of an oil freeze plan to a mere narrative.
The actual original intention to re-balance crude oil prices
through a joint freeze plan has come to a point where any de-
sign of such a plan would have the desired effect. Surely, the
Algiers discussion brought about a 5.3% hike in prices over
the weeks following the meeting without a tangible outcome.
Similar expectations for Vienna summit are therefore not ex-
aggerated. According to latest expressions of willingness by
some OPEC members to brainstorm possible alternatives
to a freeze plan, crude prices may see a slight rise, yet, this
would be merely temporary. Inconsistencies and vagueness
spread across oil freeze narratives will likely preclude any
viable agreement to be concluded at the next meeting and
effectively implemented before the end of 2016.
13

CONCLUSION
Geopolitical rivalries, regional disputes, economic competi-
tion over market share, and global trends feed into a highly
likely scenario that will make it difficult for OPEC to reach an
oil freeze agreement in Vienna.
In the view of some OPEC members, any limitations on crude
output levels, with the currently rising oil demand worldwide,
would incur massive losses to the oil producing countries.
However, if any such deal is concluded, its implementation
would hit against the wall of competing national interests.
These economic objectives of individual OPEC countries
are clearly incompatible, which may generate a dynamic
that would likely end up with an unfulfilled agreement and a
path towards any viable deal in the future sealed.
14

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