OPEC’s Quiet Man Is at Center of Cuts Deal Nobody Saw Coming

EghtesadOnline: As OPEC members meet again in Istanbul, the quiet diplomacy of one of its lowest-profile members will play a central role in whether the group can successfully implement its first production cuts in eight years.

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10 October 2016

According to Bloomberg, Algeria is the ninth-largest producer in the Organization of Petroleum Exporting Countries and has limited international clout, but in its capital last month it still managed to clinch a deal that had eluded its more formidable counterparts. The shuttle diplomacy that took soft-spoken, 5-foot-3-inch Energy Minister Noureddine Boutarfa from Tehran to Moscow and Paris since August continues this week, as members including Saudi Arabia meet with Russia.

“The major protagonists within OPEC listen to what Algeria has to say,” said Alexandre Kateb, chief economist at Tell Group, a financial services firm focused on the country. “Algeria’s role in this accord is the result of a long diplomatic tradition and relative perceived neutrality” that allowed it to maintain good relations with rivals Saudi Arabia and Iran, he said.

Last month in Algiers, OPEC reversed a two-year policy of pumping without constraints. It was a significant shift away from a free-market strategy for Saudi Arabia, the world’s largest oil exporter, and helped lift crude prices above $50 a barrel. Even so, a lot of work needs to be done by the next OPEC meeting on Nov. 30, with crucial details on how the burden of cuts will be shared, or whether producers outside the group such as Russia will cooperate, still to be resolved.

Common Ground

“We worked a lot to find a common ground between OPEC member countries” in Algiers, Energy Minister Boutarfa said by e-mail on Oct. 5. It’s important to “keep this good dynamic” going over the next two months and he’s “confident” the committee set up to figure out how to divide up cuts between members will result in “consensual proposals.”

At the the 23rd World Energy Congress in Turkey this week, Boutarfa and ministers from Saudi Arabia, Gabon, Qatar and the United Arab Emirates will meet with Russia for the first time since the Algiers deal and discuss how producers from outside OPEC can participate in the plan.

The involvement of Russia, the world’s largest energy exporter, could determine the success of a deal. West Texas Intermediate crude dropped 65 cents, or 1.3 percent, to below $50 on Friday when Energy Minister Alexander Novak said he didn’t expect to forge a cooperation agreement with OPEC in Istanbul.

Saudi Energy and Industry Minister Khalid Al-Falih, who will meet with Novak in Istanbul in the next couple of days, said Monday that many non-OPEC producers have expressed a willingness to cooperate and he’s optimistic there’ll be a deal by the end of November.

Failed Attempts

Not everyone is convinced they can pull it off. OPEC will struggle to reduce output to the 32.5 million to 33 million barrel-a-day level agreed in Algiers, said David Fyfe, head of research at Gunvor Group Ltd., one of the four largest independent oil traders.

“I’m not at all confident that they can remove a million barrels a day from the market straight away,” he said Oct. 6 at a conference in Geneva.

To read about the obstacles to finalizing the OPEC deal, click here.

Previous attempts at cooperation between OPEC and Russia failed, notably a proposal to freeze production in Doha in April spearheaded by Venezuela’s Oil Minister Eulogio del Pino. So when OPEC called for an informal gathering of its ministers in Algiers on Sept. 28, there was widespread skepticism that anything meaningful would emerge.

The Dealmaker

The hosts were determined to confound those expectations. In the weeks before the meeting, Boutarfa jetted around for private talks with the oil minsters of Russia, Iran, Saudi Arabia and the OPEC Secretary-General Mohammed Barkindo.

The petro-diplomacy stepped up a gear in Algiers. Boutarfa corralled his fellow ministers on two floors of the isolated Sheraton Club des Pins Resort, leaving them with little to do except talk to each other. Youcef Yousfi, the two-time Algerian energy minister who played a key role in OPEC’s agreement to curb production in the late 1990s, joined the effort.

Yousfi, now a close adviser on energy matters to President Abdelaziz Bouteflika, was seen speaking with Saudi Deputy Oil Minister Prince Abdulaziz bin Salman at a dinner at the Palais des Nations the night before the meeting. The two men were holding hands, a sign of solidarity and kinship among men in the Arab world, according to a person who was present at the dinner. The Algerian met informally the next day with Iran’s Oil Minister Bijan Zanganeh, just a few hours before OPEC surprised the oil market with a deal to cut production.

Concrete Numbers

Algeria has compelling reasons to advocate OPEC cuts to boost oil prices. It’s long been part of the OPEC “Fragile Five,” as defined by RBC Capital Markets Ltd., that are suffering most from low oil prices and face the risk of worsening political turmoil. The time was right for a deal last month because other members, notably Saudi Arabia, were also starting to struggle with the financial burdens of the slump.

“Most of the OPEC countries were just about ready to make a deal,” Nordine Ait-Laoussine, who was energy minister of Algeria between 1991 and 1992 and is now President of Geneva-based consulting firm Nalcosa, said by phone on Oct. 5. Algeria was a “good catalyst,” but OPEC has still only managed to achieve an agreement in principle, he said.

“The most important thing that we need to watch now is whether OPEC members will be able to put some concrete numbers behind the intention,” Ait-Laoussine said. “We’re not there yet.”