Diplomacy Delivers

Energy Desk
Diplomacy Delivers Diplomacy Delivers

OPEC turned a historic new leaf on Wednesday by agreeing on its first oil production cut in eight years and the first joint cut with Russia since 2001.

The pact that pushed crude prices up by more than 9% in a single day, aims to curb the group’s supplies by 1.2 million barrels a day to a ceiling of 32.5 million barrels over six months, starting January.

The Organization of Petroleum Exporting Countries now hopes that non-members will join the bandwagon and reduce output by another 0.6 million barrels, with Moscow to shoulder half the burden.

But one big takeaway of the agreement is the special case of Iran who sits behind Saudi Arabia and Iraq as the third biggest OPEC producer. Under the agreement, Iran is the only country allowed to raise output from October output levels.

In a strained battle for market share in which every barrel counts, Iran managed to squeeze out 90,000 more barrels in a series of arduous negotiations to secure an output ceiling of 3.8 million barrels for the first half of next year, a major achievement over a previous Saudi demand to cap production at 3.707 million barrels a day.

The next best thing comes for Libya and Nigeria with the two being exempt from any cuts due to costly internal conflicts which have hampered their production.

Other cuts range from 9,000 barrels by Gabon to a sizable 486,000 barrels from the Saudis. Even Iraq, which was a vocal dissenter against the deal in recent weeks, eventually agreed to a surprise 210,000-barrel cutback.

Iran's Diplomacy

But let’s not bask in self-glorification and superlatives just yet for an uncertain deal which has been described as a victory for Iran and a concession from Saudi Arabia. However, it is crucial to mark the role that Iran played in an agreement that almost perfectly played out according to its preference after months of back and forth negotiations.

Following its tried-and-tested diplomacy that led to the landmark nuclear deal with the world powers last year, Iran again demonstrated patience, persistence and perseverance in a series of talks that involved several parties. And mind you the stakes were high.

Iran shook off the shackles of sanctions in January, right when crude prices plunged to their lowest in more than a decade and reports said that a possible emergency gathering of OPEC and other producers to freeze production was in the works.

Tehran had made it pretty clear that it would discuss a freeze or cut only "after" closing in on the pre-sanctions production peak of around 4 million barrels a day.

An extraordinary meeting of OPEC and Russia in April to freeze production at January levels ended in acrimony after the Saudis pulled out of talks because Iran had refused to budge.

The oil kingdom later introduced an aggressive pricing strategy, cutting the price for its Light Arab blend to Asia in September by the most in 10 months in what was seen as a direct move to pile pressure on Tehran. 

But later that month, OPEC agreed on the outlines of an unlikely agreement to scale back production as Khalid al-Falih, the Saudi energy minister, said in a major shift in tone that Iran, Nigeria and Libya should be allowed to pump “at maximum levels that make sense”.

Riyadh and Tehran continued their wrangling right up to the end. A day before striking the deal in Vienna on Nov. 30, Falih sought to lock Iran's output at 3.707 million barrels as Iran was reportedly willing to settle at 200,000 more barrels.

But the two countries found common ground as Iran showed considerable flexibility at the right time to help secure a significant deal without retreating too much from its position.

Back on Track

According to Iran's foreign minister, every negotiation requires sacrifice.

“Any deal is a give and take and each side gives up part of its demands to realize the more important part until what has been given and received is balanced,” Mohammad Javad Zarif was quoted as saying by Al-Monitor last year about the nuclear agreement.

Despite all the cheers and whistles, huge questions remain over the feasibility of the deal, including whether all members will stick to planned cuts and whether outside producers will play along. And even if all play their part, it is still unclear if a similar mechanism will be extended for the second half of 2017 or producers would snap back to flooding the saturated market.

But regardless of the outcome, Iran showed it is on track to become the OPEC force it once was and that without it, an oil accord could hit the skids.

A day after the Vienna agreement, Iran's Oil Minister Bijan Namdar Zanganeh cast the deal as historic on national television, asserting that Tehran joined the talks from a position of power, referring to the country’s crude output capacity which has soared to pre-sanctions peak.

“We showed that an agreement can be clinched despite competition and serious political differences if you are in a powerful position.”


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