Confidence from OPEC’s November production deal buoyed oil markets through the end of 2016. Now that 2017 has arrived, the oil market is showing signs of waning optimism. Part 1 of this article OPEC Cheaters: Who's Cutting, Who's Not looked at the chances of compliance to the production cut deal by countries within the cartel. This article focuses on non-OPEC countries and whether each is likely to adhere to the agreement, or not.
Production cuts from non-OPEC oil producing countries are a vital component in reducing the global crude oil supply glut. In fact, a last-minute commitment from Russia to cut 300,000 bpd was essential to the consensus deal to cut 1.2 million bpd reached by OPEC.
On December 10, non-OPEC oil producers met with OPEC representatives and agreed to reduce production by a combined 558,000 bpd, bringing the planned OPEC and non-OPEC cuts to a total of 1.76 million bpd. The following is a look at the non-OPEC production cut breakdown and individual countries’ compliance so far. One should remember, however, that the target numbers reflect an average of production over the first six months of 2017.
Azerbaijan: This central Asian country committed to reduce production by 35,000 bpd. According to the Russian news agency Tass, Azerbaijan began implementing production cuts on January 1. Unlike many other major oil producers, Azerbaijan’s oil production actually fell by 1.5% in 2016, so Azerbaijan’s new cuts may in fact be natural decline passed off as production cuts.
Bahrain: This Persian Gulf nation only produces about 200,000 bpd and committed to cut 10,000 bpd from its output. Neither the Bahrain government nor Bapco, the national oil company, have issued any statements regarding compliance.
Brunei: This tiny south Asian country produces a mere 130,000 bpd but agreed to cut 4,000 bpd. The Sultanate of Brunei has yet to announce that it is making any cuts and considering the economic stress the country has been facing since the oil downturn, may find itself hard-pressed to follow through even with this small number.
Equatorial Guinea: Located in central Africa, Equatorial Guinea committed to reduce its oil production by 12,000 bpd. The country has not announced any implementation plans, but has been occupied with the recently rescheduled corruption trial of the son of the current president (who has held office since a 1979 coup).
Kazakhstan: Kazakhstan produces about 1.88 million bpd of oil and agreed to cut 20,000 bpd. According to the Kazakh Energy Ministry, the country began cutting production on January 1 and that production was already down by the required 20,000 bpd. Kazakhstan’s plan was to reduce production from oil fields in which it was already observing natural decline. Meanwhile, the country plans to continue with development projects in two of its major oil fields and to proceed with production increases by the end of 2017.
Malaysia: Malaysia, the only oil producer east of Iran other than Brunei to agree to cut production will cut 20,000 bpd. Shortly after the deal was signed, Petronas (KL:PGAS) announced it would curb its oil production accordingly starting in January 2017.
Mexico: This major oil producer has been the lynchpin of prior OPEC / non-OPEC production deals and knows how important compliance is to truly raise the price of oil. Mexico committed to cut its own production by 100,000 bpd, but the government has been facing local unrest over rising domestic gasoline prices, which higher oil prices are likely to compound. In addition, the Mexican government is in the middle of liberalizing its state-run oil industry and recently delayed auctions on drilling leases in the Gulf of Mexico that it had planned for late March. Despite these stresses, Mexico is moving to cut its production. Immediately after the agreement was signed, however, Pemex “rebranded” the cuts as a natural decline in field productivity.
Oman: This Persian Gulf oil producer eagerly signed on to cut 45,000 bpd back in December (4.5% of its 1 million bpd production). Oman’s energy minister said on state television that the country began cutting production on January 1.
Russia: This major oil producer’s commitment to cut 300,000 bpd was the glue that held OPEC’s production cut deal together. In the past, Russia has committed to cut production and then promptly failed to follow through. Initially, it seemed like Russia would not fully implement the oil cuts until the spring, which, OPEC member Kuwait quickly declared, is acceptable under the terms of the deal. Russia initially announced that during the winter months it would only cut about 50,000 bpd. However, Russia recently revealed that its oil production declined by an additional 130,000 bpd in the first week of January, so it appears that whether or not Russia wants to comply, situations on the ground are forcing its production downward.
Sudan and South Sudan: These African countries agreed to cut 4,000 bpd and 8,000 bpd, respectively. Yet neither has indicated any intention to follow through with their cuts. In fact, South Sudan, suffering from civil war, has indicated that it intends to raise oil production as soon as possible. South Sudan has produced up to 350,000 bpd, but during the war its production fell to under 130,000 bpd. Hostilities continue to plague its oil fields, so whether South Sudan will be capable of increasing production in the near future is unclear.
Finally, remember that a number of major oil producers are not part of any production agreements. Oil production from the United States, Canada, Brazil and Norway will have a significant impact on oil prices in 2017.