Petro-diplomacy starting to pay off in echo of 1999 shock
February 16 2016 10:20 PM
KRISHNAN
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Bloomberg/London/Kuwait

For more than a year, oil diplomats have been busy behind the scenes trying to forge a deal between Opec and nations outside the group to revive prices by curbing output.
The manoeuvring, led first by Algeria and now Qatar, started to bear fruit yesterday, when Russia and Saudi Arabia agreed to freeze production at January levels. The first public one-on-one meeting between the oil chiefs of the two largest producers in eight months essentially suspended a war for market share and capped months of secret talks, people familiar with the matter said.
Now officials face a second, more complicated task - getting other producers, notably Iran, which has just been unshackled from sanctions over its nuclear programme, to freeze and then cut production. This phase of negotiations could take months and success is far from certain. The Islamic republic plans to regain the market share it lost during sanctions regardless of prices, according to a person familiar with the country’s strategy.
Saudi oil chief Ali al-Naimi said the freeze marks “the beginning of a process” that may include other steps in the coming months. The goal, he told reporters in Doha after meeting his Russian counterpart Alexander Novak, is “to stabilise and improve the market.”
The shuttle diplomacy shows how oil’s collapse is bringing countries that disagree on other issues closer together. The revenue squeeze being felt from Moscow to Riyadh, Caracas to Oslo, increases the likelihood of a “grand bargain” that may go beyond oil and include political issues such as the wars in Syria and Yemen, several analysts said.
Opec has pulled it off before, forging a common front against a slumping market in 1998 and 1999 that helped trigger a decade-long bull market, lifting crude from $10 a barrel to more than $140. Back then, ministers spent months meeting privately in hotel suites and embassies from Miami to The Hague before surprising the market with a round of cuts that included not only Opec but also leading exporters Mexico and Norway. Russia’s contribution was limited to cheering.
If Opec is successful again, the world may not know about it until the last minute, according to Jason Bordoff, director of the Center on Global Energy Policy at Columbia University and a former White House official.
“If Venezuela, Saudi Arabia, Iran, Russia and other top exporters were engaged in serious talks to cut output, history suggests these would be occurring in secret,” Bordoff said.
The 1990s accord started with a confidential memo that Adrian Lajuous, then the head of Mexico’s national oil champion, sent to his country’s president titled simply “Oil Diplomacy.” The final pact surprised almost everyone and rattled the market, creating a cautionary tale traders haven’t forgotten.
Ian Taylor, chief executive officer of Vitol Group, the world’s largest oil trader, said before the Russian and Saudi freeze was announced yesterday that a new deal between Opec and non-Opec producers is “a real possibility.”
This time, it’s Qatar taking the lead after Algeria’s oil minister, Youcef Yousfi, stepped down late last year. Yousfi, who played a key roll in the 1999 pact, pushed hard to kick-start back-channel negotiations, including with the Saudis in Germany.
“These are still very early days and nothing concrete has been agreed, but there is a growing sense that countries could be more flexible, although Riyadh would insist that everyone else contribute to the cut,” said Amrita Sen, chief oil analyst from consultants Energy Aspects Ltd.
But the hurdles to reaching a more comprehensive deal are significant.
First, the main reason for the glut - the surge in US shale production - is outside the control of any government, unlike last time. And the biggest players, led by Saudi Arabia and Russia, have been locked in an aggressive battle for market share amid fears that slower growth in China will dampen demand further in the future.
Second, diplomatic relations are far more strained than two decades ago. Back then, Iran and Saudi Arabia were enjoying a rare thaw in ties after Mohammad Khatami came to power in Tehran. Today, they are at the opposite ends on issues such as the conflicts in Syria and Yemen. Russia and Saudi Arabia are backing opposite sides of the war in Syria.
A third factor weighing against a deal is Saudi Arabia’s stockpile of cash - enough for the kingdom to survive a price war of attrition. Two decades ago, it held less than $25bn and debt almost equal to gross domestic output. Today, it has more than $600bn and its debt is less than 10% of GDP.
Still, Opec Secretary-General Abdalla El-Badri has called on all countries, both inside and outside the group, to join efforts to revive prices.
“It should be viewed as something Opec and non-Opec tackle together,” El-Badri said in London in late January. “It is crucial that all major producers sit down to come up with a solution to this.”



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