Energy Expert advises against joining OPEC+

Jan 17, 2020 News

…says Guyana could seek observer status

By Kemol King

Guyana wouldn’t benefit from joining the Organisation of Petroleum Exporting Countries (OPEC+). But it can learn a lot from being an observer.
That’s the opinion of Robert McNally, a global energy expert and founder of Rapidan Group, a Washington-based oil market, policy, and geopolitical consulting firm.

Energy Expert, Robert McNally

He made the assertion at the University of Guyana’s Education Lecture Theatre, during a public lecture on Crude Pricing yesterday.
McNally gave a rundown of a long history of oil price booms and busts experienced throughout the life of the oil industry. He explained that in that time, several entities or groups have managed to take control of the oil price with various levels of success, including Standard Oil (the industrial empire of John D. Rockefeller) and the Seven Sisters (a group of seven transnational oil companies).
During certain periods, through their control of considerable portions of the world’s oil reserves, they were able to restrict or increase their supply of oil to global markets, thereby manipulating the price of oil.
OPEC+ has been carrying on that mandate. Its founding members are Islamic Republic of Iran, Iraq, Kuwait, Saudi Arabia and Venezuela.
Oil prices are volatile to shocks from many various incidents like war, McNally explained, or a single tweet from US President Donald Trump.
Its volatility is what has encouraged certain nations to join the supply management chain, OPEC+.
“Nothing causes oil producers to cooperate more than a price bust. That scares the stuffing out of everybody,” McNally said.
And he thinks it’s likely that Guyana will get an invitation to join.
The energy expert referred to a recent Bloomberg report, which lists Guyana and Norway as rival oil producers that could “threaten [OPEC]’s efforts to defend crude prices”.
Guyana’s current peak production capacity is 120,000 barrels per day, since production started in the Liza field. But its capacity to make a steep increase in the coming years, as the Liza-2 startup in 2022 will take its oil production to 340,000 barrels per day.
ExxonMobil also anticipates that it will get approval in time to start production on the Payara project by 2023, which would take Guyana’s peak production capacity to 560,000 barrels per day.
Furthermore, ExxonMobil optimistically projects that it could be producing 750,000 barrels per day by 2025. Bank of America Merrill Lynch has projected an even higher capacity of 1,000,000 barrels per day.
According to McNally, Guyana would suffer if it joins OPEC+ because it would be told to restrict its production.
OPEC+ is a swing producer group, he explained, and to be a swing producer, “you have to be willing and able to subordinate your own economic interest or your returns on your investment to the greater goal of price stability.”
“That would be bad for Guyana, bad for the producers. It’s expensive to shut in production. You’ll be delayed on your cost recovery… So Guyana wouldn’t want to do that.”
It would be unreasonable to ask Guyana as an emerging producer to restrict its output, McNally believes.
He does believe that OPEC+ would probably “cut Guyana some slack” in the beginning.
But as its production capacity rises, that could change.
Although he advises against joining OPEC+, McNally said that it would benefit Guyana to take up observer status.
“It may be in Guyana’s interest to attend the meeting and get to know some of the Ministers. Just to join that conversation to see how supply management works. You can be an observer. You can go to OPEC+ and not necessarily take a quota.”
“I think you want to get to know the other major producers. Get to know global oil market management…”
The benefit for Guyana in such a situation, he believes, is to give Guyana an opportunity to act on the world stage in a way it has not done before.
“But try not to take a quota, as long as you can.”