Ecuador opts out of agreement to reduce oil production in setback for Opec unity
Ecuador has dealt a blow to Opec unity by announcing it will start raising oil production this month, arguing it needs the money.
Opec has for years cheated on its own agreements, particularly when oil prices fail to recover after an output cut. But Ecuador has taken the rare step of saying publicly it will increase production, making it impossible for the group to conceal the desertion.
The Latin American country will not be able to meet its commitment to lower output by 26,000 barrels per day to 522,000 bpd, as agreed with Opec last year, oil minister Carlos Perez said.
“There’s a need for funds for the fiscal treasury, hence we’ve taken the decision to gradually increase output,” Mr Perez said. “What Ecuador does or doesn’t do has no major impact on Opec output.”
Indeed, Ecuador’s exit is largely immaterial when considering the size of the global oil market, as the amount it agreed to cut accounts for less than 25 seconds of daily consumption.
But it does create a dangerous precedent for Opec, opening the door for other, perhaps bigger producers to follow suit.
“Ecuador’s latest statement will not matter for global balances but it shows the challenges for Opec members given the cuts failed to raise prices,” said Amrita Sen, chief oil analyst at London-based Energy Aspects. The announcement may “again give rise to fears of the deal falling apart”, she said.
Benchmark Brent crude has erased most of the gains it made after Opec’s November deal, dropping 14 per cent this year to trade below US$49 per barrel yesterday.
Ecuador says it had a “non-written” agreement with Opec that gave it flexibility on output because of its fiscal needs. The Vienna-based group, however, has not disclosed such an accord.
Ecuador is not the only Opec member struggling to bolster its finances, with others such as Algeria also relying heavily on petrodollar reserves built up during the 2000-08 oil price boom to plug fiscal deficits. Many require prices significantly higher than today’s level to balance the books, according to non-partisan New York think-tank the Council on Foreign Relations.
Other small Opec members may now argue they also need extra money, said Torbjorn Kjus, an analyst at DNB Bank ASA in Oslo.
“They should understand that this might hurt the whole deal,” he said, suggesting Opec’s top producer Saudi Arabia could decide: “If you guys don’t want to participate then let’s just dump the oil price down into the $20s and see how funny that is”.
Opec’s implementation of its deal to curtail output is slipping after a strong start earlier this year. The International Energy Agency put compliance at 78 per cent in June, a six-month low, as Iraq, the UAE, Ecuador and Venezuela pumped more than agreed. Iraq produced 4.5 million barrels per day, meeting just 29 per cent of its commitment.
Ecuador, Opec’s third-smallest member by production after Equatorial Guinea and Gabon, is now pumping close to 545,000 barrels per day from its oilfields in the Amazon rainforest, Mr Perez said. That is not far off the 548,000 bpd it produced before the Opec deal kicked in.
Opec and several non-member countries had agreed to curb output by almost 1.8 million barrels a day, starting in January, to reduce global inventories and boost prices.