OPEC Production Policies Could Complicate Relationship with Big Oil

OPEC and its partners from Central Asia and Russia earlier this month delayed a rollback in production cuts agreed in 2023 to stem the decline in oil prices.

This means OPEC+ will produce 2.2 million fewer barrels per day than before the cuts until at least December. Some Big Oil majors may not be happy about it.

OPEC and Big Oil tend to be seen as competitors, especially when it comes to American supermajors such as Exxon and Chevron, who have a considerable footprint in the shale patch—OPEC’s main challenger in modern times. What makes matters complicated, however, is the fact that Big Oil is also a big investor in OPEC oil and gas production.

“The aim of foreign investors is not to spend billions of dollars on new oil wells and then shut them in,” Jim Burkhard, vice president at S&P Global Commodity Insights, told the Houston Chronicle this week. “If OPEC members want to continue to attract foreign investment, their investors need to see some type of return. It’s part of the equation. You can’t untangle that.”

Indeed, state control over the production of any commodity does not tend to sit well with private investors in a way similar to price controls aimed at keeping a product or service affordable for consumers, reducing potential investor returns. But there is another side of the coin as well—even with the cuts, OPEC remains an important source of production and income for Big Oil majors. When this stops being the case, Big Oil simply exits, as Exxon did in Iraq.

In fairness, the countries where Big Oil is involved in oil and gas production heavily and is as such exposed to any unintended effects of the cuts are not the biggest cutter. The single biggest one is Saudi Arabia, whose oil industry is in the hands of the state oil company. The second biggest is Russia, where the situation is identical.

Of the countries with considerable Big Oil exposure, there is Iraq, the notorious laggard in the cuts, whose share of the total cuts is 220,000 bpd. Next is the United Arab Emirates, which has undertaken to withhold some 163,000 bpd in output. While not inconsiderable, the amounts are not all that significant either, especially in a lower-price environment where everyone is making less money from the same amount of oil.

“The problem for them is they have to keep delaying, and at some point the dynamic is not sustainable. Holding back production to let competitors take market share is not a winning long-term strategy,” former BP economist Mark Finley told the Chron in comments on the state of the relationship between Big Oil and OPEC. “The fact countries like Kazakhstan rely on U.S. investment has gotten to be a bigger issue, but frankly, it’s secondary. It’s still a sovereign decision.”

Speaking of Kazakhstan, the relationship is especially complicated—the country is demanding massive compensation from supermajors developing the Kashagan offshore field. Kazakhstan’s claim is for a total $160 billion for years of delays and cost overruns in the development of one of the biggest oil discoveries of modern times. Instead of the promised 1.5 million bpd, the field is producing just 400,000 bpd.

One could say Kazakhstan is not being very friendly to foreign investors. Yet one could also say that putting foreign investors’ interest above all else is unwise for any government. It is a fine line to walk between national interests and the interests of key foreign investors, and it seems like Kazakhstan and other OPEC+ members are leaning toward the direction of national interest.

The relationship between OPEC and Big Oil has always been complicated. They are both partners and competitors, after all. But when OPEC’s cuts lift prices, everyone benefits. When Big Oil finds a better way to extract oil and gas more economically, everyone benefits.

According to S&P Global data cited by the Houston Chronicle, foreign investment in the Middle East had swelled by 50% since 2019 to $62 billion. A lot of this is investment in energy, of course. But the suggestion made by that S&P executive might be a little biased. OPEC members such as Iraq certainly need the investments—but the same is true for the investors. They need the oil. Investments anywhere are not an act of altruism, after all.

If Big Oil is investing money, time, and expertise somewhere, it is because it expects to make money on that investment, even with potentially limiting state policies. After all, OPEC has been controlling production one way or the other for decades. Production—and price—control is the point of the cartel’s existence. Big Oil and OPEC are far from a dramatic breakup and sour investor sentiment. Their relationship will, in all likelihood, remain complicated but very much alive for the observable future.