Oil Quotas: a Blessing or a Curse for Kazakhstan?

Kazakhstan has been exceeding OPEC+ oil production quotas for several months. According to some experts, this could lead to a drop in prices on the world market, Orda.kz reports.

We have spoken with oil analysts about OPEC+ quotas, their purpose, and whether they benefit Kazakhstan.  

Why are OPEC+ quotas needed?

OPEC is the Organization of the Petroleum Exporting Countries, which has existed since 1960. Kazakhstan is an OPEC+ member. OPEC+ is an expanded version of the organization, including Russia, Brazil, Mexico, and several other countries. Meanwhile, the "oil titans" of the Middle East, i.e. Saudi Arabia, Iran, Kuwait, the UAE, etc, represent OPEC.

The countries that are members of OPEC+ set special quotas, promising to produce a specific volume of oil. The primary purpose of the quotas is to regulate world oil prices. The more countries produce, the higher the probability that prices will fall, as the market will be saturated with cheap oil. And vice versa, the lower the production volume, the more expensive oil will become. This mostly looks good only on paper.

Producers agree on quotas and undertake commitments to limit exports so that world oil prices do not jump sharply - at most plus or minus 5%. This is called price volatility. This is the whole point of agreements and quotas, explains oil analyst Artur Shahnazaryan. 

How Are Oil Production Quotas Approved and Agreed upon?

Decisions on quotas are based on current oil prices and take into account the opinions of all countries. Saudi Arabia plays the leading role in OPEC.

Rather than economics, politics sometimes drives OPEC countries’ production cuts or increases. For example, OPEC countries oppose the United States' intentions to increase shale oil production. Kazakhstan also has a political nuance for participating in OPEC+. 

In reality, there is no global oil price. It is an abstraction. There are 20 regional markets in the world, and each has its own reference price, which largely depends on the grade of oil. Kazakhstan, with its average volume of oil exports and one full-fledged export pipeline, the CPC, could not be tied to the OPEC+ agreement. But Kazakhstan is forced to participate in it in direct connection with Russia. The leading players in this (OPEC - Ed.) agreement are Saudi Arabia and Russia, and our main export flow ultimately goes through Russian territory and a Russian port, indicates Artur Shahnazaryan.

The OPEC+ countries voluntarily accept oil quotas, but their effectiveness is questionable. Formally, quotas aim to ensure oil market price stability. In practice, they do not work as they should because oil prices depend more on the dollar value of oil transactions than supply and demand. Different participants' demands in the agreement also vary.

Initially, OPEC was created as a cartel, and all its members observed these quotas or at least tried to observe them. But the attitude towards OPEC+ countries is lenient - the restrictions that they take on themselves are more of a recommendatory nature, notes business analyst Abzal Narymbetov, author of the Energy Analytics Telegram channel.

Why Is Kazakhstan Producing More Oil?

Kazakhstan's shortcomings in OPEC+ compliance quotas are due to several reasons. Tengiz, Kashagan, and Karachaganak provide 70% of Kazakhstan’s oil. Their principal shareholders are large international companies that want to maintain production at a high level to recoup their investment. These fields also have production-sharing agreements with investors.

Analysts point out that Kazakhstan receives its main export revenue from three fields. The Ministry of Energy can only cautiously remind oil companies about quotas.

Our main export income comes from selling oil and other raw materials. That is, these quotas are not really profitable for Kazakhstan. Yet, they can be profitable if the reduction in production contributes to an increase in prices. In this case, there is a significant difference - if we reduce production, and this leads to an increase in prices by five to ten dollars per barrel, this will bring much greater benefits than if we simply reduce production for the sake of fulfilling OPEC+ quotas, says Abzal Narymbetov.

Volumes at Tengiz, Kashagan, and Karachaganak are only growing. The other older fields in the country, if forced to reduce production further, will see their income take a hard blow. Meanwhile, these fields, where small and medium-sized companies operate, mainly provide oil for fuel production on the domestic market.

Domestic consumption is growing every year. Now, on average, these companies send 70% to the domestic market, where prices are two to two and a half times lower. Because of this, they cannot invest, cannot maintain their production, drill new wells, build production facilities. This is a vicious cycle that has been created over the past 30 years: we maintain prices for fuel and lubricants and thereby simply kill our small and medium-sized oil-producing companies,
notes Abzal Narymbetov .

Consequences of Exceeding OPEC+ Quotas?

According to Artur Shakhnazaryan, Kazakhstan's failure to fulfill its obligations does not play a significant role. The country would not face severe OPEC+ backlash. Kazakhstan's obligations are relatively small, and the overproduction has no significant global impact. The organization also does not have notable pressure levers. However, constant reports of non-fulfillment of quotas may negatively impact the country's image.

If the foreign press mentions too often that Kazakhstan is not fulfilling its obligations under OPEC+ quotas (although they are not mandatory), is there any point in continuing to be in this organization? It seems to me that the state should think about how much Kazakhstan needs membership in this organization and whether it justifies the reputational risks,Abzal Narymbetov emphasizes. 

Kazakhstan's exceeding its quota is bad news for global oil prices. Kazakhstan is one of three countries that regularly produce more oil than promised. The other two are Iraq and Russia. Oil analysts have warned that the behavior of this trio signals an upcoming decline in prices at the global level. And if the cost of oil, one of Kazakhstan's main natural resources, drops, the country will have itself to blame.

Original Author: Nikita Drobny

DISCLAIMER: This is a translated piece. The text has been modified, the content is the same. Please refer to the original piece in Russian for accuracy.