The OPEC+ producers kept their targeted production unchanged for early next year when they met this weekend for their final gathering for the year.
While reaffirming the decision was no news for anyone, the 22 OPEC+ group members made a more important decision that will likely influence production levels, upstream investments, and oil prices for years to come.
The alliance approved a new mechanism to reassess the maximum sustainable production capacities of all its producers, which will be used as a baseline for the 2027 production quotas.
OPEC+ and its leader, Saudi Arabia, say the new mechanism to assess how much any given producer can pump for a sustainable period of time is more transparent and fair for determining production levels from 2027 onwards.
Quota Review
The baselines are important in OPEC and OPEC+’s calculations of output quotas when the cartel or the wider group implements or reverses cuts.
The assessment will be carried out between January and September 2026 for the 2027 baseline levels, and OPEC+ plans to have the maximum sustainable production capacity (MSC) assessed each year.
MSC is typically defined by OPEC as the average maximum crude oil production that can be brought online within 90 days and sustained continuously for one full year, including all planned maintenance activities.
Related: Congress Reopens More of Alaska’s Arctic Refuge to Oil Leasing
A U.S.-based auditing firm will assess the MSC of 19 out of the 22 OPEC+ members. Sanctioned Russia and Venezuela will use a non-U.S. firm, while Iran’s baseline for 2027 will be determined by the average of its production in August, September, and October 2026, as assessed by the OPEC secondary sources, of which Argus is one.
The new mechanism for quota assessment may seem too technical, but it is apparently needed as OPEC+ has seen disputes over the quota assignments in recent years.
For example, some big OPEC producers, such as Iraq, the United Arab Emirates (UAE), and Kuwait, plan to raise their oil production capacity in the coming years. These countries have argued that they deserve higher baseline production levels as they expand capacity. The UAE, for example, has won a higher baseline for 2025 and 2026.
Other disgruntled producers included now former member Angola, which quit OPEC as of January 2024 after 16 years in the cartel. The reason was a spat with the OPEC and OPEC+ members about production quotas. At a meeting in mid-2023, Angola and Nigeria were given lower crude oil production quotas as part of the OPEC+ agreement, after the two producers had underperformed and failed to pump to their quotas for years, due to a lack of investment in new fields and maturing older oilfields.
Reassessment to Boost Investment
The new mechanism to assess MSC and thus production quotas is a “turning point” in OPEC+ policy, Saudi Energy Minister, Prince Abdulaziz bin Salman, said this week.
“Now we have the most detailed, the most technical, transparent approach of how we can move forward in the future in managing the market and how to attend to production,” said the energy minister of the biggest OPEC+ producer and de facto OPEC leader.
Saudi Arabia and the other major Gulf producers will be the key beneficiaries of the new mechanism as it is set to incentivize keeping high capacity levels or boosting production capacity, Reuters columnist Ron Bousso argues.
Indeed, many of the Gulf OPEC producers have plans to raise capacity, while Saudi Arabia keeps a 12 million barrels per day (bpd) production capacity, with its current spare capacity at about 2 million bpd.
Even as Saudi Arabia is tendering a massive 44 gigawatts (GW) capacity of renewable energy projects, it will maintain its oil-producing potential to ensure global energy security, officials from the Kingdom said last year.
The United Arab Emirates (UAE), one of OPEC’s top producers, aims to increase its production capacity to 5 million bpd by 2027. Currently, capacity is about 4.8 million bpd.
“We can go to 6 million if the market requires,” the UAE’s Energy Minister, Suhail Al Mazrouei, told Reuters on the sidelines of the OPEC annual seminar this summer.
Another major producer, Iraq, is also planning on increasing its production capacity. OPEC’s second-largest producer seeks to boost capacity to more than 6 million bpd by 2029, and potentially produce 7 million bpd within the next five years.
Iraq’s current production is about 4 million bpd, as it is trying to compensate for previous overproduction in the OPEC+ agreements.
The race to invest in additional capacity started a few years ago among the Gulf oil producers, who have low-cost production and oil-dependent economies (despite diversification efforts) and would like to make the most of every barrel of the huge oil reserves they have.
The world may have reduced upstream investment in recent years, but the core OPEC producers have not—they have continued to pour oil money into additional oil production capacity while calling out those urging a reduction in oil and gas spending.
Going forward, the new quota mechanism will not only help OPEC+ producers with higher capacity win higher baselines when 2027 quotas are handed out, but also increase OPEC’s long-term capacity to influence the oil market and regain market share lost to the booming output in the Americas in recent years.
By Tsvetana Paraskova for Oilprice.com
More Top Reads From Oilprice.com
Oilprice Intelligence brings you the signals before they become front-page news. This is the same expert analysis read by veteran traders and political advisors. Get it free, twice a week, and you’ll always know why the market is moving before everyone else.
You get the geopolitical intelligence, the hidden inventory data, and the market whispers that move billions – and we’ll send you $389 in premium energy intelligence, on us, just for subscribing. Join 400,000+ readers today. Get access immediately by clicking here.
Leave a Comment
Your email address will not be published. Required fields are marked *