After a year of secret diplomacy and hushed-up talks around the world, Opec’s Saudi Arabia and rival Venezuela were persuaded to cut a deal by non-Opec Mexico that eased the acrimony and led to a much-needed rise in oil prices.
It was 1998, trust had long broken down within Opec and it took outside mediation as a last resort to stop the squabbling to clinch deals at secret meetings in Riyadh, Madrid and Miami.
Now, with oil prices touching their lowest level since 2003, Opec officials and deal-brokers are looking back nearly two decades and asking whether a behind-the-scenes deal to curb oil output between Opec and non-Opec Russia could be struck.
Some see Opec rifts as insurmountable and Russia as a wild card that cannot be trusted. But others say economic necessity to boost oil revenue could overcome acrimony and distrust and lead to a global deal to cut supply and mop up the glut.
There are plenty of reasons, however, to dispel optimism.
Unlike in 1998, the challenge goes beyond rebuilding bridges between just two Opec members. It pitches the interests of Saudi Arabia alongside fast-rising Opec producers Iran and Iraq as well as non-Opec Russia, the world’s largest oil nation. All four are involved in conflict in the Middle East but also need money to keep their oil-dependent economies afloat and meet social costs.
“The 1997-98 deal brokered between Saudi, Venezuela and Mexico took over a year to negotiate and it was touch and go as to whether it would get done or not,” said the veteran Opec-watcher Yasser Elguindi of Medley Global Advisors.
But low prices are making producers desperate. Oil sank to below $30 per barrel this year from as high of $115 per barrel just 18 months ago because of one of the worst oil gluts in history.
And sceptics could do well to read a paper by Robert Mabro, founder of the Oxford Institute for Energy Studies who helped to broker the 1998 deal. Mr Mabro wrote at the time: “Changes in policy are always possible, even likely, when significant revenue losses are at stake.”
Too much output
The factors that combined to sink the oil price include a boom in the extraction of oil from shale rock in the US, and a decision by the Saudi ruling elite to ramp up crude supply to regain market share from higher-cost producers.
Saudi Arabia has pushed its output to record highs over the past year above 10 million barrels per day, almost equal to that of Russia. Iraq also raised production sharply above 4 million bpd over the past months as foreign investment in oilfields paid dividends. Iraq expects to raise output further this year.
Meanwhile, Iran says the removal of European sanctions in January should allow it to claw back oil production and a deal with Opec is unacceptable until output reaches 4 million bpd.
“You cannot have a deal with non-Opec, until you achieve a credible Opec framework which at the moment is not possible because of Iraq and Iran. Until there can be some framework between Iran, Saudi and Iraq, all this non-Opec talk is just noise,” said Mr Elguindi.
Saudi Arabia’s oil minister Ali Al Naimi, who has been in office since 1995, has said the kingdom would join cuts if key Opec and non-Opec players co-operated. But insiders say Saudi Arabia and its Arabian Gulf allies Kuwait, Qatar and the UAE are all deeply sceptical that a workable consensus can be reached. “Iran and Iraq remain the main challenges inside Opec, and Russia won’t agree to a cut and is not to be trusted,” said a senior Gulf Opec delegate.
In the past month, however, all parties involved have sent signals suggesting the world oil dynamic may be changing.