Thursday, 1 December 2016

OPEC Decision to cut production - legal background

On 30 November 2016 OPEC held its 171st meeting in Vienna, Austria. It decided, for the first time since 2008, to cut-down on its oil output. Over the coming 6 months the cartel wants to produce 1.2 million barrels of oil less per day, compared to current output. The new limit on total OPEC output shall be 32.5 million barrel per day. Implementation of the new deal shall start on 1 January 2017.
(http://www.opec.org/opec_web/en/press_room/3912.htm) In this short piece some background information on the decision and  its legal basis is provided.

OPEC is probably the world`s most infamous cartel.
By the end of September 2016 OPEC surprised the public by deciding to cut daily output to 32.5m-33m barrels after two years of negotiations (https://www.ft.com/content/e046c77e-8615-11e6-8897-2359a58ac7a5). The problem: this agreement was not legally binding, as individual reductions per country were not specified in the deal.  After initially positive signs, Russia, which is not a member of OPEC, announced that it does not intend to cut its output, so suspicions were rife that OPEC members would also not live up to their promises(https://www.bloomberg.com/news/articles/2016-11-24/opec-s-last-push-for-oil-cuts-deal-shifts-focus-to-iran-russia).



On 30 November 2017 a binding deal has now been reached and details on how the cuts affect each OPEC country have been agreed. According to the Russian Energy Minister Alexander Novak Russia changed its mind and is now also commited to cutting back on its daily production rate by 300.000 Barrels per day (https://www.bloomberg.com/news/articles/2016-11-30/opec-said-to-agree-oil-production-cuts-as-saudis-soften-on-iran). This is remarkable, as it is the first time that the non-OPEC country Russia is officially participating in an OPEC cut-back. Given the changing positions of Russia throughout the last 6 months it remains to be seen whether or not the country will actually honour its commitment from 1 January 2017 onwards.


The meeting on 30 November in Vienna was the 171st meeting of the OPEC conference. According to article 10 OPEC Statute, the conference is the supreme authority of the organization. It shall meet twice a year, as article 12 OPEC Statute provides. The main purpose of the conference is to formulate the general policy of the organization and determine the appropriate ways and means of its implementation, according to article 15 (1) OPEC Statute - and that is what the organization did last wednesday.


According to an OPEC Press Release, the decision on the cut-back is based on the Secretary General’s report, the report and recommendations made by the High-Level Committee that was set up following the ‘Algiers Accord’, agreed at the 170th (Extraordinary) Meeting of the OPEC Conference on September 28 in Algeria, the report of the Economic Commission Board, OPEC’s Long-Term Strategy (LTS) document, as well as various administrative matters (http://www.opec.org/opec_web/en/press_room/3912.htm). According to article 15 (5) Opec Statute it is the task of the conference to
`consider, or decide upon, the reports and recommendations
submitted by the Board of Governors on the affairs of the Organization`

















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