OPEC policy is considered a greater risk to the oil & gas industry than the slowdown of the Chinese economy, according to research by global law firm Clyde & Co.
The research found that 74% of international senior oil & gas executives* think OPEC policy is the most significant geopolitical concern for the industry (see full table of responses below).
Clyde & Co says that recent changes to OPEC policy have had a resounding impact on the oil & gas market, highlighting the impact its policy decisions have on the market.
Recent OPEC policy changes which have affected the market:
- 27 November 2014, the cartel decided to test US shale oil producers by deciding not to cut its production, a move that made the oil price fall by more than 8% to a four-year low of US$71.
- 8 December 2015, the oil price dropped by 6% to US$38 as an inconclusive OPEC meeting demonstrated growing discord between Saudi Arabia and Iran and an inability for the cartel to agree to a reduced production target.
- 16 February 2016, OPEC's decision, led by Saudi Arabia, to freeze production and not cut back from record levels caused the price of Brent crude to drop by 3% to US$32.
- 22 March 2016, OPEC's announcement that it will press ahead with a production freeze despite Iran's non-involvement causes oil prices to jump to $42 a barrel.
- 1 April 2016, OPEC backtracks and says it will only freeze production if Iran and other major producers agree to cutback, oil price falls to US$40.
On Sunday (17th April) OPEC members will meet in Doha to discuss the proposed oil price freeze. Whether a production freeze is agreed, or not, the outcome of the meeting is likely to have an effect on the oil price.
Clyde & Co points out that in the week leading up to the meeting the oil price has been volatile. The price of benchmark Brent crude oil rallied to its highest price for the year so far at US$45 a barrel on Tuesday 12th, but fell back by US$1 after comments from the Saudi oil minister, a key OPEC member, undermined hopes that a freeze in production would be agreed this weekend.
Richard Devine, Corporate Partner at Clyde & Co, comments: "OPEC policy has a clear and direct impact on the oil price, so it's easy to see why this is a major concern for the industry."
Clyde & Co's research shows that the slowdown of the Chinese economy was the next most significant geopolitical concern with 50% of respondents choosing this.
Richard Devine continues: "However, it is somewhat surprising that OPEC policy outstripped the next most pressing concern – the slowing of the Chinese economy – by such a wide margin."
"Decisions relating to supply are only part of the story. Chinese demand is still likely to play a crucial role in the recovery in oil prices, especially given its potential for future global oil consumption."
The International Energy Agency has forecast China to account for a third of the projected increase in global oil consumption by 2021, explains Clyde & Co.
China a greater concern for businesses in Asia Pacific than elsewhere
Out of the 19% of respondents based in Asia Pacific, 67% flagged the slowing down of the Chinese economy as a significant geopolitical concern for the industry in 2016, whilst just 46% of the respondents based elsewhere listed this as a concern.
"The economic slowdown in China is clearly a greater concern for those based in the region than those outside. Slower growth in China could have a more severe impact on its neighbours, as the region is linked economically through value chains and outbound foreign direct investment," comments Richard Devine.
Sanctions also a key concern for the oil & gas industry
Another supply side factor was identified as a critical geopolitical risk. Iranian sanctions are third on the list of industry preoccupations, 41% listed this as a concern. While it’s hard to predict exactly how long it will take for Iranian production to come on stream in a significant way, its potential is substantial.
Richard Devine comments: "Iran certainly has the potential to impact the market. Even its decision not to participate in a potential production freeze with other OPEC members has had a direct effect on the oil price. Businesses will be waiting nervously to see how things change once its production and export is in full swing.
Clyde & Co says that a significant number of individuals and entities in Iran remain sanctioned by the EU/UK and US - including the Islamic Revolutionary Guard Corp, which is heavily involved in the Iranian economy. This creates substantial compliance challenges for businesses looking to enter Iran as information on counterparties is not as readily available as in other countries.
Authorities and regulators have been very firm in recent years with non-compliance of sanctions regulations. In some cases such breaches have resulted in fines worth billions of US dollars, says Clyde & Co.
Richard Devine comments: "For IOC's, Iran's appeal is obvious. However, they must proceed with caution. The compliance assessment is multi-layered so thorough due diligence on sanctions and potential counter-parties is vital for businesses looking to enter Iran."
The survey respondents included a cross section of senior oil and gas executives from the global energy market. The respondents are based in the UK, Europe, the Middle East, Russia, Asia, Africa, South America and North America.