Interview: Omani oil minister says OPEC+ production cut deal will not balance market

Dubai — The OPEC+ production cut agreement, which will see 9.7 million b/d taken out of the market starting in May, will not sufficiently balance the coronavirus-hit market, Mohammed al-Ruhmy, Oman's minister of oil and gas, said Tuesday.

After several days of talks, members of the OPEC+ alliance agreed to collectively cut production by 9.7 million b/d in May and June, followed by a 7.7 million b/d reduction in H2 2020 and 5.8 million b/d from January 2021 through April 2022. The agreement is aimed at counteracting the plummet in global demand caused by the coronavirus pandemic.

In an interview with S&P Global Platts, Rumhy said 9.7 million b/d will not have a major impact on the balancing of the market. "But 19 million b/d, I think will," he said.

In the OPEC+ meeting on Sunday, when the 9.7 million b/d cut was agreed upon, a cut of 19 million b/d was discussed, Rumhy added. The 19 million b/d level was first discussed during a meeting on Saturday between the G20 ministers, International Energy Agency and the OPEC secretary general, Mohammed Barkindo. The conclusions of this meeting were then considered by the OPEC+ meeting on Sunday, Rumhy said.

Under the agreed-upon cut, Oman will slash its May and June production by 23%, equating to 201,000 b/d. Its new quota is 680,000 b/d. A member of OPEC+, Oman is the Mideast Gulf's largest oil producer not an actual member of OPEC, with a maximum production capacity of about 1 million b/d.

A level of 12 million b/d to 13 million b/d will actually be taken out of the market by the OPEC+ agreement, compared with April production, Rumhy pointed out. This is because many countries including Saudi Arabia, the UAE and Russia further opened their taps in April following the collapse in March of the previous OPEC+ production cut agreement. The reference point for the 9.7 million b/d cut is actually production levels at the end of 2018, Rumhy said.

Further long-term decreases will occur organically, because of the coronavirus pandemic, as reservoirs around the world decline due to being untended.

"Less oil is going to be produced from shale formations in the United States," Rumhy said. "And many countries are reporting reduced production because of economic reasons, it's not economic for them to produce at current prices. If you don't work on any oil field, it doesn't matter where, they will decline. These reservoirs need a lot of attention."

Moreover, the supply chain for equipment is presenting challenges that could result in further production declines, he said.

"We depend on supply of oilfield equipment, from drilling to maintenance, pumps and pipeline repairs, this long chain of hardware is difficult to find," Rumhy said. "If this virus continues for longer, even if you want to drill more wells or repair more pumps, you will not be able to because our technical ability to move oil from oil from one point to another, from the bottom of the reservoir to the surface to the terminal, it will be impacted."

Much of Oman's supply for oil industry, such as valves, hails from Italian factories, which are closed. These valves get regularly warn out and require maintenance, Rumhy said. All this will have an impact in the ability to keep on producing oil.

"If the situation continues further, we still have some spare parts in our warehouses, but these will soon start to wear out," he said. "We don't know how long they will last. If things start to break down because of [rising] heat next month, then our spare parts will run out faster. I'm sure we are ok for a few months, but not longer than that."