(UNTITLED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T01017R000201290001-6
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 11
• Document Creation Date: January 12, 2017
• Document Release Date: February 24, 2011
• Sequence Number: 1
• Publication Date: August 20, 1986
• Content Type: MEMO

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Central intelligence Agency
DATE r'IC
DOC NOGJ
OIR 3
P & PD I
DIRECTORATE OF INTELLIGENCE
2 0 AUG 1986
MEMORANDUM FOR: Franklin J. Vargo
Deputy Assistant Secretary for Europe
Department of Commerce
SUBJECT: Non-OPEC Oil Producers: Prospects for
Reductions in Output
In response to your request we have attached our assessment
of the prospects of non-OPEC cooperation with OPEC. We do not
expect further significant reductions in output from non-OPEC oil
producers. As a result, price stability will continue to depend
on OPEC willingness to restrain output. If you or members of
your staff have questions concerning the report, please call
Chief, Energy Markets Branch, Office of Global Issues
Attachment:
Non-OPEC Oil Producers: Prospects for
Reductions in output
GI M 86-20189, August 19
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Reduction in Output
OGI/SRD/EMB
Limited Prospects for
(20 August 1986)
Franklin Vargo, Commerce
SA/DDCI
EXDIR
D/DCI - DDCI Exec Staff
DDI/PES
NIO/ECON
CPAS/ISS
DD/OGI, D/OGI
OGI/PG/CH
OGI/EXS/PG
CPAS/ICB
CH/SRD
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1 - SRD/EMB
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Central Intelligence Agency
19 August 1986
Non-OPEC Oil Producers: Limited Prospects for
Reductions in Output
Summary
Several non-OPEC oil producers have reasserted their
commitments to join OPEC's effort to restrain output and boost
oil prices on the heels of the new OPEC production allocation
agreement. Proposed cutbacks, however, are likely to reduce
output by a maximum of 100,000 b/d from current levels--far less
than what OPEC is hoping for. Moreover, we believe total non-
OPEC production will likely rise during the remainder of the year
as increases in exports from the North Sea, Australia, and the
USSR will more than offset any voluntary reductions in output
from other non-OPEC producers. As a result, price stability will
continue to depend on OPEC's willingness to restrain output.
This memorandum was prepared by
Energy Markets Branch, Office of Global Issues. The information
contained herein is updated to 19 August 1986. Comments may be
directed to Chief, Strategic Resources
Division
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Non-OPEC Oil Producers: Limited Prospects for
Reductions in Output
Recent Developments
OPEC has not abandoned its effort to gain production
restraint from non-OPEC producers. Indeed, Saudi Oil Minister
Yamani specified a cut in non-OPEC production as a condition of
the quota agreement and conveyed this to the oil-producing
countries which had offered to cut their output earlier this
year. Angola, Egypt, Mexico,
Brunei, Malaysia, and Oman recently indicated they will implement
the cuts they had promised. Norway recently reaffirmed it may
reconsider its oil policy now that OPEC has decided to cut
output.
Nonmembers might have renewed incentive to cooperate with
OPEC in the near future, having experienced the consequences of a
price war. Few producers had capacity to raise production to
offset the effects of lower prices, and they all benefit
substantially from an increase in prices to about the $15 per
barrel range. Poorer producers like Mexico loathe the prospect
of oil prices well below $10 per barrel and probably will take
steps to at least appear as if they are doing their part to
restrain output.
Constraints to Cooperation
The non-OPEC producers face a number of constraints to
cooperating with OPEC that will likely limit the amount of
production actually reduced. The major non-OPEC producers, for
example, are also large oil consumers and most of their
production is used to fulfill domestic needs, leaving only modest
amounts available for export. Non-OPEC production is currently
averaging roughly 26.6 million b/d, but net exports are running
only about 6.5 million b/d, leaving little room for substantial
cutbacks (figure 1). Total non-OPEC production is already down
roughly 1.2 million b/d below capacity. Marketing problems for
several countries, including Mexico and Egypt, have kept oil
output about 300,000 b/d below capacity. Maintenance programs,
especially in the UK North Sea, are reportedly responsible for
another 600,000 b/d decline in output. We estimate only about
200,000 b/d of output, mostly in the United States and Canada,
has been shut in because oil prices fell below operating costs.
Other factors that will limit production cuts from non-OPEC
oil producers include:
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 rigure i
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NON-UrtL ANU Urtu rKUUUI.I JUN HIVU vArvr\ I
SECOND QUARTER 1986
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o Divergent interests and no formal mechanism for
communication or coordination. The countries are a
disparate group that range from LDC's which depend
heavily on oil for revenue to industrial nations with
larger, more diversified economies.
o Growing financial difficulties and budget deficits. It
would be difficult politically for their governments to
agree to production cuts when there are no guarantees
that all other oil producers will follow suit.
o Technical limits to reducing current output. For
example, certain fields in Norway--particularly
Statfjord--produce associated gas, all of which is sold
under long term contract.
o Strong pressure from the United States, which advocates
a hands-off policy in the oil market. The North Sea
producers are members of the IEA and would be
particularly susceptible to such pressure.
Cooperation will be Limited
In our judgment, several nonmembers combined will probably
reduce output by only a maximum of 100,000 b/d on a voluntary
basis this year (table 1). Cuts by smaller producers such as
Malaysia and Oman will be slight, token gestures to OPEC. Mexico
said it would hold its exports to 1.35 million b/d for 1986--a 10
percent reduction from last year. Yet exports for the first half
of 1986 were only 1.3 million b/d, and Mexico could keep sales
during the second half at 1.4 million b/d and honor its
commitment to OPEC. Egypt will base its "cutbacks" on already
planned reductions in output for 1986--reductions from current
production are unlikely. Promises of cooperation from others
like Angola and China were probably lip service, in our view, and
are unlikely to translate into significant decreases in output
(see Annex: Positions of Non-OPEC Producers).
Expected increases in output from other non-OPEC producers,
however, will more than offset voluntary production cuts, causing
total non-OPEC production to rise by as much as 500,000 b/d from
current levels over the coming months to about 27.1 million
b/d. North Sea production was a low 3.3 million b/d in June due
to summer maintenance programs. We expect UK production to rise
by at least 300,000 b/d in the next month or two, reflecting an
end to the summer maintenance programs. Also, a recent tax
revision in Australia has triggered a resumption of exports of
about 100,000 b/d, and the USSR has steadily increased exports in
Consequently, changes in nonmember production will fall far
short of OPEC's expectations and are unlikely to affect price
movements significantly this year. The burden of price stability
will remain on OPEC. It is unclear at this point how these
circumstances will affect OPEC's discipline. If another price
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war should ensue, Saudi Arabia might believe that non-OPEC
producers have not learned their lesson and attempt to keep
prices at very low levels for a prolonged period.
If OPEC Reneges...
OPEC's recent agreement is tentative and could rapidly
collapse if members cheat on their quotas. The Saudis, who
probably believe they have taught producers the consequences of
indiscipline, would probably renew the market share fight and
force prices down again if violations occurred. Kuwait and
Indonesia made explicit that their participation in the new
accord was contingent on strict adherence to quotas and that
cheating by any member would absolve them of quota obligations.
If OPEC members were to participate in the struggle for market
share and attempt to force their remaining capacity onto the
market, oil prices could fall to about $5 per barrel. In the
absence of producer cooperation,
oil prices could remain below $10 per barrel for two years
If OPEC's agreement collapsed, nonmembers would likely
remove any production restraint and join the price war. Should
prices erode and approach $5 per barrel, additional output in
high-cost areas like the United States and some production in the
North Sea and Canada would be significantly affected for the
first time. During the first year or so we expect, however, that
the additional loss of non-OPEC supply--even at prices around $5
per barrel--would be relatively small, perhaps about 500,000 to 1
million b/d. In the North Sea, for example, only about 500,000
b/d of UK production would be unprofitable at $5 per barrel
(figure 2). But much of this would probably be produced anyway.
Also, shutting in production would entail considerable costs,
which might induce operators to continue producing despite short-
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rlgure L
UK NORTH SEA: ESTIMATED PRODUCTION
CUTBACKS AT VARIOUS PRICES
2.61
2.4-
2.2-
2-,
1.8
1.6
1.4
1.2 J
1-4
0.8
0.6-4
0.4 J
0.2
0
$5 $4 $3
Based on average first half 1986 production level of 2.76 million b/d.
Assumes production is lost when- rices fall below operating cost.
The cost figures used are 1985 Figures and overestimate current
effective operating costs.
SOURCE: Wood Mackenzie North Sea Report.
Per Barrel
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Annex
Positions of Non-OPEC Producers
Cooperating Nations
Mexico Mexico has reiterated its "offer" to cut exports to
1.35 million b/d. This spring exports fell to 1.1
million b/d due to marketing problems, but have
rebounded since then to about 1.4. Mexico earlier
this year set its export target at 1.35 million
b/d.
Egypt Production has been steadily declining since
January to roughly 600,000 b/d in July due to
pricing problems. Promised only to keep output
below 900,000 b/d. Imposed a production cap of
860,000 b/d for FY 1986-1987 to prevent the
overworking of older fields.
Angola Indicated in June that it would be prepared to cut
crude oil output from its current level of 300,000
b/d. No amount specified.
Malaysia Following OPEC's decision to cut output, Malaysia
announced it would reduce output by 10 percent, but
only if prices "increase significantly." Implies a
potential production cut of 50,000 b/d from its
current level of 510,000 b/d.
Oman Agreed in May to reduce production by 50,000-
100,000 b/d. Has since increased production by
50,000 b/d to 550,000 b/d but may cut hack by some
amount now that OPEC has reached an agreement.
Brunei Reportedly agreed in May to reduce output by 10,000
b/d from its production level of 180,000 b/d.
Non-Cooperating Nations
Norway Announced it will decide whether to cooperate with
OPEC by 1 September. Indicated in June it would
not alter current production but might slow down
the rate of production growth as a form of
cooperation.
United Refuses to take measures that would help raise
Kingdom prices but probably would not oppose independent
actions by companies regarding production volumes
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that would serve this purpose. The summer
maintenance program brought UK production levels to
a three-year low in June.
Canada Refuses to cooperate with OPEC. Has seen some shut
in of high-cost production but, overall, not much
change in output.
Australia Production fell by about 120,000 b/d this summer
because of domestic oil strikes and a high tax
structure which makes some production for export
uneconomic.
China Will try to keep exports at 600,000 b/d to earn
needed hard currency. No change in exports
expected during rest of the year.
USSR Facing a substantial deterioration in hard currency
earnings and an improved production situation,
Moscow could raise exports by roughly 100,000 b/d
during the rest of the year.
Note: Any "cooperation" described in this table is contingent
upon evidence that OPEC is holding to its agreement.
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
6
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Table 1
Non-OPEC Oil Production, 1986
(million b/d)
Country
Mexico
Egypt
Angola
Malaysia
Total Reductions
North Sea
US
Canada
Australia
Net Communist
Exports
Other
Projected
IV Quarter
Production
Level with
Available II Quarter Selected Changes in
Capacity Output Cooperation output
0.3 0
0.51 0.46 -0.05
0.55 0.50 ;-0.05
0.18 0.17 -Negl
4.0 344
10.7 10.5
1.8 1.8
0.6 0.5
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