The Organization of the Petroleum Exporting Countries ("OPEC") is a permanent intergovernmental organization created in 1960 in Baghdad, Iraq by the representative governments of large sovereign state oil producing nations, Iran, Iraq, Kuwait, Saudi Arabia and Venezuela.
In this article we look at the stated objectives of OPEC, its member country composition and how OPEC influences petroleum production policies.
OPEC's Principal Objectives
According to the OPEC Statute, the stated principal aim of OPEC shall be:
"A. […] the coordination and unification of the petroleum policies of Member Countries and the determination of the best means for safeguarding their interests, individually and collectively."
Article 2 of the OPEC Statute further relevantly provides that:
"B. The Organization shall devise ways and means of ensuring the stabilization of prices in international oil markets with a view to eliminating harmful and unnecessary fluctuations.
C. Due regard shall be given at all times to the interests of the producing nations and to the necessity of securing a steady income to the producing countries; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on their capital to those investing in the petroleum industry."
OPEC Members
At the time of writing, OPEC has a total of twelve member countries:
- Algeria;
- Congo;
- Equatorial Guinea;
- Gabon;
- Iran;
- Iraq;
- Kuwait;
- Libya;
- Nigeria;
- Saudi Arabia;
- United Arab Emirates; and
- Venezuela.
The commonality of interest is that OPEC Member Countries are net exporters of crude petroleum. The OPEC Statute stipulates that:
"Any other country with a substantial net export of crude petroleum, which has fundamentally similar interests to those of Member Countries, may become a Full Member of the Organization, if accepted by a majority of three-fourths of Full Members, including the concurrent vote of all Founder Members."
Declaration of Cooperation and OPEC+
In December 2016, for the first time in its history, OPEC Member Countries coordinated with 11 non-OPEC oil producing countries (now 10 on the basis that Equatorial Guinea became an OPEC Member in 2017), an expanded group referred to as OPEC+, to establish an unprecedented accord to "accelerate the stabilisation of the global oil market", the Declaration of Cooperation ("DoC").
The DoC would later have a profound impact on the world oil market. As a consequence of COVID-19, a global economic contraction driven by the pandemic caused commodity price shocks of an unprecedented magnitude. In April 2020, the effects were particularly negative for the world oil market, with the benchmark price for United States crude oil, the West Texas Intermediate, briefly going negative for the first time in history. Demand side shocks triggered by the global restrictions imposed in response to prevent the contagion of COVID-19 caused extraordinary decline in demand for oil and extreme price uncertainty. In response, members of the DoC held three Ministerial Meetings in 2020 and the outcome of these meetings was the largest and longest voluntary production adjustments in the history of the oil sector.
How does OPEC decision making influence global oil markets?
Current estimates indicate that over 80% of the world's proven oil reserves are located in OPEC Member Countries and over 60% of those are in the Middle East Region. Generally, OPEC's primary policy instrument is to set and change the collective oil production targets of its members through regular meetings, in the form of three qualitative options, to either reduce, plateau or increase. OPEC Member state governments thereafter cooperate by setting domestic petroleum policies which adopt the unanimously formed decisions of the OPEC Conference. Production quotas for individual members are based on the reserve capacity and production of that member as well as annual demand. Much has been written in empirical literature on the subject matter, with divergent views, however, there appears to be consensus that as a result of the large market share of OPEC Member Countries, the meetings themselves as well as supply-side decisions reached by OPEC to increase, maintain or decrease the production of crude oil available to the market, influence the global crude oil price movements.
Brodies' oil and gas lawyers
At Brodies Middle East LLP our specialist oil and gas lawyers based in Abu Dhabi, advise both state-owned oil companies and international oil companies in OPEC countries. As subject matter specialists in producing, operating and monetising oil and gas reserves we have decades of real-world practising experience in OPEC countries which informs our deep understanding of the specific practices of the oil and gas industry in the Middle East Region.
Our partners served in senior strategic roles for super-major oil and natural gas operators and the world's premier offshore drilling contractors, in complex legal environments, both civil and common law jurisdictions, including, the United Arab Emirates, South Africa, Angola, Equatorial Guinea, Gabon, Cameroon, Ghana, Sierra Leonne, Mauritania, Libya, Egypt, Iraq, Kuwait, Qatar and Oman.
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