Non-Opec producers secure condensate exemption

Author Anastasia Krasinskaya, News Editor

Excerpt from Argus Global Markets’ Opec+ Vienna Special Report: The exemption will come into force for December, benefiting Russia and perhaps Oman.

Non-Opec countries will exclude condensate from the Opec+ output deal starting this month, Russian energy minister Alexander Novak says.

Russia has met its 11.14mn b/d production target for only three months this year under the Opec+ deal, when pipeline shipments of crude were contaminated with organic chlorides. It has been pushing to exclude condensate from being counted towards its production on expectations that rising natural gas output will make it even less compliant with its quota. Condensate accounts for about 7-8pc of Russia's total liquids production, Novak said in Vienna on 6 December.

The Opec+ deal places limits on crude production for participating Opec countries. But limits for the 10 non-Opec signatories are based on total liquids production, including condensate. Russia's commitment under the current Opec+ deal was until now to cut output by 228,000 b/d from an October 2018 baseline, which included condensate, and which Opec listed at 11.421mn b/d. Russia will now exclude 795,000 b/d of condensate from the October 2018 baseline, so that its adjusted oil baseline will be 10.626mn b/d, Novak says.

The new target takes effect for December. This puts Russia's target oil production level for December 2019 at 10.398mn b/d, he says. Russia has also agreed to cut output by a further 70,000 b/d for January-March, bringing its total cuts commitment to "about 300,000 b/d", Novak says. Based on the revised baseline, that puts Russia's crude production target at 10.328mn b/d for January. Novak says that if Russia's compliance had already been measured against a revised baseline, then its reduction would have been 232,000 b/d in November, slightly exceeding its commitment. Russia's stabilised condensate production in November was 833,000 b/d, Novak says.

The switch to calculating production quotas of non-Opec countries without condensate will bring them to a common methodology with Opec countries, Novak says. The move drew support from Iran and Oman. "I think [Russia's request] is reasonable," Iranian oil minister Bijan Namdar Zanganeh says. "What we do not consider for us, we should not consider for others. For Opec, it has never been about condensate and never will be. Opec is about crude oil."

Winners in the deal

Oman, in particular, will benefit. It has been increasing natural gas and condensate output since 2017, but because of the original definitions in the deal, it was forced to limit its crude output to offset rising production of condensates.

Oman's crude production was 883,000 b/d in October 2018 when the agreement baseline was set, while its condensate output was 113,000 b/d. By October this year, its condensate output had increased by nearly 45,000 b/d to 157,000 b/d while its crude output had fallen by nearly 70,000 b/d to 815,000 b/d. So, even though its quota falls by 9,000 b/d in January, it could potentially increase crude production by up to 40,000 b/d and remain compliant. It also has the added bonus of being free to continue increasing condensate production.

This is probably why Oman was keen to support Russia's proposal on the eve of the Opec+ meetings. "Opec includes crude and the rest includes crude and condensate," Omani oil ministry undersecretary Salim bin Nasser al-Aufi said on 5 December before the meetings. "We want a separation of crude and condensate. If Russia puts this back on the table we would support them."

Kazakhstan and Azerbaijan could also benefit from the change to crude-only quotas because their lighter production includes sizeable portions of condensate. The Karachaganak field is one of Kazakhstan's largest supply sources. It produces condensates that forms a significant share of the CPC Blend stream.

This blog is an excerpt from the Opec+ Vienna Special Report section of the 06 December 2019 edition of Argus Global Markets, a weekly report containing vital insight into the latest international oil market developments. Click here to view the full special report as a PDF.

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