When the Organization of the Petroleum Exporting Countries met in Vienna in December, it was in danger of imploding.
Oil prices had plunged. Member states Iran, Venezuela and Libya were refusing to cut production. Qatar had quit. And U.S. President Trump was pressuring Saudi Arabia to keep prices low.
With negotiations teetering on the brink of failure, rescue came from an unlikely place-Russia, which isn’t even an OPEC member. President Vladimir Putin agreed to cut Russian oil production in league with OPEC, provided that Iran was allowed to keep pumping.
The degree of acrimony that pervaded that critical meeting, and the critical role Russia played in resolving the crisis, hasn’t previously been reported. What happened behind closed doors in December was a pivotal moment in Russia’s transformation from a nation that didn’t cooperate with OPEC at all to one that has become an indispensable partner.
As the cartel of big oil producers has lurched from crisis to crisis-crashing prices, regime changes in member countries, cartel infighting, frequent attacks by Mr. Trump-Russia has wielded its power as a major oil producer to help. That has given Mr. Putin considerable influence over the direction of the world’s $1.7 trillion crude-oil market, and more power in the Middle East.
“Russia is now OPEC’s therapist,” says Helima Croft, the chief commodities strategist at Canada’s RBC Capital Markets.
Saudi Energy Minister Khalid al-Falih recently joked that he talks more with his Russian counterpart Alexander Novak than with some of his colleagues in the Saudi cabinet. “We met 12 times in 2018,” he said of Mr. Novak at a news conference in March.
At the next OPEC meeting, scheduled for May, Russia and Saudi officials will discuss whether to formalize what has been until now an temporary alliance.
For decades, the U.S. has embraced Saudi Arabia as one of its close geopolitical allies, selling it arms and encouraging its role as a stabilizing force in the Middle East. In exchange, Washington has come to expect a stable supply of oil to global markets to help damp price spikes and to prevent harm to the U.S. economy.
With its new ally in Russia, Saudi Arabia is no longer beholden only to Washington.
Under Mr. Trump, the U.S. has altered its longstanding, hands-off approach to the cartel. Mr. Trump has repeatedly tweeted for OPEC to boost output to drive oil prices down, and he has phoned the Saudi government directly asking the kingdom to open the taps.
“The United States-Saudi Arabia relationship plays a critical role in ensuring Middle East stability and maintaining maximum pressure against Iran,” said a senior Trump administration official. “The U.S.-Saudi relationship remains strong.”
Oil prices had cratered in 2016 and didn’t look likely to rebound. The three men needed to orchestrate a deal to reduce crude output to lift global prices. Russia and OPEC agreed to cut production.
By the middle of last year, crude was soaring again, thanks to lower output from OPEC and Russia and renewed prospects for global economic growth. By the end of the year, however, amid a U.S.-China trade battle, the world’s economic outlook was dimming.
As the December OPEC meeting loomed, oil prices had plunged some 30% in six weeks. The Saudis needed unanimous agreement on proposed production cuts to shore up prices. Iran, already hobbled by U.S. sanctions that began in November, was reluctant to curb its output. Libya and Venezuela, with domestic troubles of their own, also were holdouts.
The murder of dissident journalist Jamal Khashoggi at the Saudi Consulate in Turkey last October created a fresh rift between the Saudi kingdom and the U.S.-and provided an opening for Russia to insert itself further into OPEC.
The Russia-OPEC alliance began more than two years ago with the appointment of three new decision makers.
Saudi Crown Prince Mohammed bin Salman, the son of King Salman, had begun taking a more active role in Saudi oil policy, a big break from recent years when the royal court left oil policy to energy ministry bureaucrats. In mid-2016, he replaced the kingdom’s veteran oil minister Ali al-Naimi, the face of Saudi oil policy for decades, with Mr. Falih, a longtime executive at the state oil producer known as Aramco.
Mr. Putin tapped Mr. Novak to be Moscow’s point man for international oil strategy. And OPEC appointed Nigerian Mohammed Barkindo as its secretary-general, its most senior official.
With the cartel about to meet in Vienna, Qatar, Saudi Arabia’s neighbor in the Persian Gulf, shocked global oil markets by announcing it was leaving OPEC. It was among a small group of member countries that felt overshadowed as the Saudi-Russia alliance grew stronger. OPEC has become “basically all about what [Prince Mohammed] and his buddy Putin want,” says a Qatari official.
In interviews with The Wall Street Journal, officials from OPEC members, including some of its core Persian Gulf delegates, and Russia officials described the tense negotiations that followed.
Mr. Falih, the Saudi energy minister, faced dueling demands when the meeting began. Mr. Trump had been privately pressuring the Saudi crown prince to keep oil prices low and publicly prodding OPEC on Twitter to do so, according to Saudi officials.
“Hopefully OPEC will be keeping oil flows as is, not restricted,” Mr. Trump said in a Dec. 5 tweet. “The World does not want to see, or need, higher oil prices!”
At the same time, Mr. Falih, Saudi Arabia’s most powerful civil servant, needed to guarantee adequate oil revenue to fund the Saudi government, an incentive to seek higher prices. Some 87% of Saudi Arabia’s budget is funded by oil revenue.
“I wish we could reach an agreement,” Mr. Falih told those gathered in OPEC’s headquarters, according to people familiar with the conversation. “But I don’t have to.”
Emirati Energy Minister Suhail al-Mazrouei, OPEC president and chairman of the meeting, told others that Mr. Falih’s remarks meant the Saudis didn’t expect the cartel to reach a consensus, according to the people familiar with the conversation.
When Mr. Falih asked Iran to join the collective production cut, Iranian oil minister Bijan Zanganeh rejected the demand and blamed Persian Gulf countries for replacing Iran’s sanctioned oil. According to the people familiar with the conversation, he pointed his finger at Mr. Mazrouei, the Emirati minister in charge of the meeting, and said: “You are the enemy of my country.” Mr. Zanganeh then threatened to suspend Iran’s membership in OPEC, these people said. Spokesmen for the UAE and Saudi Arabia’s energy ministries couldn’t be reached for comment.
OPEC was supposed to reach a consensus by the end of the day, then join the following day with the Russia-led non-OPEC group, which included Kazakhstan and Azerbaijan, to hammer out an agreement on a broader plan. But Mr. Mazrouei, the OPEC president, was forced to adjourn the heated proceedings without a deal.
“It was one of those meetings where we thought failure was definitely imminent,” says one OPEC official who was there. “You could sense that everyone was wondering who is leaving next.”
Russia’s energy minister, Mr. Novak, who had been in Vienna, flew back to St. Petersburg early that day to consult with Mr. Putin about the chaotic OPEC developments. A day earlier, he had clashed with Mr. Falih, who insisted that Saudi Arabia and Russia reduce oil output evenly, according to delegates from Russia and the cartel. Russia was prepared to cut only half as much as Mr. Falih wanted, OPEC officials say.
In St. Petersburg, Mr. Putin gave Mr. Novak the approval to offer Russian production cuts that were greater than initially planned, according to Russian and OPEC officials. Mr. Putin told Mr. Novak to fly back to Vienna and make sure the meeting didn’t end without a deal.
When he got back to Vienna, Mr. Novak met with the Iranian oil minister, who had threatened to suspend Iran’s OPEC membership the day before. Mr. Novak promised he would get the Saudis to agree to a production cut exemption for Tehran, OPEC officials say.
At a separate meeting with Saudi Arabia, Mr. Novak agreed to Mr. Falih’s demands that Russia decrease output by a similar amount as Saudi Arabia. In exchange, he got a pledge from Riyadh to let Iran keep pumping.
Mr. Novak acknowledged that Russia would benefit from the cartel’s cuts. “We need $60 a barrel and we are under sanctions” from the U.S., OPEC officials recall him saying.
When Mr. Falih re-entered the OPEC meeting room, he was beaming.
The coalition began curbing output in January. Oil prices have risen 30% since the beginning of the year, their best annual start since the early 1980s.
Saudi Arabia says it has trimmed more than it promised. Russia had pledged to curb production by 230,000 barrels a day, but in March it had slashed daily output by just 120,000 daily barrels, according to OPEC and Russian officials.
Saudi officials say Riyadh is willing to overlook Russia’s shortcomings because it needs support on the international stage. “We cannot afford to lose them,” says one Saudi official.
By Benoit Faucon, Summer Said and Timothy Puko
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