Opec-Plus Takes Washington's Offer

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Washington's bid to convince major oil-producing countries that market-driven shut-ins of US output should count as a US contribution to rein in an acute oversupply appears to have worked. Saudi Arabia, Russia and other key members of the Opec-plus pact were poised Thursday to agree to cut production by 10 million barrels per day in May and June (IOD Apr.10'20). The agreement was awaiting finalization at press time late Thursday subject to acceptance by Mexico. "We see US projections of declining oil production by 1.7 million b/d this year," Kirill Dmitriyev, the head of Russia's sovereign wealth fund, said Thursday, echoing official US government projections released Tuesday about the drop in US output between the fourth and first quarters of 2020 (OD Apr.8'20). "We believe it can even be higher." The news of a prospective agreement on a production cut, which would taper off but remain in place through part of 2022, stands in contrast to the Kremlin's skepticism Wednesday (IOD Apr.9'20). Beyond offering market cuts, US President Donald Trump has avoided taking steps that would give the impression the US wasn't at least trying to play ball, whatever the limitations on the federal government's ability to rein in output (OD Apr.8'20). Sources said the administration's decision not to sign off on royalty relief for oil and gas companies operating on federal land -- a proposal put forward by the Interior Department -- was at least in part driven by concern that it could look like Washington was lending a hand to shale companies. Convincing Moscow and Riyadh that price-driven cuts -- rather than curtailments prescribed by Washington or individual states -- can form the basis of the megadeal has been critical. Russia has made its participation in any new round of cuts involving the Opec-plus alliance and other producers contingent on the US joining, but private companies cannot coordinate on output. The US also applied pressure on the foreign policy front, with Republican lawmakers threatening to limit imports of foreign oil and withdraw US forces from Saudi Arabia. Trump said Thursday evening in Washington that he believed Opec would announce a deal “today or tomorrow” after he spoke to Russian President Vladimir Putin and King Salman of Saudi Arabia on a conference call ahead of his nightly news conference. “It could be good, could be not so good,” he said of the potential deal. Against the backdrop of the limits on US federal power, the Opec Secretariat began exploring alternative ways for the US, as well as Canada, to join in on the agreement, Opec delegates told Energy Intelligence. The delegates say the secretariat received replies from both officials in the US and Canada shedding some clarity on the particular legal systems in both countries. Generally, states are in charge of commerce within their borders. In the 1930s, Congress vested a handful of states with the ability to "prorate" oil volumes in order to control production. But even Texas -- which actively used that mechanism -- abandoned the practice 50 years ago. Texas Railroad Commission (RRC) member Ryan Sitton has been the only one of a three-member board enthusiastically advocating to revive the mechanism, although one other commissioner has also made remarks indicating he may be receptive (OD Apr.7'20). Other producing states have yet to take up the idea, although New Mexico and Oklahoma have begun paying more attention to the Texas discussions in recent days. Canada faces similar legal hurdles, with major oil-producing province Alberta willing to cut output. Opposition remains high from the largest US oil producers (OD Apr.9'20). However, some companies have been willing to play ball. Pioneer Natural Resources in particular has pushed the Texas Railroad Commission to consider proration as a means of emphasizing that US cuts are durable. "The US has got to figure out how to participate," Pioneer CEO Scott Sheffield said in an interview with Energy Intelligence Thursday. "Our our key message to the [RRC] and to the federal officials was to stabilize the price of around $30 per barrel versus going back to $10 or $15/bbl." Sheffield said he believes the market can rebalance inventories over a period of months if an expanded group of producing countries can agree to 10 million-15 million b/d of cuts. With a coordinated cut in play, threats to withdraw military assistance to Riyadh are likely off the table, says Amy Myers Jaffe at the Council on Foreign Relations, particularly with lawmakers turning their focus to containing the economic fallout of the coronavirus. "They move on," she said. Emily Meredith and Bridget DiCosmo, Washington, Amena Bakr, Dubai, and Deon Daugherty, Houston

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