Opec split in row over oil 'cheating'

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The Independent Online

Opec, the cartel that controls 40 per cent of the world's oil, is heading for what could be an acrimonious bust-up in which several members threaten to walk out.

The first Opec meeting of 2002 is this Friday and, though world leaders hope the event will pass quietly, insiders warn that the organisation is so riddled with internal discord that a serious confrontation is practically guaranteed.

Leading the rebellion are expected to be Venezuela and Indonesia, tipped to be joined by Libya and Algeria. All four countries are under intense domestic pressure to buck the demands of the Saudi-dominated Opec and pump as much oil as they can.

Oil analysts are also warning that in the aftermath of this week's meeting, there could be a reopening of the bitter price war between Opec and Russia that sent crude prices tumbling to historic lows in November and December.

A leading adviser to Opec said: "People are assuming that because crude prices are high again, Opec as a whole will be happy. Unfortunately, the higher oil price is just papering over the chasms. There are major disputes between Opec members that have been brewing for months."

One big flashpoint is expected to be the revelation at the meeting that many of Opec's members have been cheating on their quotas, finding loopholes that allow them to keep the crude pumping at the same old levels. "It could so easily dissolve into a furious row," the adviser said. "The one trouble with the oil industry is that it is extremely difficult to keep track of who is producing what. The poorer countries will realise crude is back inside the old band, and demand that the December cuts be revoked."

From the outside, with crude back up at $23 a barrel, Opec appears in a far better position than it was towards the end of 2001. The global uncertainty after 11 September strongly depressed crude prices, and Opec was in effect forced to abandon the $22 to $28 price band it had defended for nearly two years.

But the lurking problem is that the rise in oil prices is not the direct result of Opec's latest round of production cuts, but more to do with worries about a renewed showdown between Iraq and the US. Oil experts say that as crude prices climb, the risks of a sudden collapse, perhaps back to $15 a barrel, become far greater.

For this reason Jeremy Elden, the senior oil analyst at Lehman Brothers, warned: "Opec's success is unsustainable. The problem the cartel faces is that to achieve this recovery, it has shut in more than six million barrels a day of production – 22 per cent of its capacity – so it has sacrificed 4 per cent of its global market share."

That sacrifice is creating the rifts. Wealthier producers such as Saudi Arabia may be able to tolerate the reduced output quotas, but ministers in poorer countries are under huge pressure to resist the cuts.

The first sign of internal Opec division has come from Venezuela for precisely that reason. In a major break with the tradition, its president, Hugo Chavez, has said he is not willing to make production cuts. Analysts say other signs indicate that individual Opec members might start to pursue their own agendas. The signs include unscheduled ministerial visits to Russia.

Russia remains the biggest wild card. Over the past few weeks it has become clear that, despite promises from President Vladimir Putin, Russian producers have made few efforts to cut production, and continue to steal market share from Opec.

"Opec and Russia are set on an inexorable collision course," Mr Elden said.

"For Opec the dilemma has always been the same – higher volumes and lower prices, or lower volumes and higher prices. Russia has one agenda, which is to export as much oil as possible to get an international price of $20.70 a barrel."

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