-14 [eco] [ed] @= Break-even price keeps OPEC members apart

March 14, 2011 - 0:0

The Organization of Petroleum Exporting Countries (OPEC) producers have remained split on the preferred market price of their crude oil exports given the large gap in the level of break-even price for their budgets, an official report said on Sunday.

While it is estimated at only around $41 for Qatar, the break-even price is as high as $94 for Ecuador and about $76 for Saudi Arabia, the world's largest oil exporter, said the report by the Arab Petroleum Investment Corporation (Apicorp), an affiliate of the Organization of Arab Petroleum Exporting Countries.
But the report stressed that in current market conditions, oil producers' fiscal policies are ""unarguably"" not a key determinant of international oil prices. Yet energy economists studying oil markets are tempted to approach fiscal break-even analysis with the feeling that it could shed more light on producers' production policy, said the report.
Defining the break-even price, the Dammam-based Apicorp said it is commonly assessed as the oil price that balances governments' budgets. It added that such a price could be expressed as a quotient of two algebraic expressions: -The numerator is the sum of government expenditures, non-hydrocarbon fiscal revenues and the portion of costs incurred by the petroleum industry, pro-rata share of taxes.
- The denominator is the sum of pro-rata share of royalty and taxes of respectively net (commercial) production and exports. Authored by Apicorp chief economist Ali Aissaoui, the report said while the above model for working out each OPEC country's break-even price is straightforward, gathering and analyzing the macroeconomic and petroleum data can be daunting task. In particular, the cost element, which is the least transparent, is very approximate, it said.
""Obviously, we are dealing with the full cost incurred by the petroleum industry. In addition to operating costs and security costs, this component includes interest on debt and expenses for depreciation and amortization,"" Aissaoui said.
His figures showed estimated fiscal break-even prices for 2010 vary from $41 for Qatar to $94 for Ecuador. In between, Saudi Arabia's break-even price is estimated at $76, nearest to the OPEC weighted average of about $77.
""Explanations for these inter-country variations include discrepancy in fiscal regimes, differences in the structure and cost of the hydrocarbon industry as well as the degree ordinary fiscal revenues contribute to balancing budgets,"" he said.
""It is fairly obvious from the above that OPEC members display very heterogeneous fiscal positions. The consequence is that no member's preferred price matches another's.
This weakens the chances of making the fiscal break-even price a predictor of 'OPEC' price preference no matter how close to OPEC's average is the most influential member, Saudi Arabia.....
""How then could members, whose fiscal break-even prices are higher than the market price, behave? They could try and persuade the opposite side to take action to tighten OPEC output by lowering country quotas either pro-rata or otherwise.
The expectation would be for market prices to increase to meet their higher break-even prices, even if they lose some volume in the process.""
But Aissaoui said he believed the problem is not so much how to implement such a scheme, noting that OPEC members are well skilled in the art of bargaining).
""Rather, it is how to validate and justify it in the first place...in any case, OPEC members cannot set expenditure which depends on other members surrendering market share. Our conviction is that, ultimately, countries would spend only what they could afford,"" said Aissaoui, an Algerian.
""Therefore high spenders have no escape but to adjust their fiscal policies and bring their spending closer to their revenues..... as a matter of fact, their ""preferred prices"" are more an indication of their ""preferred spending"" than any price they are likely to achieve.""
The 12-nation OPEC, which pumps just under 40 per cent of the world's crude supply, has not made clear what the exact price it deems fair and acceptable for its crude. But Saudi Arabia and other members have indicated they would like to see prices above $80.
(Source: Emirates 24/7