* Saudi-Iran tension may be sticking point in deal talks
* Iran unlikely to agree to any cuts, experts say
* Iran production currently near maximum capacity
Geopolitical rivals Saudi Arabia and Iran may be headed for another
OPEC showdown, as the producer group enters negotiations over
extending oil production cuts in force since January.
Saudi Arabia may demand that Iran, which is allowed a slight rise in
output under the deal, commit to an output reduction as a condition
of continuing the cuts, people familiar with the kingdom's thinking
told S&P Global Platts.
The provision is among several that Saudi Arabia, tired of seeing
its market share eroded as it bears most of the burden of OPEC's
agreed cuts, is likely to come to the table with, sources say. These
include stipulations on members who have exceeded their quotas and
exempt members nearing full production capacity, notably Nigeria.
But it is Iran that is likely to be the biggest sticking point given
historic distrust between the two countries, as talks among OPEC
members ramp up amid signs that the global inventory glut remains
stubbornly high.
"We do expect that the Saudis will have demands on both poorly
complying deal participants and those exempted like Iran for the
second half," said Bob McNally, president of energy consultancy
Rapidan Group.
"We expect some tension ahead of the May 25 meeting, but as we have
seen ministers will temper disgruntlement with supportive public
comments so as not to spook investors," he added.
Saudi energy officials declined to comment on their plans, with one
telling Platts on condition of anonymity that "it is too early" to
discuss the particulars of negotiations that have yet to start.
Iranian energy officials did not respond to requests for comment.
Any move to rein in Iran's production is likely to be met with
significant resistance, experts say.
Oil minister Bijan Zanganeh last week, in remarks viewed as
conciliatory towards a deal extension, said Iran would be willing to
hold production at 3.8 million b/d for the remainder of the year.
That is right around its quota under the deal of 3.797 million b/d
and ahead of its February production level of 3.75 million b/d,
according to the latest S&P Global Platts OPEC survey.
Cutting below that "would be a non-starter especially since the
Iranian leadership is unlikely to be in a compromising mood in
advance of their May presidential elections," said Helima Croft,
head of commodity strategy with RBC Capital.
The deal, which called for OPEC to cut 1.2 million b/d and freeze
output at 32.5 million b/d, will be up for review at the
organization's May 25 meeting in Vienna. The participation of 11
non-OPEC producers, who pledged cuts of 558,000 b/d in concert, may
also be decided then.
SAUDI DISPLEASURE
An OPEC/non-OPEC monitoring committee meeting this weekend in Kuwait
may provide the first signs of whether the pact will survive past
its June expiry.
The committee is chaired by Kuwait and also includes OPEC members
Algeria and Venezuela, along with non-OPEC Russia and Oman. Saudi
Arabia, which holds the rotating OPEC presidency, will also attend
Sunday's meeting.
Saudi Arabia has cut its production by 140,000 b/d below its
requirement under the agreement with a January-February average
output of 9.92 million b/d, according to the Platts survey. That has
helped cover for its less compliant counterparts.
The kingdom has made its displeasure with non-compliant participants
known, warning against "free riders." It is likely to demand
stricter adherence for the deal to continue, sources said.
Matthew Reed, senior vice president of Middle East consulting
company Foreign Reports, said given how Iran is pumping near its
maximum capacity, the Saudis may feel Iran should participate in an
"all hands on deck" effort to reduce global inventories, as OPEC has
said is the goal of the cuts.
"These days Iranian officials are bragging about producing more oil
than at any time since the shah, so a conversation about what Iran
can contribute is obligatory," Reed said.
IRAN CAPACITY CEILING
Diplomatic sparring between Iran and Saudi Arabia scuttled OPEC's
first attempt last April in Doha to forge a production cut deal, as
Iran's insistence on an exemption while it recovered from sanctions
prompted Saudi Arabia to withdraw from negotiations.
At a September extraordinary OPEC meeting in Algiers, with Saudi
Arabia more eager for a deal and despite Iran having ramped up its
production in the intervening months, Iran came away from the talks
with a political victory -- an allowance to increase output by
90,000 b/d to 3.797 million b/d.
From Iran's viewpoint, the country is already in compliance with its
quota, making it unlikely to acquiesce to any demands to cut
production, said Sara Vakhshouri, president of consultancy SVB
Energy International.
Vakhshouri estimates that Iran may be able to raise its production
capacity by the end of 2017 to a total of 3.78 million b/d, but no
further due to financial constraints.
Keeping the current ceiling on Iranian
oil output may be
all Saudi Arabia can hope for, she said.
"Iran's production capacity by the end of 2017 is very close to what
they agreed to produce in the first half of the year," said
Vakhshouri, who is also a senior fellow at the Atlantic Council.
"Hence, even if there are political disagreements, Iran can't
technically produce much higher."
--Herman Wang,
herman.wang@spglobal.com
--Edited by Jeremy Lovell,
jeremy.lovell@spglobal.com