OPEC Struggles to Rein In Biggest Cheat Despite Saudi Arabia’s Scolding

(Bloomberg) — Saudi Arabia’s oil supply shock has set up a standoff with OPEC members who keep busting their quotas, but the biggest of the offenders has yet to flinch.

Kazakhstan — whose persistent flouting of production limits triggered Riyadh’s ire — continues to pump as usual at the biggest oil fields run by its international oil partners, according to people familiar with the matter. The Tengizchevroil joint venture that includes Chevron Corp. and Exxon Mobil Corp. will stick with plans to boost production this year and has no intention of cutting back, the people said. Another operator said they hadn’t received any official request to reduce.

Kazakhstan’s defiance throws down the gauntlet for the Saudis, testing how deep a price rout the kingdom will endure in its long-running mission to impose discipline on the Organization of the Petroleum Exporting Countries and its partners. In the meantime, the impasse will take a toll on crude prices — and perhaps on the alliance’s unity.

The OPEC coalition led by Saudi Arabia and Russia stunned oil traders last week by announcing it would revive oil output at three times the scheduled pace in May. The surprise pivot, coming just hours after President Donald Trump’s barrage of trade tariffs, has helped slash oil prices to the lowest in four years.

While Riyadh may be indulging Trump’s push for cheaper fuel to gain political favor, OPEC delegates said the decision was ultimately aimed at quota violators like Kazakhstan and Iraq. The “controlled sweating” aims to squeeze their revenues and force the delinquent nations to rein in overproduction, RBC Capital Markets said.

Crude prices have consequently crashed, sinking below $60 a barrel in London on Wednesday for the first time since 2021. The rout threatens the finances of Saudi Arabia and others in OPEC , and deals a further blow to the prospect that American shale producers will fulfill Trump’s mantra to “drill, baby, drill.”

Last week’s policy shift marked a radical departure for OPEC , which for several years has been keeping a tight lid on oil supplies in order to shore up prices. It stirred echoes of the brief 2020 price war waged by Riyadh against Moscow, and renewed speculation over how long the disparate coalition can ultimately remain united.

“This is a warning shot to say: get in line,” Amrita Sen, director of research at consultants Energy Aspects Ltd. told Bloomberg Television. Nonetheless, she said, the Kazakhs have admitted “they have not even reached an agreement with their energy companies to figure out a way to cut production.”

While a much smaller producer than the group’s leaders, Kazakhstan has long been a source of friction for Saudi Energy Minister Prince Abdulaziz bin Salman as the country repeatedly chafes against output limits. The challenge has grown in recent years as Astana proceeds with ambitious projects like the $48.5 billion expansion of its giant Tengiz oil field led by Chevron.

After a fractious OPEC gathering last month, the country’s energy minister met with international oil companies in a renewed effort at compliance. An agreement was supposedly reached to curtail production, but the latest data attest that little has come of it.

Kazakhstan pumped 1.79 million barrels per day of crude in March — surpassing its OPEC limit by more than 300,000 barrels a day — and probably won’t make any major reductions this month, Deputy Energy Minister Alibek Zhamauov told energy publication Argus Media. No agreement with foreign companies on cutbacks has been reached, he acknowledged.

Chevron Chief Financial Officer Eimear Bonner said last month that the company’s project in Kazakhstan provides “high-margin, high value barrels” that haven’t been subject to cutbacks in the past. Earlier this year the company said it would follow guidance from the Kazakh government on output.

Riyadh’s chastisement may have more success in disciplining Iraq. Baghdad reduced oil exports in March, and intends to make further cutbacks in April and May, despite the potential widening of the government’s budget deficit, according to an official who asked not to be identified.

Whether that will be enough to fully atone is unclear.

Iraq, like the Kazakhs and other laggards, has pledged extra supply curbs as compensation for over-producing. Yet respected monitors like the International Energy Agency in Paris believe Iraqi output remains far higher than the country professes, with output of 4.3 million barrels a day in February — roughly 300,000 per day above its OPEC ceiling.

Baghdad at least is showing itself to be penitent. Kazakhstan, however, has limited ability to influence oil production, because of production sharing agreements that concentrate control in the hands of its corporate partners.

State-run producer KazMunayGaz may try to reduce output at smaller oil fields, but these wouldn’t be enough to offset the growth at Tengiz, according to people familiar with the matter. Astana has relayed its difficulty in directing foreign companies to fellow OPEC nations, delegates said. The group’s response remains unclear for now.

Rather than deliberate restraint, the biggest check on Kazakh oil flows recently has been unplanned outages.

The single-largest export facility Caspian Pipeline Consortium terminal near Novorossiysk on Russia’s Black Sea coast, was forced to suspend two out of three moorings late last month after an inspection triggered by a major spill of fuels elsewhere in the Black Sea.

While loadings are expected to return to normal in coming days, the disruption — like damage to a CPC pumping station during a Ukrainian drone strike in February — underscores the vulnerability of regional energy flows.

If Astana fails to mend its ways, OPEC could intensify the punishment by accelerating production increases again when it reviews policy at the start of next month, according to Energy Aspects’ Sen. If the quota laggards don’t comply, “I think you can see another run of faster-than-expected increases.”

The financial toll of prolonged market rout could be severe for many OPEC nations, with estimates from the International Monetary Fund showing that Riyadh needs an oil price of $90 and Astana as much as $115 per barrel to cover government spending. Kazakhstan’s Deputy Prime Minister Serik Zhumangarin said on Wednesday that there is a “crisis plan” to weather $60 crude, Interfax news agency reported.

If prices do stay at $60, the country may opt to raise taxes faster rather than deplete an oil fund that’s already “melting pretty quickly,” said Murat Temirkhanov, an analyst at Halyk Finance.

An “oil price at $70 a barrel for a long time is bad,” he warned. “Sixty dollars could be catastrophic.”

–With assistance from Francine Lacqua, Salma El Wardany, Julian Lee and Kevin Crowley.

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