A Divided OPEC Is Back to Basics: What Is Crude? : Rift Over Definition That Affects Quotas May Cloud Pressing Issues on Agenda

The Organization of Petroleum Exporting Countries, once a powerful cartel perceived as having Western economies under its thumb, now can’t even decide what a barrel of oil looks like.

Defining crude oil is one of the jobs facing ministers at OPEC’s midyear meeting that starts here Saturday. It seems that lately some cash-starved member nations have stretched their perceptions of crude almost beyond recognition.

This should be a geological debate, but it is symptomatic of OPEC’s disarray and thus has attracted economists and politicians. Not all kinds of oil are subject to the cartel’s quotas, and the physical characteristics of crude have become a bargaining point in OPEC’s effort to resolve more fundamental differences.

“It’s become a big issue because there is no will to agree on more important questions. If they could agree on those things, this wouldn’t even have come up,” said Vahan Zanoyan of the Petroleum Finance Co. in Washington.

The bigger issues are:

- Whether to increase or maintain the current nominal production quota of 15.1 million barrels per day in the second half of the year. A consensus of analysts favors a rollover of that ceiling, set in December, 1987. Boosting output--backed by a Saudi Arabia-led minority--would tend to keep prices in the current $16- to $18-per-barrel range in the face of expected rising demand. Lowering quotas would send prices up--the goal of Iran, Venezuela and most other members.

- Whether to embrace a group of several non-OPEC nations, led by Mexico, that have offered to cut their production if OPEC will do the same. The initial offer prompted a special cartel meeting in late April, but the powerful Saudis--trying to keep a lid on prices--successfully led opposition to any deal that cut oil output.

- Whether to try again to return Iraq to the OPEC fold by giving it the same quota as its war opponent, Iran. For 18 months Iraq has pumped all the oil it can rather than follow its assigned quota below Iran’s, an impasse that mocks OPEC’s purpose as a cartel. Some well-connected officials say a compromise is in the works, but skeptics see little chance of this until scheduled big increases in Iraq’s oil capacity are nearer reality in 1989.

Resolving the Iraq issue would make it easier to fix other problems facing the group of 13 oil-exporting nations. One economist with close Middle East ties says the possibility has been enhanced by Iran’s recent military setbacks and increasing preoccupation with internal problems.

Some key ministers are apparently floating a musical chairs-like plan in which the true oil output by OPEC nations would be unchanged, but the allowable oil would be parceled out differently in an attempt to satisfy Iraq, an increasingly restive Venezuela, and the non-OPEC nations.

But pre-meeting maneuvering on this and other issues is viewed by many observers as futile because the cartel isn’t threatened with any crisis at the moment. OPEC seldom does much when oil prices are holding at a workable level.

Although the special April meeting failed to reach an agreement with the Mexican group, it caused a price run-up. Prices have since subsided but remain about 50 cents a barrel higher than before the special meeting, making the whole exercise a success in OPEC’s view. Many observers, including Exxon President Lee Raymond, believe that crude prices could rise by $1.50 a barrel later this year without OPEC doing anything.

“I can’t think of a single instance in OPEC history in which they took preemptive action,” said Bryan Jacoboski, an OPEC and oil company analyst for Paine Webber in New York.

Meanwhile, despite the desire of all OPEC members to establish long-term ties with other nations whose increasing oil output has undercut the cartel, the initiative from the Mexico-led group conflicts with the short-term goals of price moderation by such key members as the Saudis.

The Saudis’ pricing view is seen as motivated in part by their bitter military and religious differences with price hawk Iran. And its position has hardened with Iran’s recent setbacks and the military protection afforded Gulf producers by U.S. and other naval vessels in the Persian Gulf.

“Clearly, there can be no meaningful cooperation (with non-OPEC nations) when OPEC itself is divided on the production-versus-price issue,” says analyst Zanoyan.

Meanwhile, the vexing question persists: What is crude oil? It’s a little hazy, but geologists say it is definitely not condensate. And that, according to Kuwait and Saudi Arabia, is the problem.

Condensates are liquid gases which come out of the ground naturally with crude oil. The most common such gases are butane and propane, which can be used in making gasoline. Condensates are exempt from OPEC’s production limits, which means that the member nations can produce as much of it as they want.

The Gulf allies accuse the Venezuelans and Algerians--two of the strongest proponents of cutting oil output--of treating some crude oil as condensates as a way of skirting OPEC quotas.

Geologists say condensates range from 50 to 120 degrees of specific gravity, a measure of a liquid’s characteristics. A Dutch auditing firm hired by OPEC to check on reported production cheating by some cartel members defined crude oil as having a specific gravity of 47 degrees or less.

But the Venezuelans drop the cutoff to about 40 degrees, according to the publication Petroleum Intelligence Weekly, declaring that everything else is condensate and can be produced at will. While crude oil production has been restrained under quotas since 1982, Venezuela’s condensate output has risen sixfold since 1983.

“It is not a minor problem, far from it. Depending on which way we add up condensate, the difference can be 2 million barrels a day to the quota,” Kuwait oil minister Ali alKhalifa al Sabah complained in Vienna after he and his Saudi allies brought up the subject at the April meeting.