Why new OPEC exemptions are critical for Nigeria

The world’s biggest oil producers are pushing to extend the supply cap deal agreed last year which saw 1.8 million barrels per day sliced off global oil production, to the first quarter of 2018.

Following a supply overhang, prices dipped below $30 in the first half of 2016, the first time in over a decade and didn’t recover above $50 till the end of 2016.

 As indications emerge last week that beyond Russia and Saudi Arabia, who are spearheading the push for extension, Kuwait and Iran are positively inclined to see the cuts extended too. The deal which seeks to curb global inventories to a 5-year average was aimed at propping up oil prices.

 Worried over the implications of fallen oil prices on national economies, top oil producers agreed to cut production volumes to quell a troubling glut in the oil market. Originally, scheduled to run from January to July 2017, the relative success recorded and slow recovery of oil prices is forcing producers to seek a further 9-month extension.

 The only snag the deal has had is the threat from shale producers who began hitting their platforms to ramp up production when modest gains were recorded on account of the deal. While it them weeks to mobilize to their platforms, advanced fracking technology is letting them achieve this in a matter of days.

Oil producers like Nigeria and Libya were granted exemptions to production cuts due to internal crises that prevented optimal production. Iran, emerging from economic sanctions was allowed to increase production. Nigeria secured exemptions on account of militancy which cut production by half a million barrels last year coupled with low oil prices which made it difficult for the government to meet its obligations.

 However, Nigeria has been quite fortunate as the exemptions coincided with a period of related calm in the Niger Delta. There is need to sustain current production to continue modest efforts at economic recovery witnessed in the country.

 Ibe Kachikwu, Nigeria’s deputy petroleum minister at the recent Offshore Technology Conference held in Houston, Texas, USA told journalists that while the country is in favor of extending cuts, there are no guarantees it could secure exemptions.

 In the past six months Nigeria’s production has shown modest signs of recovery. According to OPEC’s latest Monthly Oil Market Report for May, which tracked activities for April, Nigeria’s output was put at 1.484 million bpd, from 1.21 million bpd in March.

Also crude grades that were under force majeure (a legal clause that absolves parties to a contract from liabilities due to unforeseen occurrence) are looking like they would have encumbrances removed. Forcadoes, one of Nigeria’s biggest terminals may soon be restarted.

 A key driver for this situation is the relative calm in the Niger Delta achieved through back channel negotiations spearheaded by the Presidency and Ibe Kachikwu. But it also complicates Nigeria’s argument for further exemptions.

 Therefore Nigeria’s argument should be premised on the fact that while production may have marginally improved the situation is far from being under control. To conclude that the lull in militancy represents the end of agitations in the Niger Delta is delusory.

 The trigger for further attacks could well be a thoughtless remark from someone in Abuja, withholding Amnesty allocations far longer than the ex-militant’s patience could tolerate or a dispute with an international oil company over a failed borehole project in a backwater community in the Niger Delta.

Chijioke Mama, an energy analyst and founder of EnergyDatar, an energy intelligence firm said that in spite of production increase, the underlying threat of future and further losses in the Niger Delta due to militancy is not totally eliminated. Mama said a lot is riding on how Nigeria makes its case.

Africa’s second biggest oil producer needs to sustain the current marginal economic recovery. Latest inflation figures from the National Bureau of Statistics (NBS) indicates that Nigeria’s Consumer Price Index, which measures inflation, dropped to 17.24 percent in April, marking the third consecutive month the inflation rate has fallen.

 The NBS report revealed that the inflation rate in March was at 17.26 percent pointing that current reforms in the economy seems to be yielding results. This makes the clearest case for convincing OPEC members to grant Nigeria an exemption.