Nigeria, Libya’s exemption from OPEC cuts could dilute plans to reduce oil glut
Nigeria and Libya’s exemption in the new crude oil production cuts agreed by the Organisation of Petroleum Exporting Countries (OPEC) on November 30 could be counterproductive to the plans to reduce the crude oil glut in the international markets.
Nigeria currently produces about 1.628mbpd of crude oil per day due to shut-ins caused by militant activities in the Niger Delta but at full production without militant activity, the country is able to produce about 2.2mbpd.
“The exemption of Libya and Nigeria means an accommodation has been made for higher production from both countries. OPEC is aware that Nigeria is not producing at its usual average due to militant attacks,” said Dolapo Oni, head of energy research, Ecobank.
However, the 2.2mbpd figure is what the country’s 2017 budget is based on with the assumption that current dialogue with militant youths in the Niger Delta will result in a peace deal that would allow the country return to its full production capacity.
Even though OPEC has exempted Nigeria from making any cut on its crude oil production in arriving at its new production ceiling, the exemption is based on Nigeria’s current production capacity of the 1.6mbpd, which is 600,000 below the country’s normal production capacity.
Data obtained from the website of OPEC shows that the 14-member cartel had total production of 33.64mbpd in October 2016. Nigeria’s share in OPEC’s total production volume stood at 1.628mbpd.
OPEC had used this total production figure of 33.64mbpd in October to reach its decision to cut oil production by 1.2mbpd. This effectively means that Nigeria’s production is capped at 1.628mbpd.
If Nigeria decides to move its production volumes to its full capacity of 2.2mbpd as the exemption allows it do, then it could take OPEC’s total production to 33.1mbpd, just below the pre-cut level of 33.643mbpd.
OPEC had also used a lower production capacity of 351,000 bpd for Libya against recent production capacity of 550,000 to 600,000. This effectively means that if Libya and Nigeria pumps at full capacity, both countries could add between 900,000 and 1 million bpd almost wiping off the 1.2mbpd cut that OPEC is seeking to take off the market.
What gap is left may easily be filled by Shale production in the US and production from non-OPEC members. This means that the current price gains that have followed the OPEC agreement may not be sustained unless Nigeria and OPEC is not able to boost their production based on the exemptions obtained.
Many sceptics had doubted that OPEC could reach a deal to cut crude oil production but they surprised many in reaching the deal.
But rising from its 171st meeting held at OPEC headquarters in Vienna on Wednesday, November 30, 2016, OPEC reached a landmark deal that will effectively cut production by about 1.2 million barrels per day, or about 4.5 percent of current production, to 32.5 million barrels per day.
This agreement follows an earlier meeting held in September in Algeria were each member country reached a consensus on the need to cut production.
This will be the first time since 2008 that OPEC would be accomplishing such a feat which is expected to tackle the key challenge of low price of oil in the international market which has affected the global economy with most OPEC member countries including Nigeria feeling the impact.
Member countries at the meeting agreed on the deal where considerations of the cartel offered to Iran, Libya and Nigeria would mean that in 2017, total production might likely increase, even as other members seek to cut output in the first quarter of next year.
In the agreement where the countries are exempt from the production, Nigeria was accommodated due to some of the Oil and Gas facilities damaged by militant attacks in recent months.
Emmanuel Ibe Kachikwu, the Honourable Minister of State for Petroleum Resources, led Nigeria’s delegation at the meeting and the negotiation, which saw Nigeria get an exemption from the production cut. The concession was given as the country has been through production challenges recently due to the vandalism of oil and gas infrastructure, which has negatively affected the country’s ability to produce oil optimally in the recent past.
This deal will obviously enhance the prospects for the Oil and Gas industry with the impacts already being felt as oil prices surged more than 8% Wednesday afternoon in London, hitting a high of $51.84 a barrel.
A stable increase in oil prices, which is one of the rewards that the deal will produce, would most likely contribute positively to the stimulation of the economies of member countries including Nigeria who are presently undergoing challenges.
The details of the deal saw Saudi Arabia agree to take on the highest burden of cuts – a 486,000 barrel a day to its output, while persuading Iraq to reach a decision to reduce its output, as well as getting non-OPEC producer Russia on board for a 300,000 barrel-a-day cut, according to OPEC.
This landmark deal is coming at a time when Ibe Kachikwu the Honourable Minister of State for Petroleum Resources is working assiduously with Ministers from other OPEC member countries and Nigeria’s Mohammed Sanusi Barkindo as the Secretary General of the Organization, to steer the organisation to achieve and sustain unity and competitiveness in the global energy market.