Nigeria’s cut exemption at risk from oil revival

Nigerian oil output has recovered to its highest level in more than a year as militant attacks have declined substantially, along with the return of key export grade Forcados.

Including crude and condensate, output from OPEC’s biggest African producer plummeted to near 30-year lows of around 1.2 million b/d in 2016, from 2.2 million b/d previously, as attacks on oil facilities in the Niger Delta rose at an alarming pace due to resurgent militancy.

But Nigerian crude oil production in May jumped to 1.73 million b/d, up 80,000 b/d from April, its highest level since March 2016, according to the most recent S&P Global Platts OPEC survey.

Since then, the Forcados restart has boosted flows and production is expected to increase even further this summer, according to recent loading programs.

Exports of crude oil and condensate are set to jump to over 2 million b/d in August, making it the longest loading program in 18 months, according to Platts estimates.

With output of crude and condensate now near its full capacity of 2.2 million b/d, Nigeria, which is exempt from the current OPEC cuts, could be asked to join the deal if the recovery continues.

With Nigeria’s production of condensate averaging around 300,000-400,000 b/d, it looks like this milestone might be hit sooner than he and his government expected.

“If they hit 2.1 or 2.2 (million b/d) and we get through the summer and potential situation with the [president’s] health, and it looks like production is stable, at that point you consider making them make the same level cuts as everybody else,” said Helima Croft, head of commodity strategy at RBC Capital Markets.

‘Credibility gap’

Some analysts have said that one of OPEC’s mistakes when it granted exemption to Libya and Nigeria was that it failed to outline conditions when the two countries would be brought back in, which was “contributing to a credibility gap.”

“The increase in output of both these countries has exceeded expectations amongst the vast majority. For OPEC not to devise a strategy for this has damaged market sentiment,” said Richard Mallinson, a geopolitical analyst at Energy Aspects.

The OPEC and non-OPEC cuts have failed to have the desired effects so far, with oil inventories not falling at a preferred pace and prices now hovering at seven-month lows.

The deal calls on OPEC to cut 1.2 million b/d and 10 major non-OPEC countries, led by Russia, to cut a collective 558,000 b/d until March 2018.

But despite strong OPEC and non-OPEC compliance, surging US shale output and stubbornly high US inventories have led to bearish sentiment.

And production gains from Libya and Nigeria — which collectively have added over 300,000 b/d since the producer pact implemented the cuts — also appear to be weighing on prices, along with an uncertain global demand outlook.

Sustainability factor

An OPEC decision to bring Nigeria into its output pact will likely be swayed by how sustainable it believes the country’s current oil revival is.

Indeed, the underlying security problem in the Niger Delta persists, and the government will have to continue to engage with the militants to ensure attacks remain dormant.

Some analysts like Dolapo Oni, head of energy research at Ecobank, believe the country’s production recovery is “sustainable” and that there is more “flexibility in the system now.”

Integral to maintaining the current calm is to ensure the payment system as part of the amnesty program is maintained.

Nigeria’s oil ministry has made strides in tackling the militancy problem, stressing greater engagement with the grass roots, pipeline protection and investments, but admitted it still has some way to go and needs to sustain that commitment.

While Oni did concede that the peace in the Niger Delta is fragile, he was more confident that any setbacks would be less severe than in the recent past.

“The security situation still needs some work. Pipeline breaks by oil thieves to feed the illegal refineries are still present,” he said. “I don’t think these issues will cause a restart of hostilities but

I suspect they will continue to constrain onshore investments.”

Some analysts were a little more cautious. While 2017 has so far been positive, they said the government will need to urgently address the development concerns of the Niger Delta, and that ceasefires or amnesty programs will only ever be temporary solutions and will not provide long-lasting peace.

“The relative peace with militants which the [government] is spearheading has quieted the restiveness in the Niger Delta. The choice of rapprochement over the hardline stance has been productive,” said Adeola Adenikinju, an oil analyst and professor at the University of Ibadan.

Source: S&P Global Platts