OPEC supply cap compliance may get harder with new Nigerian volumes

At its 7th meeting convened in Muscat, the Sultanate of Oman, on 21 January 2018, OPEC announced that, based on the report of the Joint Technical Committee (JTC) for the month of December 2017, OPEC and participating non-OPEC countries have achieved a record-breaking conformity level of 129 percent with their voluntary production cut of 1.8million barrels to global supply.

“Conformity levels have increased on a monthly basis, from 87 percent in January to the outstanding current level. Once more, the unwavering resolve of participating countries to rebalance the market has been amply demonstrated. The JMMC expressed satisfaction with the overall results and urged all participating countries to continue and, to the extent possible, intensify their collective and individual efforts, in the interests of bringing stability to the oil market. The JMMC will strive to maintain or exceed full conformity by all participating countries, throughout 2018,” said OPEC.

But this may change quickly if volumes continue to rise in Nigeria. Independent producers in Nigeria are ramping up crude oil production with output projected to hit 250,000 bpd by 2020. This is in response to the plan by the ministry of petroleum resources to raise Nigeria’s crude oil production to 2.5million bpd.

Key producers Aiteo, Shoreline, and Seplat are seeking to double their output before the end of 2018 and this may raise Nigeria’s production above the supply cap of 1.8million imposed by OPEC. Nigeria’s planned additional volumes of 700,000 barrels a day will come from NNPC, independents, and oil majors.

Shoreline recently agreed a $530 million deal with financiers led by Vitol Group, the world’s biggest independent oil trader in a bid to double crude output to 100,000 barrels a day by the end of the year. According to Bloomberg reports, there are at least a dozen small to mid-sized Nigerian producers pumping between 5,000 and 100,000 barrels each day. Together, they plan to add incremental supply of at least 150,000 barrels a day this year.

But Ibe Kachikwu, Nigeria’s minister of state for petroleum resources, has reaffirmed that the country would comply with OPEC output cap.

Nigeria is working hard to keep its crude oil output within the OPEC quota, and would therefore need to focus on getting more revenue from existing projects by reviewing the production sharing contract (PSC) terms, he said.

This means prioritizing the approval of oil projects with international oil companies and reviewing the fiscal terms in the agreements with foreign partners to develop deepwater oil fields.

Nigeria has not seen the start-up of new big oil fields in almost half a decade. But later this year it will get first oil from the 200,000 b/d offshore Egina oil field.

Last week, Mohammad Barkindo, OPEC Secretary-General said that data pointed to high compliance of oil producers in January with their deal to cut output. Speaking in Riyadh at an industry conference alongside Saudi Arabia’s Energy Minister Khalid Al Falih and Russian Energy Minister Alexander Novak, Barkindo also said oil demand growth in 2018 was seen at healthy levels.

It is not however clear how long this situation may remain the same. Bloomberg reports that countries and companies both inside and outside OPEC are looking to add production. Iraq is building infrastructure to allow a huge increase in capacity, while Iran’s oil minister has said the country can produce more almost instantly. An Angolan field will come on stream by year end and add 250,000 barrels daily, while companies in Russia pushed to pump more before the country renewed its supply-curbs deal with OPEC late last year. There are also concern that Libyan production would threaten compliance with the pact.

The OPEC deal is currently in place until the end of this year and global demand is rising fast. The International Energy Agency (IEA) this month revised up its growth estimate for world oil consumption by 100,000 barrels a day, taking it up to 1.4 million.

ISAAC ANYAOGU