How will extension OPEC production cut extension benefit Nigeria?

Many OPEC member countries have expressed support at extending the current production cuts, which will expire in June. Kuwait, Iraq, Algeria and Angola have all stated that prolonging the production cuts is necessary to rebalance the markets.

While global inventories have declined, according to KLR total inventory is still about 350 MMBO above the 2010-2014 average.

Just last Tuesday Saudi Arabia told OPEC officials that it wants to extend production cuts for an additional six months. According to the Wall Street Journal, OPEC ministers hope to reduce storage inventories by about 260 MMBO before resuming full production.

KLR’s analysis seems to confirm that another six months of reduced production are needed to reduce inventories, projecting that the oil market will be “meaningfully undersupplied” if cuts are extended. Most of the supply drawdown will occur in the second half of 2017, and after 2018 markets will become more balanced.

As  good as this development  may be , it would only be  beneficial  to Nigeria  if the  current negotiations between  the Federal Government and  the Niger Delta leaders  and  militants  is successful and peace is allowed to reign again in the Niger Delta  for the  shut – in wells  to flow .

If pipeline vandalism is not stopped it would be difficult for Nigeria to benefit from any extension of the production cut. The country is currently producing 1.2 million barrels of   crude including condensate. This is one million barrel short of what the country is supposed to be producing on daily basis.  All because of militancy

The Shell’s strategic Forcados pipeline came under attack by militants in Febuary 2016 and this has resulted in the shut –in of over 300,000 barrels per crude oil production since then.

According to the Nigerian National Petroleum Corporation (NNPC) a total of 48.88 million barrels of crude oil and condensate was produced in the month of December 2016 representing an average daily production of 1.58 million barrels. This represents a decrease of 15.51% compared to November 2016 performance.

An extension of the OPEC production cuts should normalise global inventories this year, according to research by KLR Group.

Announced on September 28, 2016, OPEC agreed to limit production to 32.5 MMBOEPD in the first half of 2017. According to KLR, OPEC production over this period will actually average 32 MMBOEPD, due to lower than agreed Saudi output and Nigerian and Libyan unrest.

The IEA reaches similar conclusions in its most recent Oil Market Report. The IEA predicts a total stock change of about 1 MBOPD in Q2 2017, with further reductions later in the year if cuts are extended. However, the IEA has revised its demand growth expectations downward, meaning balancing will take longer than previously predicted.

Saudi Arabia’s motivations go beyond reducing the global oil surplus.

The kingdom is planning to complete an IPO for Saudi Aramco, its national oil company. While only 5 percent of the company will be offered in the IPO, Saudi Arabia hopes to raise $100 billion, giving the NOC a $2 trillion valuation. The plan by Saudi Arabia, if workable, would create by far the largest valuation in the market today. But the high price, and therefore Saudi Arabia’s proceeds from the IPO, is in doubt.

The downturn in oil prices affected not just American producers, but nations with nationalized oil production. Saudi Arabia is highly dependent on Aramco for revenue, and lower prices created significant government budget deficits. Russia is another example. Putting forth an Aramco IPO is seen as a way for the nation to raise revenue, replenishing cash reserves that were decimated during the downturn.

Analyzing the market conditions, the background of oil development in Saudi Arabia and the geopolitics of the Middle East, Tom Petrie, founder and chairman of Petrie Partners, gave his perspective on the Aramco IPO at the EnerCom Dallas investor conference in early March:

“There’s a determined effort to bring Saudi Aramco public. … This really is transformational if they can pull it off,” Petrie said. “The deputy crown prince who is now 32 years old is beginning to put into place a dramatic set of changes: cutbacks in subsidies to the Saudi citizens, looking to instill the notion that work in itself is a worthy activity—that’s not part of the historic Saudi culture.”

Petrie pointed out that this is not just the deputy crown prince talking to the royal family and the extended family of about 30,000-40,000 people, but rather he is talking to 19 million citizens of Saudi Arabia. “And we still have the last vestiges of ten sons of the founder of the country of almost 120 years ago, a number of whom are less than fully committed to the changes that the deputy crown prince is putting forth.”

Olusola Bello