What revival of Libya’s largest oil field means for Nigeria, OPEC

For Nigeria’s and some other Organization of Petroleum Exporting Countries (OPEC’s), the quest to defend battered oil prices faces another major test after Libya has restarted production at its largest field, Sharara.

The news of increasing supply serves as a fatal blow to the Benchmark of Nigeria’s crude oil which has more than doubled to around $42.45 a barrel since May, but it’s still down 36percent this year.

The production capacity of Libya’s largest field?

Libya is currently producing about 300,000 bpd and Sharara could add up to 200,000 bpd more after the lifting of an oil port blockade by the eastern-affiliated Libyan National Army.

From below 100,000 bpd, oil output reached close to 300,000 bpd in a matter of two weeks. And plans are to continue ramping up as the governor of Libya’s central bank has called on the industry to raise oil production to 1.7 million bpd, which would be more than the country produced before the oil port blockade – 1.2 million bpd.

The National Oil Corporation, which has been saying for months the blockade is costing Libya billions in lost oil revenues, earlier this month reported it had booked in July the smallest monthly revenue this year. At $38.2 million, the July figure was down from $2.1 billion a year earlier.

Read also: Three reasons why Nigeria should not expect an oil rally soon

Headwind for OPEC

Libya is an OPEC+ member and home to Africa’s largest crude reserves. But it’s exempt from the group’s supply cuts, initiated in May as the coronavirus pandemic stifled economies and caused oil prices to tank.

The alliance, led by Saudi Arabia and Russia, planned to ease the curbs by 2 million barrels a day from the start of 2021.

The news from Libya’s Sharara will be a huge concern for OPEC and its allies who now face a dilemma on either to include or exclude Libya which was previously exempted from production cuts because of its internal turmoil which affected oil production.

“The Libyan oil restart is gaining momentum faster than most people expected,” said Bill Farren-Price, a director at energy analysis firm Enverus. The likelihood of more Libyan exports is “an additional headwind for OPEC at a time when it is already grappling with softer than expected demand as the second wave of Covid-19 intensifies.”

JPMorgan Chase & Co. forecasts that production will rise to 1 million barrels daily by March.

The producers’ group will meet again in December 1 to discuss whether to continue the supply reductions or further increase in the first half of 2020.

OPEC pumps about a third of the world’s crude and the biggest of its 15 members is Saudi Arabia, one of America’s closest friends in the Middle East. While the group doesn’t target a specific oil price, it adds or removes supplies in the market and therefore can affect the cost of crude.

Nigeria’s concern

Africa’s biggest oil-producing country needs the oil price to rise and in the worst case, remain steady at any price above the $40 benchmark of the 2021 budget.

To achieve this, the country needs to avoid disruptions in crude production and also hope that the alliance under OPEC achieves its objective, even though many are yet to comply with the output cut, including Nigeria.

Nigeria depends on oil sales for around 60percent of its revenue and 90 percent of its foreign exchange earnings, though it only accounts for less than 10 percent of GDP, according to the International Monetary Fund (IMF).