Nigeria exempted as OPEC agrees to cut crude oil production

Nigeria, Libya and Iran will be allowed to boost their crude oil production by 1.5 million barrels per day, as the Organisation of Petroleum Exporting Countries (OPEC) agrees its first limit on oil output since 2008.

The three countries are currently producing below their OPEC quotas. Nigeria produces about 1.6 mbpd, as against its agreed OPEC quota of 2.2 mbpd.

OPEC has agreed to cut production by 1.2 mbpd while non-OPEC member Russia, could cut additional production by about 500,000 bpd in a bid to remove excess crude supply from the international markets.

Excess crude oil supply in the global markets is estimated at 1.2mbpd, with OPEC estimating that it needs to keep production at about 31.9mbpd from January to June 2017 to balance supply and demand in the international markets. OPEC currently pumps about 33.7 mbpd of crude oil. The cut reduces its production to 32.5 mbpd.
Diran Fawibe, chairman, International Energy Services (IES) says the OPEC cut would not have a meaningful impact on Nigeria unless the government is able to deal with militancy in the Niger Delta.

Brent crude futures jumped eight percent to more than $50 a barrel, after the initial news filtered in that an agreement has been reached. Investment banking firm, Morgan Stanley had estimated that an agreement could add US$5 to crude oil prices. Any price above US$50 would be a significant boost to Nigeria’s oil revenues, since the 2017 budget is based on average crude oil price of US$42.50. Ibe Kachikwu, deputy minister of petroleum resources says Nigeria would be comfortable with a crude oil price of about US$55 per barrel though would be happier if it gets US$60.

But the price surge would not be sustained, as sources in the oil and gas industry say there is already a cap on how far crude oil price can rise, due to the activities of producers in the US. Shale producers in the US have a break-even cost of between US$20 to US$55, which means that any price above that would encourage them to start pumping crude oil.

Also, the emergence of Donald Trump as president-elect of the US is likely to see an increase in investment in US crude oil production, raising the chances of the US becoming a net exporter of crude oil in the international markets. Analysts say crude oil prices are not likely to exceed US$60 in the foreseeable future, despite the new agreement by OPEC and major non-OPEC members like Russia to a cut.

Before the meeting, Saudi Energy Minister Khalid al-Falih said OPEC was focused on reducing output to a ceiling of 32.5 million bpd, and hoped Russia and other non-OPEC producers would contribute a cut of another 0.6 million bpd.

“It will mean that we (Saudi) take a big cut and a big hit from our current production and from our forecast for 2017. So we will not do it unless we make sure that there is consensus and an agreement to meet all of the principles,” Falih said.

But he added that even if OPEC failed to reach a deal, the market would slowly recover: “We believe that non-OPEC growth has reversed and also, most of the OPEC growth we have seen is already behind us,” he told reporters.
“If we cannot come to an agreement, then the other scenario of rolling over and waiting for the market to recover on its own is not a bad outcome.”

Clashes between Saudi Arabia and Iran have dominated many previous OPEC meetings.
On Tuesday, Iran wrote to OPEC saying it wanted Saudi Arabia to cut production by as much as 1 million bpd, more than Riyadh was willing to offer, OPEC sources who saw the letter told Reuters.
But the tone changed on Wednesday. “I am optimistic,” Iranian Oil Minister, Bijan Zanganeh said before the meeting, adding that there had been no request for Iran to cut output. He also said Russia was ready to reduce production.

“Moscow have agreed to reduce their production and cut after our decision,” Zanganeh said.
The 14-country OPEC, which accounts for a third of global oil production, made a preliminary agreement in Algiers in September, to cap output to prop up oil prices which have halved since mid-2014.

OPEC said it would exempt Iran, Libya and Nigeria from cuts, as their output has been crimped by unrest and sanctions.

The September deal was seen as a victory for Iran. Tehran has long argued it wants to raise production to regain market share lost under Western sanctions, when Saudi Arabia increased output.
In recent weeks, Riyadh changed its stance and offered to cut its output by 0.5 million bpd, according to OPEC sources, while suggesting Iran limit production at around 3.8 million bpd – in line with or slightly above the country’s current output.

Tehran has sent mixed signals, saying it wanted to produce as much as 4.2 million bpd. Iran’s letter to OPEC suggested Saudi Arabia should cut output to 9.5 million bpd.
Sources said that out of additional non-OPEC cuts of 0.6 million bpd, OPEC expected Russia to cut by 0.4 million. A Russian ministry source said the figure was “a bit excessive”.

OPEC member Iraq has also been pressing for higher output limits, saying it needs more money to fight the militant group Islamic State.

Iran and Iraq together produce over 8 million bpd, only slightly behind long-time leader Saudi with 10.5 million bpd.

The argument between Iraq and Saudi Arabia mainly focuses on whether Baghdad should use its own output estimates to limit production or rely on lower figures from OPEC’s experts.

 

Olusola Bello with agency report