The decision by Organization of Petroleum Exporting Countries (OPEC) and it’s major allies to cut their crude production by an extra 500,000 barrels a day will have major implication for Nigeria, the oil cartel, and the global economy at large.
OPEC had reached a preliminary agreement on Thursday after talks went into the night, but the decision had to be rubber-stamped on Friday by the wider group of countries that have been involved in an oil alliance since 2016.
The new production cuts will tally around 1.7million bpd, an increase of around 500,000 bpd from a prior deal for 1.2million bpd in curbs that expires in March 2020.
The group, which pumps more than half the world’s oil, is expected to take on 372,000 bpd of the additional cuts that are effective from January, while countries outside the cartel will be responsible for 131,000 bpd.
But Prince Abdulaziz bin Salman, the new energy minister of Saudi Arabia, said total cuts will be even higher at around 2.1m bpd once an extra voluntary cut of 400,000 bpd from the kingdom is accounted for.
Implication for Nigeria
The new production cut will have a big effect on Africa’s largest crude oil exporter who has made efforts in tweaking the agreement to accommodate its expanding oil industry.
Nigeria has previously tried to draw a distinction between what it considers as crude and what it considers as condensates, an ultra-light crude-like product that doesn’t fall under the OPEC+ cut agreement.
The questions of what can be classified as condensates or crude has also become more intense after an S&P Global Platts’ survey of industry officials, analysts and shipping data found out that Nigeria pumped above its production range in the month of October.
OPEC does not publish a condensates figure, reporting only the crude output of its 14 members. The Nigeria National Petroleum Corporation (NNPC) also publishes no condensate numbers however analyst sources told Reuters that Akpo is the only substantial Nigerian grade marketed as condensate, which is typically exported at a rate of 100,000-133,000 bpd.
Also, production of another condensate grade, Oso, has declined so substantially that it is blended into Qua Iboe crude exports.
The quota increase will mean Nigeria will see an improvement in its compliance with the production cut accord. The commodity also accounts for 2/3 of Nigeria revenue and nearly all of the foreign exchange earnings.
In recent weeks, Nigeria’s regulatory authorities have been instructing some companies to dial down production from their largest producing fields in order to meet its OPEC obligation.
One clear case is the French’s Total operated Egina, which averaged 203,000 bpd in August 2019 and was only allowed to produce 180,000 bpd in October 2019.
Supply pressure from outside OPEC
Market analysts are also doubting if a mere 500,000 bpd reduction will alter the outlook for H1 2020 which, according to Paris-based autonomous International Energy Agency, will remain oversupplied.
IEA said in November that OPEC faces a “major challenge” next year as accelerating production from rivals undermines its efforts to rein in oil production.
OPEC’s actions in the past have angered US President Donald Trump, who has repeatedly demanded OPEC’s de facto leader Saudi Arabia brings oil prices down if it wants Washington’s to provide Riyadh with military support against arch-rival Iran.
In the past few months Trump has said little about OPEC but that might change later in 2020 if oil and gasoline prices rise – a politically sensitive issue as he seeks re-election in November.
Additional barrels are also expected to come online from countries such as Brazil, Norway and Guyana. This means the number of barrels required from OPEC to fill any gap is forecast to fall in 2020. This is part of the reason why some analysts believe that despite a deeper production cut of 500,000 bpd by OPEC and its allies, oil prices could feel some pressure in the aftermath of the meeting.
Will Russia finally achieve 100% compliance?
After the oil price crashed in 2014, Saudi Arabia looked outside of the producer group, to Russia, for help. Under previous oil minister Khalid al-Falih, this relationship was a priority. Now Russia’s own willingness to comply with the deal is being examined.
Local oil companies have long believed that cutting production would only subsidise rival producers. Chief executive of Russian oil company Lukoil said recently that there is no reason right now to extend the cuts beyond March 2020.
Russia had also reportedly asked that condensates no longer be quoted as part of output for countries, a move which would reduce the total impact of the cuts.
So far Russia has consistently pumped too much, achieving its production cut target in just three months this year when chemical contamination shut down a major pipeline. Energy Minister Alexander Novak has offered several explanations for his country’s poor compliance, most recently blaming it on the startup of new natural gas fields that added more condensate into Russia’s oil mix.
“In general, I think we have a good level of compliance,” given that statistics include condensate output that has risen significantly, Novak told reporters in Moscow.
The risks involving Aramco’s IPO
According to sources, Prince Abdulaziz Bin Salman, the new Saudi oil minister, is expected to pressure countries that have not been holding up their share of the cuts to comply with the existing deal, a move which will be very important for its Saudi Aramco Initial Public Offering (IPO).
The seasoned oil diplomat is anticipated to take a much harder line than his predecessor, warning that if OPEC peers do not enact their share of cuts fully in December and January, the kingdom will no longer shoulder the burden and could increase its own oil production. “Saudi Arabia is willing to do more than its share, but only if the others do their bit,” said Amrita Sen at consultancy Energy Aspects.
Yet the people briefed on the kingdom’s position said Saudi Arabia believes the oil market will tighten in the coming months in any case, and officials are content with crude prices where they are — meaning they can bear that risk for now.
Signs of weakness in global demand
Persistent trade spat between the US and China and global economic weakness has forced global oil agencies to roll back assumptions for demand growth for this year and next.
Oil prices went on a downhill in June this year with investors becoming increasingly concerned about slowing demand. Appetite for oil is at risk of a further slump if the U.S. and China fail to resolve trade differences in 2020, which will cause the global economy to weaken even more.
The two world superpowers account for about 34 per cent of the global crude oil.
With supply growth expected to swamp the rate of consumption, OPEC has itself said that there are “signs of stress” that could hit demand.
Also, Saudi Aramco’s Initial Public Offering (IPO) prospectus seen by BusinessDay revealed oil demand is expected to peak around 2035 before levelling off, but that the inflexion point could occur by the late 2020s.
The timing of peak demand has big repercussions for the planet and future of oil producers most especially countries like Nigeria who seem unprepared.
DIPO OLADEHINDE
