• Thursday, March 28, 2024
businessday logo

BusinessDay

OPEC supply cap dampens Egina first oil euphoria

OPEC-oil

Nigeria’s daily crude oil production will rise by 200,000 barrels per day (bpd) from February when the first cargoes from Total’s newly producing offshore Egina Floating Production Storage and Offloading (FPSO) which hit first oil on December 29, 2018, comes into the market, lifting output above 2 million bpd, and pushing the country’s output past the Organisation of Petroleum Exporting Countries (OPEC) quota.

On December 7, 2018 in Vienna, Austria, OPEC committed to cutting 800,000 bpd from global output, and 10 non-OPEC producers led by Russia agreed to further slash another 400,000 bpd from their production for six months, beginning January this year, under a preliminary deal reached after two days of intense negotiations.

Nigeria, which had enjoyed exemptions in 2016 when OPEC and its allies first agreed to cut 1.6m bpd from global production is now required to cut 52,530 bpd, which represents 3 percent of its October production of 1.751million bpd according to OPEC rules.

Based on the agreement, exemption was granted to Iran, Libya and Venezuela while the rest countries will cut up to 3 percent from their production using October output levels as the baseline. Kuwait, was granted an exemption to use September production volume as baseline, due to bad weather which affected its production in October.

This effectively caps Nigeria’s production at 1.7million bpd and creates the problem of what to do with spare capacity. One analyst says the cuts are a good thing.
“The choice is between having increased production with low oil prices or to implement cuts which can boost oil prices and increase bigger revenue for Nigeria and other oil producers,” Chuks Nwani, an energy lawyer said.

But Rafiq Raji, chief economist at Macroafricaintel says he doubts that Nigeria would cap its production since the government desperately needs revenue.

“Production fluctuates, so an average over a period might be within range of the cap,” he said, insisting that “there would be no punitive measures” even in the event of Nigeria exceeding the cap.

This prospect will gladden the Federal Government whose 2019 budget benchmark is premised on production of 2.3million bpd and an average oil price of $60 per barrel.

Brent crude, the benchmark price used for Nigeria’s output hovered around $53.25 on Wednesday, remnants of a quiet rally that started during the last week of December.
“I am almost certain Nigeria would be able to easily persuade other OPEC members about its desperate need for revenue in the aftermath,” Raji argues.

Nigeria secured output exemption in 2016 based on the sabotage of its oil and gas infrastructure by militants who blew out the Forcados terminal, the country’s biggest export line, thereby cutting a third of output. Dwindling oil prices further pushed the economy into a recession.

The argument for an exemption would be harder to make this time considering that the country has almost recovered previously lost capacity as well as most of its market share.
OPEC cuts are designed to shore up oil prices and countries granted exemptions have often had significant shocks to their economy. Venezuela is suffering its worst recession, Iran is facing the prospect of a US sanction which could shut-in 1million bpd to its production and Libya, has been in crises mode since the ouster of its former leader Muammar Gaddafi.
Raji also avers that an OPEC without as much influence may be unwilling to quickly sanction defaulters

“Bear in mind OPEC is not likely to be aggressive with its members so soon after Qatar left the cartel,” Raji said.

However, Saad Sherida al-Kaabi, Qatar’s minister of state for energy affairs and president and CEO of Qatar Petroleum, said Qatar’s exit from OPEC “is not political, it was purely a business decision for Qatar’s future strategy towards the energy sector.”

Qatar with only 2 percent of OPEC production but with the world’s biggest LNG production saw a future linked with gas, rather than an oil market where even OPEC needs non-member’s input to counter the threat of US shale production.

Meanwhile oil prices fell on Wednesday, under pressure from rising output in major OPEC and non-OPEC producers and due to concerns about an economic slowdown that could weaken demand.

Brent crude fell 74 cents, or 1.4 percent, to $53.06 a barrel at 8:16 a.m. ET (1316 GMT). U.S. crude slipped 71 cents, or 1.6 percent, to $44.70.

Russian production hit a post-Soviet record in 2018, figures showed on Wednesday. Other data showed U.S. output reached a record in October and Iraq boosted oil exports in December.

 

ISAAC ANYAOGU