Energy: OPEC: Could production cut exemption favour Nigeria?

By Adewale Sanyaolu

Hope seems to be on the horizon for Nigeria’s troubled economy battling deep recession as the Organisation of Petroleum Exporting Countries (OPEC), recently exempted Nigeria and two other countries from its planned crude oil production cut amounting 750,000 barrels among its member countries.

The decision by the cartel to unanimously speak with one voice is coming for the first time in eight years, as part of efforts to shore up crude prices which has been at an all-time low for close to two years, hitting a record low of $27 before rising to $50 recently.

The rebasing of the country’s Gross Domestic Product in April 2014, had clearly underscored the decline in the contribution of the oil and gas sector to the GDP in recent times.

The sector contributed only 8.26 percent to total real GDP in the second quarter of 2016, down from the contribution recorded in the corresponding period of 2015 and the first quarter of 2016 by 1.54 percent points and 2.03 percent points respectively to the economy.

The move to cut oil production among the cartel members had sent shivers down the spines of Nigerians due to the effect low oil prices had had on the funding of the 2016 budget.

The Federal Government had set a $38 per barrel benchmark for its 2016 budget, but the continuous slide in crude oil prices, coupled with the disruption in oil production by Niger Delta agitators had made production a tough challenge. Government had predicated its funding on 2.2 million barrels per day, but the activities of the vandals forced it to an all time low of 1.5 million barrels per day, and in the process denying it of projected revenue.

But, the intervention of the Nigeria’s Minister of State for Petroleum Resources, Mr. Ibe Kachikwu, at an OPEC unofficial meeting in Algeria recently, doused the tension as the oil cartel decided to exempt Nigeria and two other countries from the planned production cut.

Stakeholders are however, divided on whether the decision to exempt Nigeria would be benefit it or turn out to be disadvantageous.

The Algiers meeting

Prior to the Algiers meeting, several attempts by OPEC members to enforce cut in oil production has met stiff resistance from members countries, especially Saudi Arabia and Iran, even in the face of low oil prices as they failed to reach a consensus, with the meetings ending in a deadlock.

It was therefore surprising that the first time in eight years, member countries last week unanimously agreed to cut oil output to 32.5 million barrels per day (bpd) from 33.24 bpd, representing 750,000 bpd.

A strong member of the cartel- Saudi Arabi, relaxed its stance on arch-rival Iran amid mounting pressure from low oil prices.

Two sources in the OPEC said the group would reduce output to 32.5 million barrels per day from current production of 33.24 million bpd.

“OPEC made an exceptional decision today … After two and a half years, OPEC reached consensus to manage the market,” Iranian Oil Minister Bijan Zanganeh, was quoted by Iran’s SHANA news agency as saying, without giving details.

How much each country will produce is to be decided at the next formal meeting of OPEC in November, when an invitation to join cuts could also be extended to non-OPEC countries such as Russia, sources said.

Oil prices rise after meeting

As a fall out of the Algiers meeting, oil prices have risen by more than 5 per cent to trade above $48 per barrel as many traders said they were impressed OPEC had managed to reach a deal with others saying they wanted to see details of the deal.

“This is the first OPEC deal in eight years. The cartel proved that it still matters even in the age of shale! This is the end of the ‘production war’ and OPEC claims victory,” said Phil Flynn, senior energy analyst at Price Futures Group.

Jeff Quigley, director of energy markets at Houston-based Stratas Advisors, said the market had yet to discover who would produce what: “I want to hear from the mouth of the Iranian oil minister that he’s not going to go back to pre-sanction levels. For the Saudis, it just goes against the conventional wisdom given what they’ve been saying.”

Saudi Energy Minister, Khalid al-Falih, had said on Tuesday that Iran, Nigeria and Libya, would be allowed to produce “at maximum levels that make sense” as part of any output limits which could be set as early as the next OPEC meeting in November.

That represents a strategy shift for Riyadh, which has said it would reduce output to ease a global glut only if every other OPEC and non-OPEC producer followed suit. Iran has argued it should be exempt from such limits as its production recovers after the lifting of EU sanctions earlier this year.

The Saudi and Iranian economies depend heavily on oil but in a post-sanctions environment, Iran is suffering less pressure from the halving in crude prices since 2014 and its economy could expand by almost 4 percent this year, according to the International Monetary Fund.

Iran just recently returned to OPEC fold after several years of sanction by the United States.

How Nigeria got exemption

After about forty eight (48) hours of a grueling meeting of OPEC member countries on Wednesday, September 28, 2016 in Algiers, the oil cartel finally agreed to a landmark deal to cut oil production. This could be loosely tied to the role that has been played by member countries, including Nigeria, in refocusing OPEC to work harmoniously in identifying needs and challenges that are peculiar to the body and surmounting them, a key challenge being the low price of oil in the international market which has affected the global economy with most OPEC member countries feeling the heat.

OPEC member countries reached a consensus in the agreement where three countries were exempted from the production cuts and they include, Iran, which just had its economic sanctions lifted earlier in the year, Libya and Nigeria who have had some of their oil facilities damaged by terrorist attacks in recent months.

Director of Press, Ministry of Petroleum Resources, Idang Alibi, explained that, Kachikwu, who led Nigeria’s delegation to the meeting argued for the exemption of Nigeria from the production cut.

Alibi explained that the concession was given considering the recent challenges the country has been through, due to vandalism of oil and gas infrastructure which has negatively impacted the country’s ability to produce oil optimally in the recent past

‘‘This deal will obviously enhance the prospects for the energy industry with the impacts already being felt as oil price jumped more than 5 percent in New York after the agreement was reached.

A steady increase in oil prices which is one of the advantages that the deal will produce would most likely contribute positively to the revival of the economies of member countries presently undergoing challenges which Nigeria is part of.

Alibi disclosed that the groundbreaking deal is coming at a time when Kachikwu recently played a key role to clinch the top job at the Organization of the Petroleum Exporting Countries, OPEC for Nigeria with the appointment of Dr. Mohammed Sanusi Barkindo as the Secretary General of the Organization.

Oil industry reacts

Head of Energy Research, Ecobank Transnational Corporation, Mr. Dolapo Oni, said the rise in oil prices shortly after the OPEC deal was occasioned by market traders’ sentiments, adding that real growth and increased pricing would be experienced when the cut in production fully comes to effect.

Oni said Nigeria would only begin to feel the impact of the OPEC deal if oil prices are sustained around the $50 threshold, and production remaining at 1.9 million bpd, stressing that in the long run, Nigeria will be better for it because it would serve as a form of compensation for lost barrels, more especially that the budget benchmark is $38.He, however, warned that prices lower than $50 won’t be good for the country.

The Ecobank analyst equally said it’s not all a bed of roses because there would be a rush into the market as oil prices begin to rise, especially from non-conventional sources-Shale oil, warning that if not properly harnessed, prices would begin to fall again.

‘‘Due to the high cost of shale oil production, a lot of them have suspended production for now because it is no longer profitable to do so in this era. But as soon as prices move above the $50 threshold, they will return to production and saturate the market, which will lead to crash in oil prices,’’ he said.

He disclosed that the move by OPEC to cut production would help spur up fresh oil and gas investments because companies have seized to make new investments due to low oil prices.

Regrettably, he said by mid to late October, demand for oil will dip further because most refineries around the world, especially in Europe and Asia where so many are locate will shut down for turnaround maintenance.

On the other hand, he said a lot of new terminals are already opening up in Nigeria, while new oil wells are equally opening up Ghana, Angola, Cote d’Ivoire  and  Congo with outputs coming from other parts of the world, thereby saturating the market, which might further led to crash in oil prices.

On her part, the Head of International Relations, Lagos Chamber of Commerce and Industry, Temitope Akintunde, said Nigeria’s exemption is good for the country because this will translate to more resources to fund the 2016 budget.

She maintained that the development would equally help the country to gain from disruptions that it had witnessed of late, due to vandalisation on critical oil and gas infrastructure.

Beyond that, she said companies would equally return to profitability and begin to consider new projects that will cushion the effect of past destruction to their assets.

She however, said the key factor in all of this, is the ability to sustain oil prices at about $50 ber barrel, else the gains of the oil cut exemption would have been eroded.

Akintunde feared that the OPEC nod given to Nigeria and two others to produce at maximum level, which may likely take it to over two million bdp, could return the market to initial era of crude oil glut, adding that supplies would equally come from non-OPEC member countries because the cartel does not in any way have control over them.