As OPEC Rolls over Pact to Cut Oil Output by One Year…

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Rising from their meetings in Vienna, the Organisation of Petroleum Exporting Countries and the non-OPEC allies, led by the Russian Federation, decided to continue until December 2018 the production cut agreement they reached in 2016 to revive oil prices and rebalance the market. Chineme Okafor, who covered the meetings, writes

The agenda was straight and forward at the 173rd meeting of the Organisation of Petroleum Exporting Countries, and third meeting of OPEC and non-OPEC members on November 30 in Vienna. The meetings were to deliberate on how the production cut agreement they reached in 2016, but started implementing in January 2017 to rebalance the oil market, had worked.

At the meeting, everyone possibly expected the group to agree to keep the production cuts going. But no one seemed to know exactly how long and on what terms the decisions would be made. Experts expected that ample considerations would be given to the prospective dangers that shale oil producers posed for the group and their aspirations to rebalance the oil market.

Optimism

Shortly before the meeting, Nigeria’s oil minister, Dr. Ibe Kachikwu, suggested that parties to the production cut pact were comfortable with the results of the decision they took to chore up oil prices and that there was no need to change a formula that had worked for them. Kachikwu, however, pointed out that deciding on how long to go on this would be the major decision left for the group at the meeting. He also said he was optimistic Nigeria would be fine after the meeting.

Backed by indications that Saudi Arabia and Russia – two key players in the agreement – were in support of an extension of the pact to curtail production by 1.8 million barrels a day to bring global inventories back to their five-year average, the meeting agenda equally showed the group may not really waste time in taking their decision.

Within the past few months, the production freeze has helped to raise oil prices to levels not seen since 2015, and provided countries like Nigeria, which had issues with funding their budgets, fresh financial support.

Tricky Decision

From the agenda released by OPEC, the November 30 meeting was expected to last just about three hours for the group’s oil ministers to decide whether to extend their oil supply cuts beyond March 2018. But it lasted much longer.

Going by OPEC’s customary practice, the earlier stated three hours was principally a short meeting considering that past meetings had sometimes stretched for long when ministers argued about policy decisions and other issues.

In the agenda, a closed session of just OPEC ministers and its Secretary General, Dr. Mohammed Barkindo, began from 12 noon. It was followed by a combined meeting of OPEC and non-OPEC ministers and delegates at 3pm, after which there was to be a news conference. Though, an opening session was also expected to begin from 10am, but these didn’t really turn out as planned.

Outcome

Having deliberated for hours, OPEC and its non-OPEC allies agreed that the “declaration of cooperation” they signed in December 2016 would be renewed. They also agreed to roll over the output cuts to the end of 2018. But in doing that, they also found a way to address the troubling issue of keeping oil outputs from Nigeria and Libya from risking the results they claimed to have achieved in the market rebalancing efforts.

While OPEC countries in November 2016 agreed to cut their production by 1.2 million barrels per day, they subsequently exempted Nigeria and Libya from the deal. The deal was further strengthened by the decision of about 11 non-OPEC countries led by the Russian Federation to join the production cut and help achieve oil market stability in the interest of all producers and consumers.

The non-OPEC members decided to restrict their output by 558,000 barrels a day, effective from January 2017, for six months. The joint deal was subsequently amended in May 2017, and the cut extended by nine months, commencing from July 2017, with both Nigeria and Libya still allowed their exemptions.

But rising from the 173rd meeting of the conference of OPEC countries and the third meeting of the groups on Thursday in Vienna, Austria, the two groups again agreed to extend the production cuts until December 2018.

Nigeria and Libya, however would be allowed to keep their production figures within their 2017 highest production levels, suggesting that while they are not expressly forced into the deal, they would be expected to keep their productions within levels that would not jeopardise the efforts to rebalance the market which OPEC said was beginning to regain its momentum.

Nigeria had initially made commitments to cap its production at 1.8mbd of oil without condensate. It equally produces close to 300,000 barrels of condensates, and had projected in its 2018 budget to produce 2.3mbd of oil.

Reading the outcome of their meeting, OPEC’s President, and Saudi’s energy minister, Khalid Al-Falih, said: “The Declaration of Cooperation is hereby amended to take effect for the whole year of 2018 from January to December 2018, while pledging full and timely conformity of OPEC and participating non-OPEC countries in accordance with voluntary agreed production adjustments.”

Al-Falih, further stated: “In view of the uncertainties associated mainly with supply and, to some extent, demand growth it is intended that in June 2018, the opportunity of further adjustment actions will be considered based on prevailing market conditions and the progress towards rebalancing of the oil market at that time.”

He also said both Nigeria and Libya had assured the group that they will not act irresponsibly with their production outputs within the period.

On the potential impacts that shale oil could exert on the extended pact, Al-Falih noted that the group would be firm in monitoring the market dynamics but would not be in a hurry to take a decision as regards shale oil’s response to the impact of their extension.

He said demand for oil was increasing on the basis of economic growths across regions of the world, and that the group did not believe shale oil would conveniently meet these demands, hence, its adoption of a careful posture in this regards.

Shale Factor

While OPEC and its allies decided on the extension, experts however opined that shale was still a factor to be considered and that some OPEC officials were a bit uneasy about how much shale oil could hit the market with the rebound in prices.

Shortly before the announcement of their decision, the US Energy Information Administration released a data that showed U.S. oil production surged in September by a massive 290,000bpd from a month earlier, and hitting 9.48mbb.

But in response to that, Russian energy minister Alexander Novak said at a press briefing that the group did not see that as news anymore. Novak said, “I am asked this question every interview and I have already answered it many times. This is not news for us. For some reason when people ask this question they seem to believe that we didn’t think that shale oil would grow.

“Either you underestimate us or you think we lack professionalism. I think that if you think we are professional you need to understand that we are including all this in our calculations.”

Novak said the rise in shale production was within expectations, stressing that he believes the oil market could rebalance in the third quarter of 2018.

Nigeria’s Position

For Nigeria, Kachikwu had said the country would support an extension of the cut deal as long as the right terms were on the table for it to continue to participate in the deal. Though Kachikwu had repeatedly said the country, which has enjoyed exemption in the cut agreement alongside Libya, was comfortable with capping its oil production at 1.8mbd without condensate, he has insisted that Nigeria would be meticulous in its participation in the deal.

Kachikwu’s insistence on a meticulous participation in the deal comes from reported uncertainties in Nigeria’s production levels, which he said would need time to rebalance.

Though Nigeria’s output has rebounded since militant attacks that cut its output by over 800,000 barrels per day (bd) stopped and relative peace returned in the Niger Delta, Kachikwu was quoted as saying that the recovery was on-going and the country would embrace the production cuts at a production level close to 1.9mbd.

Speaking with THISDAY on the outcome of the meeting and its potential impact on Nigeria’s 2018 budget, Kachikwu said it was a positive meeting. He said he was not expecting the deal to affect implementation of the budget.

He noted that while the country was technically allowed to stay on the exemption granted it earlier, it would require “some very skilful crafting and harmonious working of the ministry with the NNPC” to meet the oil production target in the budget.

Kachikwu also said the country would have to leverage the growing prices of oil in the international market to keep up with its aspirations in the budget.

According to him, “The budget is based on around 2.2 million barrels per day, and if you add condensates, that would bring us to about that. In the real sense, it shouldn’t matter because prices were also based on $45 per barrel and prices are now around $62.

“We need to do a lot of work in terms of incentivising production. Will there be an impact? No. If we work collaboratively, we can actually do a lot and end up having some very healthy outcome.”

Cooperation

Meanwhile, OPEC proposed to formally institutionalise the partnership it struck in December 2016 with non-OPEC members to stabilise oil prices and rebalance the market, saying it has resulted in a lot of positives for the market. Al-Falih, in his opening remarks at the conference, noted that the partnership had led to drops in oil stock overhang by 50 per cent to 140 million barrels in October 2017, from 280mb in May.

He stated that the market structure was flipping into backwardation for Brent and West Texas Intermediate (WTI) for the first time since 2014, indicating the market was gradually moving towards a more balanced condition. Based on this, he called on the two groups to institutionalise the partnership to ensure they achieve results that would be long lasting and sustainable.

Al-Falih said, “In May, the OECD stock overhang was about 280 million barrels above the moving five-year average, but it has since fallen by almost 50 per cent to 140 million barrels as for the month of October. Crude in floating storage is also down by an estimated 50 million barrels since June, and the drawdown applies to all regions, including both crude and products.

“We have also witnessed the market structure flipping into backwardation for both Brent and WPI for the first time since 2014, indicating the market’s gradual move towards more balanced conditions. All in all, market stability has improved and the sentiment is generally upbeat. The rebalancing trend has accelerated and inventories are on a generally declining trend.”

He further explained: “This gratifying outcome has resulted primarily from a near 100 per cent or more compliance to the production target by the combined OPEC 12. OPEC’s credibility has also been enhanced, although a couple of members have lagged behind and we hope they will pick up in months to come, all producers have benefitted from this improving situation.

“History tells us that as we get closer to the goals, sometimes commitments can start to waver. So, to achieve our goals on a sustainable basis, I call on all of you to stay on course with each member country taking responsibility for its own contribution and not relying on others. That’s the only way to succeed.

“To succeed going forward, it is essential that we continue to maintain unity within OPEC. But let me hasten to add that without the support of our non-OPEC partners, the encouraging situation we see today would not have been achieved. So, we should seek to institutionalise the OPEC and non-OPEC cooperation framework as very well built by the healthy foundation we had laid in 2017.

“We need to continue to foster a secured and stable market in the interests of both producers and consumers. And, to protect the long term interest of consumers, we must invest in capacity. To do that, trillions of dollars must be invested in addition of oil capacity and infrastructure over the next couple of decades. These staggering investments will not be forthcoming unless there is sufficient market certainty.”