Amid growing uncertainty in the global oil market, which continues to threaten the production cap deal reached by OPEC members and their allies, led by the Russian Federation, Chineme Okafor looks at how the condition of the market is trying to redefine the debate over the exemption from the cap granted Nigeria and Libya
The Kuwaiti oil minister, Issam Almarzooq, recently said that the exemption granted Nigeria and Libya with regard to the output cuts set for members of the Organisation of Petroleum Exporting Countries and non-OPEC suppliers might soon be withdrawn. Almarzooq, who chairs the committee monitoring compliance with the production cap, said both countries could be told to cap their crude oil outputs in an effort to keep the production agreement intact. The output cuts started in January, which were extended by nine months to March 2018 in May, after the landmark deal reached last November failed to solve a global oversupply problem, was to rebalance the crude oil market.
Almarzooq said the cartel and its allies might hold fresh discussions with Nigeria and Libya on their production outputs. This followed reports that oil prices had dropped below OPEC’s $50 per barrel expectation, amid concerns that the production cutbacks were only partially affecting prices due to supplies from Nigeria, Libya, and the United States’ shale output.
“We invited them to discuss the situation of their production. If they are able to stabilise their production at current levels, we will ask them to cap as soon as possible. We don’t need to wait until the November meeting to do that,” Almarzooq, reportedly said.
He further stated, “It is too early to discuss deeper output cuts by OPEC/non-OPEC producers participating in the agreement to curb production. We just finished the meeting in May and we need to give it more time.”
Almarzooq’s comments indicated that the cartel and its allies might be worried that the market had not responded significantly to the output strategy. They also suggested that the group might be looking for a quick way out, with production cuts from Nigeria and Libya as potential elixirs.
But Almarzooq’s position appears not to enjoy the support of experts, including OPEC’s Secretary-general, Mohammed Barkindo, who told reporters at the World Petroleum Congress in Istanbul that giving Nigeria and Libya production cut exemptions was a collective decision, and any proposal to include them in OPEC’s plans will also require a joint decision.
Another oil market expert, and Kuwait’s former representative to OPEC, Abdulsamad Al-Awadhi, faulted Almarzooq’s suggestions. Al-Awadhi was reported as saying, “Capping Libya and Nigeria might help but won’t cut the supply by much.”
He added, “OPEC needs to have better compliance, and it must respect the right of Libya and Nigeria to go back to the market. Other countries that raised output while Libya and Nigeria are out should do more and give space to these two countries to go back to the market.”
Having comprehensively participated in the processes that led to the output freeze deal, Nigeria opted to diplomatically attend to the worries, stating then that it would not unsettle the deal, but make it work better. The country, however, called on OPEC and its allies to recognise its challenges with growing back its production, which, according to it, had not significantly improved, but was, in fact, far below its 2017 budget benchmark for oil production.
Addressing journalists on the development in Abuja, the Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, stated that Nigeria would in due time join in the production cut to stabilise the market. He added, however, that the country’s production levels were still too unpredictable to guarantee a timeframe for joining the deal. He sought more understanding from the cartel.
Kachikwu explained that the country was committed to the deal and would do whatever would be required to keep it intact.
The stated, “We’re fairly in consensus. There is no disagreement on that. But just to set the record straight, the price of oil today is hovering around $44.70 cent per barrel, so there is a bit of upsurge trajectory, which is good.
“Definitely below the $50 mark which is where we’ll feel comfortable and a lot of the reasons for this are the aggressive shale production, and obviously barrels coming out from Nigeria and Libya because of the exemption. It is true that Nigeria has begun to recover but that recovery has been gradual.”
He explained, “Over the last one and a half months, we’ve basically began to recover some of our assets that were vandalised and we’ve been getting a lot more cooperation from the militants that they are letting us continue to try and grow those barrels. But that recovery is going to be gradual. We’ll still have below the benchmark set for us by OPEC and I think that over the next one or two months, hopefully, we can get to that point when we can say the recovery has been tested, is systemic, and predictable.”
Reaffirming Nigeria’s commitment to the agreement, the minister stated, “We need to watch that for a couple of months so that we can get to a predictive comfort and then we voluntarily go to OPEC and see how we can contribute. But make no mistake about it; Nigeria is a very firm member of OPEC. We’ve been very active in this organisation for 46 years and we’ll continue to be very active. We’re the brains behind some of the cut analysis and strategies that were gotten from Saudi Arabia and the rest.”
Kachikwu disclosed that the growing uncertainty in the oil market would affect Nigeria’s execution of its 2017 budget. He noted that already the country had come short of the 2.2 million barrels per day projected oil production levels the budget was built on.
Kachikwu explained that a couple of capital projects in the budget might be affected by this development. He, however, said the Ministry of Finance was working on measures to cushion the effect of the shortfall from oil production on the budget.
He stated that while the oil production benchmark in the budget was 2.2mbpd, the country was currently producing about 1.7mbpd of oil without condensate, but was still within the price band of $42.50 per barrel which the budget has.
According to him, “In terms of the budget impact, definitely, it is predicated on the number of 2.2 million barrels per day and a price index of $42.50. Within the price cap, I think we’re still reasonably within range. Obviously, we’ve lost quite a lot of months, at least two or three in which we didn’t produce what the budget had projected. So there is definitely going to be differential…
“But the Ministry of Finance is aggressively looking for ways to cover some of these shortfalls, part of that is efficiency, how do we cut down our expenditure.
“Obviously, certain capital items will be affected. If we don’t have money, we can’t do certain capital projects that we have in the budget. There is no gainsaying the fact that budget will be impacted but we are working hard with the Federal Executive Council to see how we can forecast or predict that sort of impact and see how we can recover.”