After Bolstering Prices, OPEC Now Looks to Ramp Up Output Chineme Okafor
The Organisation of Petroleum Exporting Countries (OPEC) is making a success of the oil price rebalancing measures it initiated and executing with non-OPEC members led by the Russian Federation, writes
At their bi-annual meeting in Vienna last week, the OPEC and non-OPEC members led by the Russian Federation, decided to increase their oil output by a million barrels per day.
Indicating the output raise would be based on them adjusting their compliance levels with previously agreed output cuts to 100 per cent as against the 147 per cent recorded so far, the group made the decision some six months ahead of the expiration of an existing output restriction agreement they had reached.
In simple terms, the development entailed that OPEC and its allies will now pump more oil into the market in the coming months – starting from July. And, while this happens, it is likely that the prices, which the group had worked hard to raise to circa $70 per barrel, could be impacted in the near term, but then, the group would in their calculation gain some extra market advantage in terms of volumes.
Decision
Rising from the 4th OPEC and non-OPEC ministerial meeting in Vienna, under the Co-Chairmanship of OPEC President, Suhail Mohamed Al Mazrouei, who is Minister of Energy and Industry of the United Arab Emirates, and Alexander Novak, Minister of Energy of the Russian Federation, the two blocs said in May 2018, they recorded a conformity level of 147 per cent in the 2016 production cut agreement they reached and would now adjust their compliance to 100 per cent. Specifically, OPEC announced its members would adjust their compliance levels to the OPEC-only agreement which it said was 152 per cent as at May to 100 per cent.
In the communique they issued after their meeting, the group stated their respect for the rights aof peoples and nations to permanent sovereignty over their natural wealth and resources, but reaffirmed their continued commitment to the Declaration of Cooperation (DOC) to a stable market, the mutual interest of producing nations, the efficient, economic, and secure supply to consumers, and a fair return on invested capital. They also noted the overall improvement in market conditions and sentiment, as well as the return of confidence and investment to the global oil industry, which may have contributed to the decision to raise output.
“Recalling the 171st OPEC conference resolution reached on 30 November 2016 for a production adjustment of 1.2 million barrels a day (mbd) for OPEC member countries, with the understanding reached with key non-OPEC participating countries, including the Russian Federation, to contribute a production adjustment of 0.6mbd. “Recalling the DOC reached on 10 December 2016; and noting that countries participating in the DOC have exceeded the required level of conformity that had reached 147 per cent in May 2018. “Accordingly, the 4th OPEC and non-OPEC ministerial meeting hereby decided that countries will strive to adhere to the overall conformity level, voluntarily adjusted to 100 per cent, as of 1 July 2018 for the remaining duration of the DOC and for the Joint Ministerial Monitoring Committee (JMMC) to monitor the overall conformity level and report back to the OPEC and non-OPEC ministerial meeting,” said the communique.
The group equally stated that they will meet again on December 4, 2018, to review their decision and its impacts on the market. Also, OPEC Secretary General, Mr. Muhammad Barkindo, dismissed suggestions that pressure by the United States President, Mr. Donald Trump, played a role in OPEC’s decision to increase oil production.
Barkindo said the decision to increase oil output was taken without political influence, even though Trump had in several tweets claimed the group was manipulating the market artificially.
Barkindo, however, explained that: “The impact of geopolitics is visible everywhere in this industry, and therefore our efforts to insulate the organisation from geopolitics have never been more challenging than now.”
According to him: “The founding fathers of this organisation designed it in a way that will be an apolitical organisation focusing on the industry and as a technical body that advises member countries.
“So, politics is not for us in the organisation. We remain focused as an apolitical organisation and will remain focused on our core responsibility of trying to manage the market, especially the instrument of supply management to maintain stability at all times.” He said OPEC had transformed and that was why the organisation remained a strong voice in the global energy industry. “The family is growing and for us, the more the better. Equally important is the fact that for the first time, we have been able to establish a Declaration of Cooperation that brought 25 countries to share responsibility to this one industry that we all belong. We are trying to institutionalise this cooperation because we all agree that we are better together. That is why we are focusing on how we can stay together. “We are now developing that framework. This will allow countries to join OPEC as full members, some as associate members,” he said.
Potential Impact
For oil, 2018 has been a good one for it so far. Buoyed by the OPEC and non-OPEC members’ agreement to restrict their oil output by 1.8mbd, prices have gained some advantages and was nearing $80 per barrel in May for the first time since 2014.
The development has helped oil companies across the world and oil-dependent countries like Nigeria to recoup their losses from the 2014 price slump.
Also, based on the price rise, OPEC and non-OPEC countries now plan to raise their outputs, but this according to experts, did not mean they would be able to immediately pump more oil into the market by their findings, most of the member countries do not have the wherewithal to quickly ramp up their output.
A scenario analysis done by Forbes indicated that at most, the overall increase in the OPEC oil supply that will reach the markets could be around 600,000bpd.
However, the development should serve Nigeria, which has its 2018 budget benchmarked on 2.3mbd oil output and $51 per barrel price, well, because unlike before when she was placed under a watch not to exceed certain output levels even though she was technically not part of the restriction measures. She should be able to ramp her output to meet the 2018 budget benchmark.
The country was thrice exempted from the output cut, but was subsequently asked to cap her production to 1.8mbd, a level she never really attained in 2017.
According to OPEC records, the relative peace in the oil-bearing Niger Delta region of the country, ensured the country improved her out from about 1.388mbd in first quarter of 2017 to 1.751mbd in the last quarter of the year.
The OPEC records indicated that from 1.388mbd in Q1-2017; the country’s oil output rose to 1.485mbd in Q2; 1.592mbd in Q3; and then 1.751mbd by November.
Analysts however told THISDAY that the country’s ability to benefit from the current development would depend largely on its ability to raise its output levels, and which will largely include constantly meeting up with its obligations in the joint venture oil production agreements it has with oil firms, as well as making sure the Niger Delta is safe and stable for production.
Other development
Apart from the review of the output agreement, the cartel also admitted a new member – the Republic of Congo, into its midst as its 15th member country.
Congo’s admission into OPEC at the 174th ordinary meeting, makes it the eighth African country now within the ranks of OPEC. It joined Nigeria, Angola, Algeria, Libya and other African countries in the cartel.
Its Minister of Hydrocarbons, Jean-Marc ThystèreTchicaya, reportedly announced immediately after the OPEC meeting ended that his country was now a member of the cartel.
Thystère-Tchicaya, said: “The Republic of the Congo is thrilled and honoured to be joining OPEC and to do our part to preserve an equilibrium in global oil markets and ensuring a sufficient flow of investments into hydrocarbons.”
“Severe oil market downturns like the one the world experienced recently remind us of the essential role that institutions like OPEC in ensuring stability. We are proud to cooperate with the world’s oil leaders,” he added. As an OPEC member, Congo will now enjoy the benefits of policies instituted by the cartel which controls about 40 per cent of the world’s oil production and more than 80 per cent of established oil reserves.
The country will also benefit from OPEC’s coordination and unification of the petroleum policies of its members, as well as the determination of the best means for safeguarding their interests, individually and collectively. In 2017, OPEC made Congo. which is mired with economic challenges, one of its 11 non-member countries to profit from the output cuts.