Nigeria’s recovery could end OPEC oil output cut exemption, Libya further away
When OPEC agreed to exempt Libya and Nigeria from its oil production cuts, market watchers said the two beleaguered countries’ upside potential could complicate its attempt to accelerate the market’s rebalancing.
Both countries have ambitious aims to recover output following months of militant attacks on oil infrastructure that caused their production to plummet last year, as OPEC was negotiating the deal.
But while Libya has seen a renewal of fighting that threatens to derail its recent fragile oil output recovery, Nigeria appears well on the way to full restoration of its output that could see it pressured by its fellow OPEC members to end its exemption from the production agreement.
The six-month deal, which expires in June, will be up for review at OPEC’s next meeting on May 25, with some ministers saying the production cuts should be extended to continue drawing down global inventories.
“As things stand at present, potentially the new dynamic that will need to be resolved is if Nigeria’s militant attacks die down, there will be a case to bring Nigeria into the quota system,” said Richard Mallinson, geopolitical analyst with Energy Aspects. “That’s unlikely to be something that Nigeria would welcome, but that would be a part of the negotiations.”
Nigeria oil officials could not be reached for comment, but oil minister Emmanuel Kachikwu, following the last OPEC meeting on November 30 when the production agreement was signed, acknowledged that a fully-recovered Nigeria likely would be asked to share in the cuts.
“I don’t expect that once you reach your volume you are going to have free rein, so we probably have six months to get our act together and then hopefully zoom back out production and then we will be asked to contribute,” Kachikwu told reporters. “That is what I imagine.”
The OPEC deal calls for the producer group to lower output by some 1.2 million b/d from October levels and freeze production at around 32.5 million b/d, while exempting Libya and Nigeria from any cuts.
The latest S&P Global Platts OPEC survey released Monday found the group is about 340,000 b/d above that ceiling.
OPEC Secretary General Mohammed Barkindo has said the organization is closely monitoring news from the two exempt countries.
“Every barrel that they can produce and export will be accommodated by OPEC, as well as non-OPEC producing countries, as well as the market,” Barkindo said in February at the IP Week conference in London. “By accommodation I mean that both OPEC and non-OPEC…will continue to review developments in Nigeria, as well as Libya, and will take those into account.”
NIGERIA PEACE TALKS
Nigerian oil production in February was 1.70 million b/d, according to the Platts survey, up just 20,000 b/d from the deal’s October benchmark level. But it is 280,000 b/d higher than its nadir last May, at the height of militant-related disruptions in the oil-rich Niger Delta.
The government in recent weeks has stepped up peace talks with Niger Delta leaders and youths, who have demanded a greater share of oil revenues, and attacks on oil facilities have declined over the last two months.
Nigeria’s major oil export terminal, Forcados, remains offline. But officials with the oil ministry have said they expect its return to service sometime in the second quarter, once repairs are complete.
Forcados, a gasoil-rich sweet crude blend, is one of Nigeria’s top export crudes averaging some 250,000 b/d of output. But there have been no loadings since the terminal was bombed a year ago, save for a brief resumption in October that was quickly halted after further attacks.
Once the terminal resumes service and offshore crude grade Bonga, which averages 225,000 b/d, returns from maintenance in April, Nigeria will be at its full output capacity, assuming militancy remains quelled.
Kachkiwu has set a June goal of 1.9 million b/d of crude production plus 300,000 b/d of condensates, for a total 2.2 million b/d output.
“I will be very surprised that if I hit my 2.2 million b/d, I am not called upon to do my contribution [to the OPEC cuts]”, Kachikwu said after the last OPEC meeting.
Meanwhile, Libya’s output, which appeared to have returned to growth as the state-owned National Oil Corp. politically navigated the various militias that have controlled the country’s oil infrastructure, now looks set to fall below 600,000 b/d, if not further, according to analysts.
The Benghazi Defense Brigades seized control of the Ras Lanuf and Es Sider oil export terminals on Saturday from a rival militia. Exports from the two terminals have been suspended, and ship owners have refused to load from Libya’s eastern ports during the clashes.
Libya’s production in February was 670,000 b/d, flat from January, according to the latest Platts OPEC survey.
“This would be an important reversal of gains made since September, during which Libyan output doubled to nearly 700,000 b/d on average so far this year,” analysts at PIRA Energy Group, an analytics unit of S&P Global Platts, said in a note. “We are growing increasingly concerned that escalating violence damages major oil infrastructure and causes prolonged outages.”
Libyan output had hit a low of 230,000 b/d in August. But with the gradual reopening of the country’s oil export terminals, even though they are not operating at full capacity, NOC Chairman Mustafa Sanalla earlier this year declared an output target of 1.25 million b/d by year’s end.
Output was 530,000 b/d in October, according to the Platts survey.
Libya’s fellow OPEC members say they wish nothing but a return to stability for the North African country, but no doubt any output losses there would help lessen the pressure on the rest of the organization to cut further.
“For now OPEC is saying that it is considering the option of maintaining the cuts in the second half of the year. But if Libya and Nigeria manage to increase supplies from current levels there will not be a lot of room for the rest of OPEC next year,” said Oliver Jakob, an analyst with Petromatrix.