This year, oil prices have sunk and risen at the whim of speculation regarding an agreement to reduce production by OPEC, which controls roughly 40 percent of the world’s oil exports.
Negotiations on the terms of the deal occurred against the background of major geopolitical conflicts, with governments and non-state actors struggling to gain recognition and/or notoriety to further their own agenda.
These are their stories, and this is where you can look for geopolitical chaos and volatility in the oil patch in the New Year:
The second half of 2016 has been a comeback period for Libya – a country that has begun to revive its oil sector after four years of civil war and terrorist insurgencies in the aftermath of the fall of dictator Muammar Gaddafi.
After General Khalifa Haftar’s takeover of the Oil Crescent in the north, the North African petrostate has revitalized its role in international oil politics, securing an exemption to the production freeze orchestrated by OPEC at the end of last month.
The government’s latest forecasts put national production at 900,000 barrels per day over the next couple of months – a more than 30 percent increase on the 600,000-barrel rate the nation is currently pumping.
Haftar’s Libyan National Army (LNA) has so far proven to be skilled enough to fight off small-scale revolts against its dominance in the oil game. The United Nations-backed Government of National Accord (GNA) rules the western half of Libya, from Tripoli.
And there’s more good news for the LNA: last week, the faction of the Petroleum Facilities Guard (PFG) that controls major pipelines fed by the Al-Feel field agreed to lift a two-year blockade on the lines—apparently now aligning itself with, or bowing to the power of, Haftar.
Reopening the Rayayina pipelines could add more than 400,000 barrels per day to Libya’s oil production, and according to Khalid Shakshak, the Head of the Audit Bureau, reopening the pipeline would resolve 70 percent of Libya’s economic woes.
If output grows as planned, Haftar’s political capital will increase along with the capital in his administration’s bank accounts – allowing the government he backs to re-establish lost subsidy programs and other citizen services over the course of 2017. But the question remains of whether he will simply become another Gaddafi.
Despite Iraq’s insistence on being exempted from any OPEC freeze deal due to the high costs of fighting the Islamic State - particularly in the oil-rich areas of Fallujah, Mosul and beyond – the terms of the agreement have the country cutting output by nearly 20 percent to achieve the bloc’s 32.5 million-barrel-per-day limit.
The fight for Mosul has been long and slow. Unlike Fallujah, which was liberated with steady momentum in roughly one month (if you leave out the three-month siege that preceded the battle) Iraqi and allied forces have been warring with ISIS in Mosul for over two months now, with victory still a distant prospect.
Iraqi forces freed hundreds of villages in the outskirts of the country’s second-largest city at the very beginning of the battle in October, but new advances have been tougher to define, making it difficult to estimate the length of the battle and thus, its costs. Related: The Bearish Case For Oil In 2017
Fighting in Mosul has been synchronized with action by Syrian forces waging the Raqqa offensive in the city at the heart of ISIS’ apocalyptic lore. If Mosul and Raqqa fell simultaneously sometime next year, the terrorist organization’s economic and ideological centers would collapse – making a recovery next to impossible.
The elongated liberation of Mosul and ISIS’ unfortunate recapture of the historic city of Palmyra suggest the group still has some fight left. But there is hope that recent strikes by United States and allied forces on the terrorists’ weapons stored in Palmyra prove to be crippling.
Kurdistan Regional Government
An additional challenge to Iraq’s financial situation is the Kurdistan Regional Government’s (KRG) reluctance in implementing oil production limits agreed upon by Baghdad at the November 30th meeting in Vienna.
The KRG is not a sovereign government recognized by the international community, so it did not get its own seat at the OPEC negotiations. Curbing output would mean the cash-strapped regional authority might have to further delay paying its Peshmerga soldiers, who have been ISIS’ most formidable opponents in the battlefield.
To make good on the OPEC deal, Iraq must reduce crude output by 210,000 barrels a day from October levels. Kurdistan controls about 600,000 barrels a day of oil production, or approximately 12 percent of Iraq’s total output.
Due to the divisive oil-sector relationship between the KRG and Baghdad, Iraq’s central government is no position to order the KRG to reduce output. As the situation stands, companies operating in the KRG have given every indication that they are planning to increase oil production early next year by 40,000 barrels a day.
Iran has been working double-time this year to build back its oil sector from six years of international sanctions, spurred by the dubious nature of its nuclear energy program. Since mid-January, it has managed to build output almost to pre-sanctions levels – only missing the target due to OPEC’s push to lower production.
Tehran walked out of the OPEC deal a star. Members of the national parliament declared Iran’s 3.797 million-barrel cap a diplomatic victory, even if the country did not manage to secure the exemption it had desired.
As Saudi Arabia prepares to carry out the bulk of the cutting, as outlined by the agreement, Iran can begin to win back market share that the KSA had stolen during Tehran’s period of economic isolation. Saudi Arabia’s retreat – coming on the heels of the Kingdom’s over-eager production increases – will be a boon to Iran’s new rise as an oil supplier in 2017.
The Niger Delta Avengers (NDA) have wreaked havoc on the country’s oil profits, causing an estimated $4.8 billion in lost revenues. Tacked on to the cost of hunting down the militiamen in the Niger Delta, 2016 could not have been a worse year for Nigeria’s budgetary woes.
The NDA’s attacks have reduced Nigeria’s oil exports by almost 50 percent in volume and jeopardized power generation fueled by natural gas input. Oil makes up 70 percent of the west African country’s GDP and 90 percent of government revenues.
New reports from the region say the group’s notorious “General VIP” and “General Eagle” have been arrested as part of the Nigerian military’s Operation Delta Safe. The two - who are said to be “masterminds” of the NDA’s attacks on pipelines – were paraded in front of journalists last week by the commander of the Delta Safe force.
If the pair arrested really are the duo the government had been hoping to capture all along, the discovery of new oil in Boko Haram-ridden Borno will further increase the government’s independence from oil from the Niger Delta.
Though the exact size of the find has not been revealed yet, if the field proves to be commercially viable, it will serve as a boon to the region, which has seen 26,000 people die in five years due to violence instigated due to Boko Haram’s goals to fashion an Islamic Caliphate in Northern Nigeria.
New arrests and oil finds – as well as an exemption from OPEC’s freeze deal – leave Nigeria in the position to fight back in 2017.
Venezuela’s economy has tanked so badly from fallen oil revenues this year that it opened its borders with neighbor Colombia several times to allow its citizens to buy medical and day-to-day supplies from the rival country. Thousands of Venezuelans lined up at the border for the half-day openings, bringing back with them everything from toilet paper to life-saving medications. Related: Can Killer Whales Strike A Blow Against Canada’s Oil Sands?
The over 10 percent boost in barrel prices after the OPEC deal was announced marginally eased the South American country’s woes, but the biggest challenge to Venezuela’s national stability now comes from the government’s new decision to demonetize 100 bolivar bills in an attempt to prevent the success of supposed plots to export mass amounts of hard cash.
An economic crisis that began before the start of the oil price crash in 2014 has only been furthered by two years of an under-$50 barrel. Brewing social unrest leaves Venezuela’s political future uncertain, even as oil prices recover in the coming years.
Petrobras, Brazil’s national oil and gas company, has been on a liquidation spree in 2017 with a plan to eliminate $4 billion in assets by the end of December and $15.1 billion by 2018.
The energy giant has been in the public eye for a couple of years now, after it emerged that members of its senior management were involved in a corruption network that also involved prominent politicians, among them former President Dilma Rousseff.
New developments, which also implicate newly installed President Michel Temer in a bribery scandal, may divert public attention away from Petrobras, at least for a while, but the company remains saddled with the largest debt in the oil and gas industry globally, at $123 billion.
The coming debt payments have the company looking for stable sources of income over the next few years. Cue China.
Last week, Petrobras announced that it had entered into a 10-year, $5 billion financing deal with China Development Bank Corp and will be selling over a period of 10 years a total volume of 100,000 bpd to China National United Oil Corporation, China Zhenhua Oil Co. Ltd, and Chemchina Petrochemical Co. Ltd, subject to market conditions.
Still, the deal represents a tiny portion of the funds the company needs to truly get back in the oil game – funds that it can only generate through a solid price recovery.
By Zainab Calcuttawala for Oilprice.com
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