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OPEC is trying to persuade Libya and Nigeria to join cuts if the cartel agrees to reduce production, delegates told S&P Global Platts, while the OPEC and non-OPEC leaders of the deal, Saudi Arabia and Russia, are still discussing how much to cut and how to share these cuts out.
Libya and Nigeria, exempted from the deal forged in November 2016 because of violence that had severely disrupted their respective production, have recovered their output and have been raising production in recent months. The two countries are seen reluctant to cut because of a still fragile security situation, but this time around, the other OPEC members may not listen to any excuses and are urging the two African members to join a possible cut.
Following severe production and export disruptions in the early summer, Libya’s oil production has been steadily rising over the past three months.
As of two weeks ago, Libya was pumping close to 1.3 million bpd, and NOC’s chairman Mustafa Sanalla said that he hoped Libya would be exempted, again, from any new OPEC-wide production cuts.
Nigeria is also boosting oil production, which is set to further rise with the imminent start-up of the Total-operated Egina oil field.
However, the Nigerian National Petroleum Corporation (NNPC) warned last month that sabotage attacks on oil pipelines were on the rise, while analysts also warn that violence may return in Nigeria’s oil industry ahead of the general elections in February.
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While OPEC delegates are persuading Libya and Nigeria to join the cuts, the nature of such cuts has yet to be defined, and the leaders of the deal, the Saudis and the Russians, are said to be currently at odds over who’s cutting how much.
Saudi Arabia is looking to persuade Moscow to make a hefty cut in the region of 250,000 bpd-300,000 bpd, while Russia has reportedly indicated that it wasn’t okay with cutting this much, and could agree to half that proposed amount, Reuters reports, citing OPEC and non-OPEC sources.
Meanwhile, Iran will not be negotiating its production quota. Oil Minister Bijan Zanganeh said on Wednesday, as quoted by state news agency IRNA:
“As long as Iran is under sanctions, the Islamic Republic’s OPEC quota will not be discussed with anyone.”
By Tsvetana Paraskova for Oilprice.com
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Nigeria was also exempted because of attacks on its oil production facilities disrupting production.
Since then Libya’s production has hit almost 1.3 mbd and Nigeria’s has been boosting its production in recent months. They are now being asked by other OPEC members to join the production cut agreement which is still in force. However, the two countries are seen reluctant to cut because of a still fragile security situation, but this time around, the other OPEC members may not listen to any excuses and are urging the two African members to join a possible cut.
Libya may be asked to cap its production at 1.2 mbd thus cutting its production in effect by 100,000 b/d. Nigeria could also be asked to cut production by 150,000 b/d.
However, the overwhelming majority of OPEC members are not in favour of new cuts. Instead, they will demand that Saudi Arabia and Russia withdraw the 650,000 barrels a day (b/d) they jointly added to the market in June against OPEC members’ wishes and return them to the original 1.8 mbd cut under the OPEC/non-OPEC agreement.
It is very probable that a cut of production will be agreed upon in the OPEC meeting tomorrow in Vienna. But who will be doing the cutting?
Saudi Arabia will end up doing most of the cutting with some symbolic reduction from Russia estimated between 100,000-150,000 b/d as a show of solidarity with the Saudis.
There is some divergence between the Saudi and Russian approach to the cuts. Saudi Arabia needs an oil price higher than $80 a barrel to balance its budget. On the other hand, Russia can live with an oil price of $40 or even lower having benefited from the diversification drive of its economy since the 2014 oil price crash. Moreover, the bulk of Russian oil production is being carried away with private Russian companies with a small State stake. These companies have invested heavily during the last few years to raise Russia’s oil production to the highest level in the post-Soviet era. They are not keen on cuts as they want to recoup their investments very quickly.
Still, Saudi Arabia may surprise the world by refusing to cut production following in the foot steps of its discredited strategy of flooding the global oil market as it did in the aftermath of the 2014 oil price crash. But this time its economy will suffer far worse than in 2014 particularly that its financial reserves have fallen from $750 bn in 2014 to $500 now most of which is needed to prevent a devaluation of the Saudi currency.
On balance, Saudi Arabia will decide to bite the bullet and do most of the cutting as the least of two evils.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London