Friday, 22 January 2016

HOW CRASH IN OIL PRICES TEARS OPEC APART

The Organisation of Petroleum Exporting Countries (OPEC) may be wading through troubled waters resulting from the low crude oil prices and its curtailing strategies which have divided the interest of the 13-member cartel.

The seemingly uncontrollable fall in oil prices has largely affected the economic status of some members, including Nigeria since 2014, but the test of strength within OPEC appears to have overshadowed the need for urgent and strategic decision that could reduce the tension.

Oil prices have fallen by more than 70 per cent over the last 18 months, mainly as a result of oversupply. The cartel, in a policy championed by Saudi Arabia, had decided to keep production unchanged to avoid domination of the emerging shale oil. Now the prices have slid to critical level. Benchmark Brent crude futures slipped yesterday below $28 a barrel to a 12-year low, while the OPEC basket was $25 per barrel.

Indeed, the cartel is perceived to have divided into two main groups over the unresolved puzzles of cutting oil productions due to the oil glut in the market. The two main camps: One has nine members ranging from Algeria to Venezuela who want to scrap the Saudi-led price war with non-OPEC producers and the giant four called the Arab-block.

The current challenge before the cartel is that the four who want to continue the fight- Saudi Arabia, Kuwait, Qatar and the UAE – hold nearly all of OPEC’s spare capacity, so their votes inevitably carry more sway.

The percentage share of OPEC oil showed that Venezuela has the largest with 24.9 per cent; Saudi Arabia, 22.1 per cent; Iran 13.1 per cent; Iraq, 11.9 per cent; Kuwait, 8.4 per cent; UAE, 8.1 per cent; Libya, 4.0 per cent; Nigeria, 3.1 per cent; Qatar,2.1 per cent; Algeria, 1.0 per cent and Angola 0.7 per cent among others.

Also often overlooked is that OPEC only works by unanimous decision – making the effort to corral all members incredibly difficult at a time when their economies are hurting badly.
Meanwhile, report published by Wood Mackenzie recently indicated that 68 big oil investment projects have already been mothballed due to cost implications on production.

Kuwait and Saudi Arabia are estimated to have the lowest cost of production at $8.5 per barrel and $9.9 per barrel respectively, followed by Iraq, UAE, Iran, Russia, Algeria, Venezuela, Libya and Nigeria in hierarchical order.

Nigeria’s cost of production is presently estimated at $31.5 per barrel with capital expenditure – $16.20 and operational expenditure at $15.30. This, according to experts has put producers on their toes as they strategize to cut cost so as to sustain production.
According to current estimates, more than 80 per cent of the world’s proven oil reserves are located in OPEC Member Countries, with the bulk of OPEC oil reserves in the Middle East, amounting to around 66 per cent of the OPEC total. OPEC’s proven oil reserves currently stand at 1.2 trillion barrels, while the non-OPEC producers have 286.9 billion barrels reserve (about 19 per cent of the market).

Minister of State for Petroleum and OPEC President, Dr. Emmanuel Ibe Kachikwu, had disclosed that some members of the cartel were moving for an emergency meeting to curtail the sliding prices, but others, especially the Arab-block have moved to quash talk of a potential emergency meeting.

The UAE Energy Minister, Suhail bin Mohammed al-Mazroui, does not see the need for emergency meeting, saying that the current OPEC strategy was working.

He said: “I don’t think it’s fair to ask OPEC to unilaterally cut production.” The UAE minister who appears to be on the Saudi’s side said low-cost producers within OPEC should not attempt to prop up prices for Russia, and other non-OPEC producers.

“If we do something artificial, I don’t think that’s going to last. I’m not convinced OPEC alone can change or can solely unilaterally change this strategy just because we have seen a low in the market,” Mazroui said.

Mazroui added that while the first half of 2016 would be tough for the oil market, there would be a gradual recovery later in the year, aided by an expected drop in non-OPEC production.

Besides, the end of economic sanctions against Iran could shake up oil markets, as the nation is ready to pump about 500,000 barrels per day. U.S. and European Union sanctions on Tehran were finally lifted at the weekend restoring Iran’s access to world’s markets. Iran has been gearing up for this moment for months and could soon return to the top ranks of global oil producers, unless the fresh sanction slammed by the United States is sustained.

Kachikwu did not specify which OPEC members wanting a meeting and said any such gathering would be in February or March. OPEC’s next scheduled meeting is around June.
He said Nigeria should not be considering cutting production at this time but rather look inward to how it could revive refineries and other domestic utilisation options.

The OPEC helmsman said it is very important for OPEC to dialogue at this critical period so that the market can be strengthened.

Kachikwu, who is also the president of OPEC had earlier noted that the planned emergency would be held between February and March, but Nigeria’s presidency at OPEC would cease by the end of this month, indicating that he could not coordinate such meeting. According to him, Qatar would take over the mantle of leadership at OPEC from next month (February, 2016).

The oil minister believed that the recent turbulent in the sector might be a blessing in disguise for Nigeria, as this would allow for the nation to consider other viable options and exploit them accordingly.

“Hard times bring new innovation and good opportunities, God’s willing the hard time for Nigeria will push it to greater heights,” he said. (Source: Guardian)