Opec meeting merely re-affirms bid to keep taps open despite falling oil prices

As expected, the Organisation of Oil Exporting Countries (Opec) meeting last week merely re-affirmed their self-imposed 30 million barrels per day (bpd) crude oil production quota which has been in place since 2012. Currently Opec members are producing slightly over 31 million bpd.

The meeting therefore preserved the crude oil global over-supply status quo. This leaves the Brent prices to swing within the $60-70 per barrel range which has apparently now become the “new normal” price range. The “old normal “of above $100 crude oil price was last seen in June last year.

Opec is a group of 12-member countries, all with varying political and economic challenges and aspirations. In reality each member produces crude oil according to its individual national plans and hardly observes its allocated production quota.

The lesser producers in Opec (like Nigeria, Algeria, Ecuador, Venezuela and Mexico) have actually been pushing for reduced production to force the global prices up. These countries are under immense budgetary pressure from reducing oil revenues.

The larger mostly Middle East Opec countries led by Saudi Arabia are more driven by the desire to protect their global market shares in the face of threats from “new oil” especially from North American non-conventional sources.

These Middle East producers are pushing for unrestricted production where the supply/demand market forces determine the prices.

Global oil demand stands at about 91 million bpd. At current 31 million bpd, Opec commands about a third of global market.

In early 1970s, it produced over 75 per cent of global oil supply. Saudi Arabia, Russia and the US between them produce about a third of global oil supplies, with each producing a near equal amount of about 10 million bpd.

Of the three nations it is mostly the US which has been playing a production catch-up game mainly from its non-conventional oil from shale.

I said in this column earlier this year that it is Russia that is most likely to drop oil production in the face of reduced prices and the economic sanctions imposed by the West.

In spite of all odds, Russia has demonstrated resilience with the government recently re-affirming it will maintain the current levels of production. This implies that the Russian government is prepared to offer budgetary support to sustain production.

The US shale investors have done what progressive businesses are normally good at. Since the oil prices started to fall, they have been implementing efficiencies (technologies and work methods) to reduce production costs.

This has made shale oil increasingly competitive in the “new normal” price scenario.

This has therefore slowed down production cutbacks. Saudi Arabia, favoured by low production costs (estimated at $10-20 per barrel), will continue to maintain the “swing” producer status for a long time to come.

Unexpected price shifts can occur any time due to a number of unresolved geopolitical issues especially in the Arab-Iranian world.

Should the ISIS continue their march to the south, then Iraq production would be under severe threat and this can send global prices shooting up even above $70.

Should a deal on the Iranian nuclear impasse be concluded at the end of this month, then the Iranians will definitely embark on putting more oil into the market to recover lost ground.

The Iranian scenario has the potential to reduce prices below $60. Should Libya stabilise, more oil will be produced thus reducing prices.

The other price determinants are global economic performance, but these are expected to cause only minor periodic up/down price variations within the $60-70 price range.

When the Chinese and US economies over or underperform, the impact usually shows up in crude price variations.

Then on the sidelines we have the speculators and analysts who usually “talk up” the oil prices. These are the guys who between 2004-2014 helped to influence the rise of oil prices from $30 to over $100 when supply/demand fundamentals did not support the increases.

There was never tangible physical shortage of oil anywhere in the world, yet prices kept on artificially increasing. When the speculators went hyper, the investors and producing nations went into collusive silence.

In mid-2014 the investors and producers were still in silent slumber when the artificial prices collapsed.

It is important to note that we still do not have effective global regulatory oversight to rein in these speculators.

Back to the East Africa region. In Kenya, we have recently witnessed abandonment of marginal exploration blocks, increased farmouts, new equity partnerships and postponements of exploration in general.

Upstream investors are hectic trying to re-allocate and prioritise their capital to reflect the realities associated with reduced oil prices.

In reality the low oil prices have pushed Kenya back to a frontier status and this is a new reality we have to absorb and adjust to accordingly. To investors, declining global prices usually increase commercial risks.

In Uganda, we recently witnessed a lukewarm response by international investors to a recent round of exploration blocks bids. Whereas Uganda has plenty of oil in place, the country may need to re-examine itself in respect of other perceived country and commercial risks.

The first oil sale for Uganda is not expected until 2020 which is 14 years since first commercial discovery. This fact alone is loaded with a number of perceived risks in the eyes of current and prospective investors. It is time for self-reflection by Uganda.

However, it is a very different and sweet story down south in Tanzania and Mozambique.

With huge global-scale natural gas discoveries conveniently located at the coast, these countries are hosting global heavyweight investors in the like of ExxonMobil, BG Group, ENI, Statoil, Anadarko, among others.

The near captive natural gas markets in the Far East significantly reduce commercial risks associated with falling natural gas prices.

By 2020 Tanzania and Mozambique are expecting to export liquefied natural gas (LNG). Tanzania is now the place foreign direct investments are rushing to go.

This is supported by Tanzania’s assured and robust natural gas sector and an already strong mining sector.

Mr Wachira is the director Petroleum Focus Consultants. Email: [email protected]