OPEC: Nigerian field development investments threatened

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…Nigeria, Libya stripped of quota exemption

By Sopuruchi Onwuka

Organization of Petroleum Exporting Countries (OPEC) has finally slammed production cap on Nigerian crude oil production, raising investors’ concerns over commercial returns on costly field development projects from where new production volumes are expected next year.

The group charged Nigeria and Libya not to exceed a combined output of 2.8 million barrels per day (mbd) without giving them specific production figures, The Oracle gathered from Nigerian sources involved in the meeting.

The 13 member group which is collaborating with 10 non-member producing nations to curb global market supplies in a concerted move to arrest free fall in prices Thursday brought Nigeria and Libya into calculations for the first time since the production cuts started in 2016.

OPEC granted Libya and Nigeria their exemptions when the production cut agreement with 10 non-OPEC countries was negotiated late last year, as the two African nations dealt with internal strife and civil unrest that had targeted their oil infrastructure.

But both countries have seen sharp rises in production this year, partially undoing the impact of the OPEC/non-OPEC coalition’s collective 1.8 million b/d in supply reductions.

Libyan output rebounded to 980,000 b/d in October, a rise of 70,000 b/d from the previous month as production from key fields like Sharara ramped up.

Nigeria currently posts production figure of some 2.1 million barrels per day (mbd) of wellhead petroleum liquids. Of the total volume, 1.75 mbd is crude oil while some 350,000 b/d is condensate. OPEC does not consider natural gas liquids like condensate in its production rationing arrangements.

Minister of State for Petroleum Resources, Dr. Emmanuel Ibe Kachikwu, had beaten his chest in the past for sustaining Nigeria’s exemption from OPEC’s production cuts until Thursday when the group asked the two exempt countries not to exceed current production figures.

The minister however points at Nigeria’s opportunity to make up for crude oil cuts with hikes in the production of condensates.

Dr. Kachikwu told agency sources at the meeting that Nigeria’s current crude oil production would not exceed current level in the near term, adding that Nigeria would accept an output cap at 1.8 mbd and would continue to be responsible with its production.

“Nigeria will always support any moves to help solidify OPEC, especially given the gains we are having,” Dr. Kachikwu is quoted as saying.

He said, however, that Nigeria would seek to boost its condensate production instead of crude, describing the strategy as part of its commitment “to be disciplined” with OPEC’s efforts to rebalance the market.

“A lot more energy will now go to build to condensates as opposed to building crude expansion production.”

But the country has lean capacity for enhanced condensate production. Instead, new deepwater development investments are being driven by multinational oil companies under production sharing contracts that provides incentives for speedy cost recovery.

OPEC production cap means that the new investments would stream with low capacity as Department of Petroleum Resources (DPR) would now spread the output cuts proportionately across major producing fields in the country.

Experts who spoke with The Oracle on the dilemma blamed Nigeria’s loss of local refining capacity for the rising concerns, arguing that OPEC is primarily concerned with export volumes and not necessarily production volumes consumed in-house by member countries.

According to an oil company executive, Nigeria would optimize its full production capacity without violating OPEC limits if it were capable of refining all its domestic fuel requirements locally.

He pointed out that cumulative equity crude of all foreign companies in the country would not plus marginal export by government would not by any means jeopardize new development investments in the country.

On Libya, local situations are seen as already limiting the country from breaking OPEC’s production ceiling in the short term.

According to industry analysts, “Technical and security realities on the ground will likely limit their upside, in effect accomplishing the same outcome.”

Concerns are rising in Libya’s key eastern “Oil Crescent” where one of the country’s most powerful militias has imposed a military no-go zone, just as OPEC slapped it with a production cap for the whole of next year.

Under a command from General Khalifa Haftar, the Libyan National Army has declared the entire Oil Crescent region a closed military zone, and warned that access would not be permitted to anyone without authorization from their headquarters.

The decision is part of the LNA’s strategy to counter threats around the facilities in central Libya from forces affiliated with the Islamic State militant group.

The production cap on Nigeria and Libya are part of far reaching decisions by OPEC ministers for a nine-month extension of their production cut agreement through the end of 2018.

“We decided to roll over the past decision to the end of 2018, and Nigeria and Libya accepted not to produce more than their production in 2017 for all of 2018,” an OPEC source said. “We didn’t set a figure [for Libya and Nigeria], but both are less than 2.8 [million b/d].”

The current deal calls on OPEC and its 10 non-OPEC partners, led by Russia, to cut 1.8 million b/d in supplies from October 2016 levels to hasten the market’s rebalancing. It is scheduled to expire in March.

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