Two years ago, the northeastern Nigerian town of Maiduguri was a picture of despair and desolation.
As the Islamist militants of Boko Haram swept through the country’s north, ransacking outlying towns and slaughtering unarmed villagers, nervy government troops and terrified civilians erected improvised roadblocks and prepared for a bloody siege.
This May, despite ongoing attacks that have killed dozens, executives from the Nigerian National Petroleum Corporation (NNPC) tentatively returned to the troubled town, bearing promises of much-needed investment in the nearby Lake Chad oil basin. By returning to the high-risk north while searching for ways to ramp up production in the still unsettled Niger Delta, the NNPC has one goal in mind – returning oil to its position as a dominant force in the Nigerian economy.
Yet while Nigerian politicians may be weak-kneed at the prospect of fresh oil revenues flooding into government coffers, their hopes – and those of Africa’s other major oil producers – remain heavily dependent on an uncertain recovery in global oil prices.
To that end, all eyes have turned towards the implementation of a critical pact made in May between Russia and Saudi Arabia, which pledges to slash global output in a bid to protect prices. By extending the output cuts agreed between OPEC and non-member countries by a further nine months until March 2018, the deal aims to keep a lid on a market glut that African producers blame for their recent record of turgid economic growth.
Since the collapse of oil prices from over $100 per barrel in mid-2014 to around $50 today, low prices have decimated government expenditure in Africa’s oil producers, bled treasuries of foreign exchange and, alongside stalled reforms, contributed to a recession in Nigeria. While the bid to return oil stocks to an OECD five-year average by cutting 250m barrels may require strict compliance, Capital Economics estimates that an effective rollover of the cuts until March 2018 could return OECD stocks to numbers last seen before the 2014 crash.
“Saudi Arabia is the de facto leader of OPEC, so most other countries will probably fall in line. Being the largest of the non-OPEC producers, Russia’s participation was always going to be key,” says Tom Pugh, commodities analyst at Capital Economics. For Nigeria and Libya the resumption of output cuts will come with another welcome bonus – they are again likely to be exempted. When the previous deal was agreed, both countries were battling insurgencies that directly threatened their extractive industries.
National output was slashed by a third in Nigeria last year following the resumption of a decades-long military campaign by militias in its oil-producing Niger Delta region to scuttle pipelines and oil installations, while in Libya, a patchwork of militant groups held sway over the country’s oilfields, taking advantage of a vacuum of power in the aftermath of the 2014 civil war.
Since that agreement both countries have battled, with moderate success, to get their industries back on track. In February, Nigerian vice-president Yemi Osinbajo visited the Delta and spoke with representative groups in a bid to seek a lasting peace, while the government cleared a backlog of almost $100m in amnesty payments to ex-militants.
Meanwhile in Libya, Russian-backed strongman General Khalifa Haftar has wrested control of several important oilfields from local militias, strengthening his bargaining power with the rival UN-backed Government of National Accord and boosting hopes of a future settlement, according to analysis from S&P Global Platts. While both countries are likely to see a further exemption as they continue along the road to recovery, OPEC will be keeping a close eye on any signs of a return to normal production levels.
“Both are doing quite well in terms of production, Nigeria is up to about 1.7m barrels a day, getting close to their normal level of 2m. Libya is getting up to 800k. They used to produce 1.5m but 1m is more realistic now.
Both will be exempt but if Nigeria gets much higher they would be summoned to a meeting and asked to put a cap on increases. But that’s a step down the road, maybe the end of 2017,” says Spencer Welch, IHS Markit oil analyst.
Shorn of contributions from Nigeria and Libya, OPEC is likely to insist on stringent compliance in other member states. A May survey from Reuters found that Angolan compliance with the deal was running at only 91% following a surge in production. Yet if the overall result is higher prices, countries are likely to be persuaded that it is in their interests to comply.
“Everyone would prefer to be in the camp where everyone cuts and you don’t, but Angola isn’t facing the same kind of temporary security issues so the argument isn’t really there for them. They’re better off contributing in a small way to the deal rather than seeing prices plummet back to the 40s like before,” says Pugh.
The new normal?
Yet even if OPEC is able to enforce rigid compliance among member states, the output of non-OPEC producers – most ominously the United States, where shale can be extracted at increasingly low cost – means that few analysts are optimistic of a return to prices anywhere near 2014 levels.
“If this deal holds for another year or certainly until the end of this year you can probably see oil picking up a little bit, but not much. Supply and demand will come into balance maybe in the third or fourth quarter and prices may harden a bit.
But at the same time you’ll start to see more oil coming out of America and probably some OPEC countries wavering a bit in resolve. I don’t think the price will even get to $60 this year, but certainly round the mid 50s. They’ve got to realise that if OPEC cuts, someone else will pick it up,” says John Hall, chairman of Alfa Energy.
For the hard-pressed finance ministers of Africa’s struggling oil giants, raised on the budgetary assumptions of reassuringly high oil prices, that may be a bitter pill to swallow. While Nigeria’s parliament approved a modest budgetary assumption of $44.5 a barrel this year, the flurry of risk-heavy NNPC activity in Nigeria suggests that some in Africa are struggling to envision a future without an economy in thrall to oil.
“In the longer term, should prices remain at current levels, I would anticipate marked political and social shifts in these countries… and their decline will bring about new pressures, both to governments and society at large. The fact that the historical drivers of changes to oil prices no longer apply certainly make a compelling case for African economies planning for a post-oil future,” says Manji Cheto, senior vice president at Teneo Intelligence.
from African Business Magazine http://ift.tt/2rGnQEp