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A new reality for oil prices

A new reality for oil prices

Despite greater quota discipline from Opec, global oil prices have fallen over the past month, with Brent crude trading at $45 a barrel on 20 June.

This is obviously welcome news for the majority of African states that are net oil importers, but not so positive for the continent’s exporters. Countries with export ambitions of their own, such as Kenya, are banking on sustained higher prices to justify field development and pipeline construction.

Yet Africa is not merely a pawn in global oil economics. Rebounding output in Nigeria and Libya is one of the main causes of the price fall. The two countries are not subject to the same constraints as other Opec producers because of their domestic difficulties.

Nigerian oil production recovered to 1.84m barrels per day (b/d) in May as a result of a reduced impact from militant attacks, but this is still well below the 2.2m b/d average Abuja has budgeted for this year. While the rest of Opec produced 16,000 b/d less in May than in April, the two African states produced 336,000 b/d more, as they continue to recover from their security problems.

Libyan output has gradually recovered over the past year, reaching 830,000 b/d by mid-June, up from an average of 550,000 b/d in April. The National Oil Corporation (NOC) aims to boost output to 1m b/d by the end of July.

This seems likely if an agreement between the NOC and Wintershall is implemented. About 160,000 b/d of production capacity on the German firm’s fields has been shut in for two years as a result of a dispute with the NOC. A long-term resolution has not yet been reached but an interim deal has been arranged to allow production to resume.

It is always difficult to predict the direction of oil prices but the current situation in Libya makes it particularly difficult. Renewed fighting could easily see pipelines shut down and exports halved overnight.

The NOC aims to produce 1.32m b/d by the end of this year and 2.2m b/d by 2023. The latter figure is well beyond the 1.6m b/d that Libya produced before the civil war and will require $18bn in investment. A much-improved security situation and stable government will be required if this is to be achieved.

An even bigger cause of low prices is the recovery in US shale oil production. Under the leadership of Saudi Arabia, Opec had maintained high production over the past three years, apparently in order to put US unconventional oil producers out of business through low prices.

This strategy did have some impact but the shale oil industry has responded with a series of efficiency savings and technological advances. The breakeven oil price varies from area to area but is now generally put at about $40–45 a barrel, so they can still compete at current prices.

As a result, US shale production was 700,000 b/d higher in May than in September 2016. The International Energy Agency forecasts further rises during the rest of this year and in 2018. Many analysts had expected prices to rise as a result of the dispute between Qatar and several other Gulf states.

Saudi Arabia, the United Arab Emirates and others have accused Qatar of funding terrorist groups in the Middle East, raising fears over a prolonged blockade of Qatari oil and gas exports. Yet relatively weak global demand and buoyant production have more than compensated.

Although prices fluctuate from day to day, oil prices have fallen year on year since 2013. The average price of Opec oil fell from $49.49 a barrel in 2015 to $40.76 a barrel last year.

The other Opec member states and a number of other big oil producers, including Russia, have sought to keep a lid on production and run down their inventories in order to buoy prices. An agreement on this came into effect in January and was extended in May for another nine months.

However, speaking at the International Association for Energy Economics conference in Singapore in June, Fereidun Fesharaki, the chairman of oil and gas consultancy FGE said that prices could fall to $30 a barrel in 2018 unless Opec takes more action.

Outlook

Saudi Arabia has traditionally taken on the role of a safety valve in the global oil industry. It had 2m b/d of spare production capacity that could be brought into use or mothballed in order to keep oil prices within a desired band. It is only a few years since Opec ministers suggested that prices in excess of $100 a barrel would be the new norm. The US shale oil boom changed everything by increasing the proportion of non-Opec output in the global production mix.

 Riyadh’s attempt to kill it off through low prices seems to have done more harm to the finances of Opec member states than the shale producers. It is now the shale industry that acts as the price regulator. When prices rise significantly above $50 a barrel then more capital is attracted into the sector and drilling activity increases, driving up output. When they fall then shale oil activity drops off.

Traditional crude oil producers in Africa and elsewhere may have to get used to this new reality. Output will be maintained on established fields where the required capital investment has already been made.

The biggest impact will be in frontier areas, particularly where new pipelines are needed – such as Uganda and Kenya – and in deepwater areas. Technological advances over the past 15 years have made it commercially viable to produce oil in the Gulf of Guinea’s ultra deepwater areas, including offshore Nigeria and Angola. However, low prices have held up field development, particularly on a string of projects in Nigeria that it was hoped could compensate for suspended production in the Niger Delta.

Neil Ford

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