Oil & Energy
2022 Could Be A Great Year For OPEC+ Producers
The year, 2021 was a challenging year for OPEC+ as prices began to recover, presenting a temptation that has always been difficult to resist.
OPEC+ exercised restraint, however, refusing to open the taps even as energy prices skyrocketed across the globe.
As the world races towards a greener tomorrow, OPEC+ officials have noted that the energy transition, if not managed well, could lead to underinvestment in oil and gas, which could mean even higher prices.
OPEC+ did some surprising things in the past two years. First, it broke up at the start of the pandemic with its two leaders—Saudi Arabia and Russia—turning on each other because of differences of opinion on how the crisis needed to be handled. Then the two made up, and the group united around the deepest production cuts in the history of OPEC in response to the demand destruction caused by the pandemic, also unprecedented.
All in all, 2020 was a year of unprecedented events.
But this year was not that much different. It was a challenging one for OPEC+ as prices began to recover, presenting a temptation that has always been difficult to resist, especially for the most oil-dependent economies in the Gulf and Africa. And yet resist they did, sticking to a production increase plan seen adding 400,000 bpd in combined oil production every month.
This plan is still in action, at least until January, when OPEC+ may reconsider as some analysts warn of looming oil oversupply. OPEC’s analysts are not among these—the cartel expects a mild and temporary effect on demand from the omicron variant of the coronavirus. But the cartel has proved in the past two years that it could be cautious.
Bloomberg’s Julian Lee earlier this weekreminded us that ever since its inception, the extended OPEC+ cartel has had its work cut out for it. From the very beginning, when members decided to reduce production in response to the U.S. shale boom, to this year, when they had to be flexible with production amid wave after wave of Covid-19 infections, it’s been a challenging five years for OPEC+.
The challenging nature of the cooperation was only to be expected given the often different priorities of member states. And yet it somehow worked, even with bumps along the road such as Iraq’s inability to stick to its production quotas, for which it had to be “punished” by getting additional cut quotas. And this may well have made the group more resilient to any future shocks.
According to analysts, the first challenge would be excess supply. It would not be much of a challenge, however, as it is seen as temporary, only until the omicron wave passes, and assuming it would be as bad as previous waves, which is a bit unlikely for a very pragmatic reason: most governments cannot afford another long lockdown.
A much bigger challenge, as noted by oil industry observers and OPEC members, is dwindling spare production supply. According to the U.S. Energy Information Administration, OPEC’s spare capacity could fall to 5.11 million bpd in the final quarter of next year. This is down from 9 million bpd in the first quarter of 2021.
The Energy Information Administration defines spare oil production capacity as oil production that can be started within 30 days and sustained for at least 90 days. The International Energy Agency defines spare capacity as production that can be cranked up in 90 days.
Whatever the definition, the world’s spare oil production capacity is falling because it is not a static pool of oil. Oil reservoirs that are not exploited tend to diminish in resources—one big reason why so many oil producers were reluctant to start plugging wells when the pandemic killed demand. Once you plug a well, it may or may not return to full or any production.
Speaking of plugging wells, these may well be part of the reason Russia is now near its capacity of producing oil, and it’s a much lower level than before the pandemic. Before, Russia was pumping north of 11 million bpd.
Now, according to a Reuters report citing Russian oil companies, total output is nearing capacity at 10.9 million bpd, even though Deputy PM Alexander Novak has argued Russia’s oil production will rebound to 11.33 million bpd by May.
Most of the spare capacity, therefore, will be in OPEC, and more precisely, in the Middle East. But even that spare capacity needs maintenance, and maintenance means investment. And investments in oil production are getting harder to come by these days.
“We’re heading toward a phase that could be dangerous if there’s not enough spending on energy,” Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman said earlier this month. The sentiment was echoed by Finance Minister Mohammed Al-Jadaan: “We have very serious concerns that the world could run short of energy if we are not careful in managing the transition.”
It’s not just the Saudis that are warning about underinvestment, either. IHS Markit’s Daniel Yergin said the world is painting itself into a corner featuring a series of energy crunches because of insufficient investment in oil and gas. And it’s public knowledge that U.S. oil companies are prioritizing returning cash to investors rather than production growth while Big Oil is pouring billions in low-carbon energy to clean up its reputation.
What all this means is that the world may be in for a few more tough years in terms of energy security, especially parts of it. OPEC+, on the other hand, may be in for some more windfall profits as the supply of oil remains tight for purely fundamental reasons. Of course, there is always the possibility of another demand destruction event in case the pandemic continues to surprise us, but OPEC+ has already been there and has done that. It will survive and maybe even become stronger.
By: Irina Slav
Slav reports for Oilprice.com
The Federal Government has expressed optimism in attracting more investments by International Oil Companies (IOCs) into Nigeria to foster growth and sustainability in the energy sector.
This is as some IOCs, particularly Shell and TotalEnergies, had announced plans to divest some of their assets from the country.
Recall that Shell in January, 2024 had said it would sell the Shell Petroleum Development Company of Nigeria Limited (SPDC) to Renaissance.
According to the Minister of State for Petroleum Resources (Oil), Heineken Lokpobiri, increasing investments by IOCs as well as boosting crude production to enhancing Nigeria’s position as a leading player in the global energy market, are the key objectives of the Government.
Lokpobiri emphasized the Ministry’s willingness to collaborate with State Governments, particularly Bayelsa State, in advancing energy sector transformation efforts.
The Minister, who stressed the importance of cooperation in achieving shared goals said, “we are open to partnerships with Bayelsa State Government for mutual progress”.
In response to Governor Douye Diri’s appeal for Ministry intervention in restoring the Atala Oil Field belonging to Bayelsa State, the Minister assured prompt attention to the matter.
He said, “We will look into the issue promptly and ensure fairness and equity in addressing state concerns”.
Lokpobiri explained that the Bayelsa State Governor, Douyi Diri’s visit reaffirmed the commitment of both the Federal and State Government’s readiness to work together towards a sustainable, inclusive, and prosperous energy future for Nigeria.
While speaking, Governor Diri commended the Minister for his remarkable performance in revitalisng the nation’s energy sector.
The Federal Government has assured investors in the nation’s gas sector of the security and safety of their investments.
Minister of State for Petroleum Resources (Gas), Ekperikpe Ekpo, gave the assurance while hosting top officials of Shanghai Huayi Energy Chemical Company Group of China (HUAYI) and China Road and Bridge Corporation, who are strategic investors in Brass Methanol and Gas Hub Project in Bayelsa State.
The Minister in a statement stressed that Nigeria was open for investments and investors, insisting that present and prospective foreign investors have no need to entertain fear on the safety of their investment.
Describing the Brass project as one critical project of the President Bola Tinubu-led administration, Ekpo said.
“The Federal Government is committed to developing Nigeria’s gas reserves through projects such as the Brass Methanol project, which presents an opportunity for the diversification of Nigeria’s economy.
“It is for this and other reasons that the project has been accorded the significant concessions (or support) that it enjoys from the government.
“Let me, therefore, assure you of the strong commitment of our government to the security and safety of yours and other investments as we have continually done for similar Chinese investments in Nigeria through the years”, he added.
Ekpo further tasked investors and contractors working on the project to double their efforts, saying, “I want to see this project running for the good of Nigeria and its investors”.
Earlier in his speech, Leader of the Chinese delegation, Mr Zheng Bi Jun, said the visit to the country was to carry out feasibility studies for investments in methanol projects.
On his part, the Managing Director of Brass Fertiliser and Petrochemical Ltd, Mr Ben Okoye, expressed optimism in partnering with genuine investors on the project.
Crude oil prices recently logged their second monthly gain in a row as OPEC+ extended their supply curb deal until the end of Q2 2024.
The gains have been considerable, with WTI adding about $7 per barrel over the month of February.
Yet a lot of analysts remain bearish about the commodity’s prospects. In fact, they believe that there is enough oil supply globally to keep Brent around $81 this year and WTI at some $76.50, according to a Reuters poll.
Yet, like last year in U.S. shale showed, there is always the possibility of a major surprise.
According to the respondents in that poll, what’s keeping prices tame is, first, the fact that the Red Sea crisis has not yet affected oil shipments in the region, thanks to alternative routes.
The second reason cited by the analysts is OPEC+ spare capacity, which has increased, thanks to the cuts.
“Spare capacity has reached a multi-year high, which will keep overall market sentiment under pressure over the coming months”, senior analyst, Florian Grunberger, told Reuters.
The perception of ample spare capacity is definitely one factor keeping traders and analysts bearish as they assume this capacity would be put into operation as soon as the market needs it. This may well be an incorrect assumption.
Saudi Arabia and OPEC have given multiple signs that they would only release more production if prices are to their liking, and if cuts are getting extended, then current prices are not to OPEC’s liking yet.
There is more, too. The Saudis, which are cutting the most and have the greatest spare capacity at around 3 million barrels daily right now, are acutely aware that the moment they release additional supply, prices will plunge.
Therefore, the chance of Saudi cuts being reversed anytime soon is pretty slim.
Then there is the U.S. oil production factor. Last year, analysts expected modest output additions from the shale patch because the rig count remained consistently lower than what it was during the strongest shale boom years.
That assumption proved wrong as drillers made substantial gains in well productivity that pushed total production to yet another record.
Perhaps a bit oddly, analysts are once again making a bold assumption for this year: that the productivity gains will continue at the same rate this year as well.
The Energy Information Administration disagrees. In its latest Short-Term Energy Outlook, the authority estimated that U.S. oil output had reached a record high of 13.3 million barrels daily that in January fell to 12.6 million bpd due to harsh winter weather.
For the rest of the year, however, the EIA has forecast a production level remaining around the December record, which will only be broken in February 2025.
Oil demand, meanwhile, will be growing. Wood Mackenzie recently predicted 2024 demand growth at 1.9 million barrels daily.
OPEC sees this year’s demand growth at 2.25 million barrels daily. The IEA is, as usual, the most modest in its expectations, seeing 2024 demand for oil grow by 1.2 million bpd.
With OPEC+ keeping a lid on production and U.S. production remaining largely flat on 2023, if the EIA is correct, a tightening of the supply situation is only a matter of time. Indeed, some are predicting that already.
Natural resource-focused investors Goehring and Rozencwajg recently released their latest market outlook, in which they warned that the oil market may already be in a structural deficit, to manifest later this year.
They also noted a change in the methodology that the EIA uses to estimate oil production, which may well have led to a serious overestimation of production growth.
The discrepancy between actual and reported production, Goehring and Rozencwajg said, could be so significant that the EIA may be estimating growth where there’s a production decline.
So, on the one hand, some pretty important assumptions are being made about demand, namely, that it will grow more slowly this year than it did last year.
This assumption is based on another one, by the way, and this is the assumption that EV sales will rise as strongly as they did last year, when they failed to make a dent in oil demand growth, and kill some oil demand.
On the other hand, there is the assumption that U.S. drillers will keep drilling like they did last year. What would motivate such a development is unclear, besides the expectation that Europe will take in even more U.S. crude this year than it already is.
This is a much safer assumption than the one about demand, by the way. And yet, there are indications from the U.S. oil industry that there will be no pumping at will this year. There will be more production discipline.
Predicting oil prices accurately, even over the shortest of periods, is as safe as flipping a coin. With the number of variables at play at any moment, accurate predictions are usually little more than a fluke, especially when perceptions play such an outsized role in price movements.
One thing is for sure, though. There may be surprises this year in oil.
lrina Slav
Slav writes for Oilprice.com.