Deeper Opec cuts put compliance on shaky ground

Author Rowena Edwards, Senior Reporter

Excerpt from Argus Global Markets’ Opec+ Vienna Special Report: Iraq and Nigeria are coming under increased pressure to comply with their output targets.

Deeper output cuts for the Opec+ group are likely to frustrate some member countries that have struggled to meet their commitments.

Iraq and Nigeria have struggled to meet output targets this year, and both expressed reservations about deeper cuts before the Opec/non-Opec meetings in Vienna on 5-6 December. But they have been under pressure to comply, particularly from Saudi Arabia, whose oil minister Prince Abdulaziz bin Salman, says it will only continue to cut production when others commit to their quotas.

Iraq's oil minister Thamir Ghadhban presented Opec with a detailed plan to reach full compliance with the previous agreement by December. But Iraq's output was 120,000 b/d above its original 4.51mn b/d quota in November, and Ghadhban still says it will reach compliance "soon". The minister ordered state-owned oil firms on 6 December to reduce output in line with the quota. Iraq's new production quota of 4.462mn b/d for the first quarter will lower exports by up to 150,000 b/d, Ghadhban says.

Baghdad has long hidden behind its lack of control over the semi-autonomous Kurdish region's growing production to explain part of its non-compliance, a view Ghadhban restated in Vienna on 6 December. Ghadhban signalled newfound stability through claims that the Kurdistan Regional Government (KRG) has pledged to cap output at 450,000 b/d. Kurdish sources say there is no such deal and Ghadhban appears to be turning a blind eye to the region's plans to increase output. "As far as I know, there is no significant increase forecast for [the KRG] in 2020," Ghadhban says. KRG production already exceeds 470,000 b/d and plans by firms operating in the region could add at least 50,000 b/d next year.

Iraq's commitment to several projects designed to boost production and export capacity also raises questions about its ability to fully comply with the new quotas. It has invested in a "fast-track solution" to boost export capacity with a 4-6 month target to complete its Sea Line 3 pipeline, aimed at replacing old infrastructure. This will be followed by a "permanent" solution, Ghadhban says. The capacity of Sea Line 3 falls to 700,000 b/d from 2.2mn b/d without a sufficient pumping station, which the oil ministry aims to complete by 2022 at the earliest. This would add to Iraq's operational export capacity of 3.7mn b/d.

Wise for the people

Iraq is also pressuring ExxonMobil to speed up the long-delayed Southern Iraqi Integrated Project (SIIP) to develop southern oil fields and associated pipeline and storage infrastructure. Part of the urgency is the need to put policies in place before Iraqi cabinet changes. A new government must be in power by mid-January after prime minister Adel Abdul-Mahdi's resignation. "Any new government should think seriously about adopting a very wise [oil] policy that will maximise the revenue for the people of Iraq," Ghadhban says.

Nigeria has also struggled with compliance since joining the Opec+ agreement in December 2018. It was exempt from the previous deal in recognition of unrest disrupting production. Under the new agreement, its cut increases by 21,000 b/d, meaning it will have to curb output by 140,000 b/d from November levels to comply. The current crude price of around $60-65/bl is "good" for Nigeria, oil minister Timipre Sylva says. Nigeria's initial limit of 1.69mn b/d was lifted to 1.77mn b/d in early July, backdated to 1 June.

Nigeria says it reached full compliance by the end of November, but this has been complicated by the ministry classifying crude from the 200,000 b/d Egina field as a condensate, despite provisional crude assays identifying it as a 27°API crude. Egina still needs to undergo an Opec classification process.

This blog is an excerpt from the Opec+ Vienna Special Report section of the 06 December 2019 edition of Argus Global Markets, a weekly report containing vital insight into the latest international oil market developments. Click here to view the full special report as a PDF.

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