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Analysis: Libya, Nigeria exemptions in focus as OPEC meets on output cuts

Highlights


Output caps could be discussed for both countries: sources

Uncertain Libyan outlook may cushion it from getting a quota

Condensate question helps keep Nigeria output below 1.8 mil b/d

Libya and Nigeria can expect to face growing pressure from their OPEC counterparts to end their exemptions from production cuts and accept an output quota, when ministers meet Thursday for a closely watched summit.

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While the production outlooks for both countries remain hazy due to political, security and technical challenges, voices have been growing louder within OPEC that their output has recovered sufficiently to join in their market rebalancing efforts, sources told S&P Global Platts.

"I think both countries will be discussed," an OPEC source told Platts, but he declined to say whether members would insist on imposing quotas.

One option being discussed is a "loose" quota that would be triggered if production in either country rises to a certain level, while another option would be to place a quota right at or above each country's production target, to at least symbolize that they are willing to accept a cap, other sources and analysts said.

But it is entirely possible that both countries' exemptions will be maintained, as they have been vehemently opposed to any output restrictions while they recover from militancy, the sources said.



Officials from Libya and Nigeria did not respond to requests for comment.

OPEC granted Libya and Nigeria their exemptions when the 1.8 million b/d 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 OPEC's collective supply reductions.


LIBYA'S PRODUCTION ROULETTE


Libyan output is currently around 1 million b/d and cannot go much higher, unless financial, security, technical issues are resolved, according to most sources.

Mustafa Sanalla, chairman of Libya's National Oil Corp, had sights on an ambitious 1.25 million b/d target by year-end but this looks unachievable at the moment.

Most sources said Libya was unlikely to agree to a cap but that if it could be persuaded, the quota would be higher than the 1.25 million b/d figure.

"We expect a rollover [of the exemption] with a possible cap at 1.4 million b/d -- Sanalla's preferred level," Managing Director of consultancy Rapidan Energy Scott Modell said.

"Libyan oil production could go as high as 1.3 [million] to 1.4 million b/d if the NOC has a fully funded budget that will allow for maintenance, capex and salaries for oil workers," he added.

However, this is a big if, and Modell said he expected Libya's base case production to be "closer to 1 million b/d as political negotiations stall."

Senior vice president of Middle East consultancy Foreign Reports Matthew Reed said the helter-skelter nature of its oil sector will likely shield Libya from a hard quota.

"Libya [will] get a free pass in Vienna again because no one inside or outside the country knows where production will stand tomorrow," he said.

Libya's output recovery has been impressive, with production rising more than 800,000 b/d after it fell just below 200,000 b/d last August, when the key oil terminals of Zawiya, Es Sider and Ras Lanuf were down.

Libyan production has averaged around 777,000 b/d over January-October, according to data from the most recent S&P Global Platts OPEC Survey.


NIGERIA'S SELF-IMPOSED CAP


Nigeria declared in late September that it had agreed to a production cap of 1.8 million b/d, a level its oil minister Emmanuel Kachikwu has said will not be achieved until early 2018.

Other OPEC ministers and delegates appeared caught off guard by that announcement, as it contradicted Kachikwu's previous statements that Nigeria would not join the output agreement until its production stabilized at 1.8 million b/d, from which it would cut.

Kachikwu told reporters then that he wanted to "change the narrative" and that his country was already contributing to the deal by producing below that level, albeit involuntarily.

Nigerian oil production from January to October this year ranged close to 1.74 million b/d, according to the Platts OPEC survey, a rise of 300,000 b/d from December last year, but still much below the 1.8 million b/d cap.

Output hit a 16-month high of 1.86 million b/d in August, but has fallen since due to operational and loading delays.

It could face further challenges, with the growing threat of attacks in the oil-rich Niger Delta next year, as the country heads into its presidential campaign season, analysts said.

"We expect there will be attacks by Niger Delta militants next year, but we don't expect outages to exceed 100,000 b/d," Modell said.


NIGERIA CONDENSATE QUANDRY


Counting Nigerian oil production has also been a difficult exercise, with divided opinions on what constitutes crude and what should be counted as condensates.

Nigeria has long said its oil production capacity is at around 2.2 million b/d, with condensate production accounting for around 350,000-400,000 b/d. The remaining 1.8 million b/d or so, which coincidentally is its self-declared cap for the agreement, consists of crude oil.

Nigeria this year began counting its Agbami grade, output of which is about 250,000 b/d, as part of its condensate production, which market watchers say makes it easier for the country to keep its crude output below 1.8 million b/d.

But some independent secondary sources used by OPEC to monitor crude output under the deal still count Agbami as crude.

Platts, one of the secondary sources, includes Agbami in Nigeria's crude oil figure as it is marketed as a crude export blend and not a condensate by the Nigerian National Petroleum Corp. and international oil companies.

In its latest monthly oil market report, OPEC said the six secondary sources that it uses pegged Nigerian crude production at an average of 1.68 million b/d for the first 10 months of the year.

Nigeria's directly reported figures to OPEC shows that crude output from January to October averaged 1.58 million b/d.

-- Staff reports, herman.wang@spglobal.com

-- Edited by Jonathan Dart, newsdesk@spglobal.com