The Fuse

Gabon Officially Rejoins OPEC as Low Prices, Declining Production Hurt Country’s Economy

by James Blatchford | July 01, 2016

Last month, at the 169th Meeting of the Conference of the Organization of the Petroleum Exporting Countries (OPEC), the Conference approved Gabon’s request to rejoin OPEC more than twenty years after it left, and Gabon’s membership is effective today, July 1, 2016. Gabon’s renewed membership brings the total number of countries in OPEC to 14, following Indonesia’s re-admittance in January of this year.

In December 1994, Gabon cited an inability to pay its share of the OPEC budget as the reason for withdrawal. Gabon had previously asked the Conference to adjust dues proportional to production, but major producers resisted the change, arguing that if equal budgetary requirements were to be modified so should equal voting rights.

In 1994, Gabon, the group’s smallest contributor, produced approximately 340,000 barrels per day (b/d) of oil, just over 1 percent of OPEC’s total, but above its quota of 287,000 b/d. Gabon’s production quota was also considered a factor in its decision to leave the organization.

The United States was until quite recently Gabon’s primary export market, but increasing quantities of Gabon’s oil are today being shipped to Asia, including China and India.

Gabonese oil production has declined since its high in the late 1990s. Last year, the country produced approximately 230,000 b/d, making it once again the smallest producer in the organization. Gabon is a net oil exporter, however, unlike the other recently rejoined member, Indonesia, which has been a net oil importer since 2003.

The United States was until quite recently Gabon’s primary export market. However, according to data from the United Nations, increasing quantities of Gabon’s oil are today being shipped to Asia, including China and India, a region, and countries, into which OPEC is seeking to expand its influence and market share. Both Australia and Japan also import substantial quantities of Gabonese oil. Despite declining exports to the United States, Gabon has not found new markets as difficult to find as Nigeria, for example, due to its crude being mostly medium-to-heavy grades, which are highly marketable.

GabonUSexports

Low oil prices, declining production hurt Gabon’s economy

In 2014, oil accounted for approximately 85 percent of Gabon’s oil export revenue and 45 percent of total government revenue. Naturally, the decline in oil prices since the summer of 2014 has drastically reduced Gabon’s oil revenue and also slowed the country’s economic growth. Between 2010 and 2014, the IMF calculated, Gabon’s economy grew at approximately 6 percent per year. The rate declined to 4 percent in 2015 and is expected to fall further, to 3.2 percent, in 2016. This impact has been exacerbated by not only lower oil prices, but also declining Gabonese oil production. Over the medium term, the country’s economic diversification strategy (Plan Stratégique Gabon Emergent) seeks to reduce dependence on oil through investments in the agricultural sector, education, and infrastructure, among others.

Gabon1

Due in large part to their impact on government revenues and expenditures, low oil prices have resulted in contractions of non-oil activity in Gabon, including construction and public works (down 27 percent year-over-year) and hotels and lodging (down 30 percent). To help minimize the negative impacts to the economy and ensure fiscal sustainability, the IMF has recommended, among other things, that Gabon contain its public wage bill, which grew by 70 percent between 2010 and 2015 and the number of public servants increased by 30 percent. In another reform, Gabon’s leaders eliminated gasoline and diesel subsidies in February. Low oil prices helped facilitate the move, lowering the cost of—and need for—the subsidies, which were estimated at more than $360 million in 2013, but just $40 million in 2015. The government did, however, also indicate that “accompanying measures” would be implemented to help offset the impact of higher prices on the poor.

Tension expected ahead of elections this year

The run-ups to both the presidential and parliamentary elections this year are likely to be accompanied by heightened social and political tensions, with protests expected.

The Gabonese Democratic Party has ruled Gabon since the country gained independence from France in 1960. On August 27, Gabon will hold presidential elections, and in December, it will hold parliamentary elections. The IMF believes that the run-ups to both are likely to be accompanied by heightened social and political tensions, with protests expected. The presidential election is expected to include several notable challengers, including former African Union head Jean Ping, who will seek to mobilize opposition against the incumbent and expected victor, Ali Bongo. However, the lasting effects of any protests are likely to be limited due to the support the Bongo government has garnered through its expansion of public sector employment.

Despite heightened tension expected ahead of this year’s elections, Gabon is today generally considered one of the more stable African countries. Strikes do periodically affect Gabon’s oil industry, most recently in April last year, which reduced production by approximately 10 percent. In 2013, a four-day strike halted all production. These strikes are typically the result of disagreements between Gabon’s powerful l’Organisation nationale des employés du pétrole (ONEP) union and the government regarding employment terms.

The need to attract investment

A pressing concern for Gabon remains attracting investment to counter its flagging production.

A pressing concern for Gabon remains attracting investment to counter its flagging production. The Gabon Oil Company (GOC), a national oil company founded in 2011 by President Bongo which operates outside of the purview of the Ministry of Petroleum, will handle a series of auctions for upstream blocks that have been much delayed—most recently due to the unfavorable market conditions. Upon the completion of these tenders and the beginning of the resulting joint ventures with international oil companies, the GOC could emerge as a significant player, having been of little consequence since its founding, in part due to rivalry with, and interference from, the Ministry, which has affected GOC’s operations, according to one expert.

Gabon Oil Production, 1965-2015 (w logo)

Rejoining OPEC allows Gabon to strengthen ties with the cartel’s other members, all of whom are struggling with similar challenges associated with low oil prices. It also provides a seat at the discussion and decision table when the group analyzes market trends collectively and develops the production policy. Finally, rejoining likely helps improve access to any technical or other assistance Gabon might require.

For OPEC, adding another member—albeit one that contributes just 0.3 percent of global oil production—incrementally increases the organization’s total market share. As an oil exporter, Gabon’s interests, especially regarding price, are likely to be well aligned with other members. Gabon’s rejoining also increases total membership to 14—a membership that has increased by two since the start of 2016—helping combat the popular narrative that OPEC is “dead,” it is of increasingly limited relevance, and its influence is waning.

This article is part of a series of research and analysis exploring the future of OPEC and its member countries.

 

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