The Fuse

OPEC: Unleashed but Hamstrung

August 11, 2016

Guest Post by Matthew M. Reed | @matthewmreed

Matthew M. Reed is Vice President of Foreign Reports, Inc., a Washington, DC-based consulting firm focused on oil and politics in the Middle East.

OPEC pumped over 33 million barrels per day (mbd) in July according to the group’s latest Oil Market Report. Saudi Arabia led the pack, as usual, pumping 10.7 mbd, followed by Iraq reporting production at 4.6 mbd (apparently including KRG volumes) and Iran at 3.6 mbd.

But these historically high volumes obscure the fact that OPEC is also experiencing some of its worst-ever unplanned outages. Combined, the volumes lost to violent conflict, political disputes and other setbacks add up to almost 3 mbd.

What follows is a snapshot of each outage.

Libya: Pre-war capacity was about 1.5 mbd but current capacity is perhaps only 1 mbd. Today Libya produces some 300 thousand b/d. Thus, the country has lost 700 thousand b/d or 1.2 mbd, depending on how “capacity” is defined; EIA splits the difference with an estimate of 1 mbd lost.

Cause: Civil war broke out in Libya in 2014 and rival governments formed in the east and west. In December 2014, forces loyal to the unrecognized (and now defunct) government in Tripoli tried and failed to capture the Es-Sider and Ras Lanuf terminals along the Gulf of Sirte. Forces loyal to the then-recognized government in the east beat them back, but not before damage was done to Es-Sider. Libya’s NOC declared force majeure on both ports to be safe. To make matters worse, ISIS joined the fray in 2015. The group forced the closure of at least a dozen fields in the Sirte Basin last year and in early 2016 it destroyed much of the storage at Es-Sider and Ras Lanuf. Factions loyal to opposing sides of the civil war continue to prevent the reopening of major fields in the west.

Outlook: A partial comeback can’t be ruled out but the ceiling for Libyan production capacity appears to be about 1 mbd for the foreseeable future. Technically speaking, the western fields could come back quickly, but the political obstacles are monumental. Libya’s NOC is confident that with proper investment it can raise output in the east, where the bulk of Libya’s oil is produced today, and to a lesser extent in the central region, where fields are damaged and storage is limited. Going forward, Libya will remain extremely vulnerable.

Nigeria: 700 thousand b/d lost according to EIA. Currently producing 1.5 mbd according to OPEC official data and secondary sources.

Cause: Nigerian production is way down thanks to sabotage. Militant attacks on oil infrastructure began in February, after the government cut back a 2009 amnesty program which had paid militants to protect facilities they targeted in the 2000s. For years, the payments bought peace in the Niger Delta. Production rebounded to 2.5 mbd after attacks by MEND and other militants forced production below 2 mbd in 2009.

The amnesty program was all but scrapped this year by President Muhammadu Buhari. Not long after, the Niger Delta Avengers destroyed Shell’s underwater pipeline carrying Forcados crude. Since then the group has attacked several more sites. So far it has rejected government outreach and instead issued more threats.

Outlook: The government reinstated the amnesty program’s monthly payments for ex-militants this month. But the Avengers—who appear to be the most diehard, active, dangerous and least-understood faction—may hold out for political concessions. There’s little reason to believe that a comprehensive deal can be reached when the Delta is so divided. Rumors of a ceasefire proved unfounded and it’s unclear who actually speaks for the Avengers.

Kuwait and Saudi Arabia combined: 500 thousand b/d lost. Together they produced 13.6 mbd in July according to OPEC’s official data.

Cause: These missing barrels are from the Neutral Zone, where Kuwait and Saudi Arabia share the 300 thousand b/d Khafji field (offshore) and the 200 thousand b/d Wafra field (onshore). Saudi authorities closed Khafji in October 2014 and Wafra was shut by the Kuwaitis in May 2015. Trade press has reported that the dispute goes back to 2009, when the Saudis signed a 30-year operations agreement with Chevron, which operates the Wafra field inside Kuwait, without Kuwait’s consent. Plans for a major new refinery in Kuwait were complicated by the deal and the dispute reached a tipping point in late 2014.

Outlook: There are rumblings about a comeback. The two sides agreed in March to at least restart the Khafji field, which would take a year or so to reach capacity. However, no progress has been reported since. Field economics may be a factor as the crude grade is costlier to produce and was often sold at a discount before 2014. Urgency is lacking.

Iran: Still short 400 thousand b/d compared to “pre-sanctioned” levels. Iranian officials and OPEC’s secondary sources agree Iran is currently producing about 3.6 mbd.

Cause: Limits imposed on Iran’s oil export volumes were lifted in January when the nuclear deal came into effect. Production climbed gradually throughout 2015, after it became clear the deal was achievable, and has plateaued around 3.6 mbd since May after a few big jumps this year. Officials are intent on reaching 4 mbd, which they refer to as Iran’s “pre-sanctioned” level. It’s really their old OPEC quota level from the mid-2000s.

Outlook: It’s unclear why exactly Iranian volumes have leveled off for three months in a row. Producing another 400 thousand b/d could depend on whether or not NIOC can place barrels at a reasonable price in a glutted market. Iran has resisted discounting its oil.

Iraq and the KRG: 100 thousand b/d lost in March and another 70 thousand b/d lost in July. Currently producing 4.6 mbd combined according to OPEC’s official data, although OPEC’s secondary sources put it at 4.3 mbd. (Iraqi production is down otherwise due to temporary technical issues, including power generation problems and bad weather, which limits exports.)

Cause: A long-standing dispute between Baghdad and the Kurds came to a head in March, when Iraq’s Oil Ministry ordered the state-run North Oil Co. to re-inject 100 thousand b/d of Kirkuk crude into the ground, rather than allow the Kurds to continue selling it by pipeline. For a time after the ISIS blitz in 2014, the Kurds exported oil from their territory and from fields operated by Baghdad—some of which were taken over by Kurdish operators. The oil was exported under a fragile revenue-sharing agreement which collapsed last year; the Kurds complained they were not paid their fair share for exports and the central government argued that the volumes fell short of what was promised. In March, Baghdad withheld the oil because it never saw revenue from it.

Outlook: There’s talk now of a deal which would allow the re-injected oil to be processed in KRG refineries and the resulting products would be sold in/around Kirkuk to locals. No progress has been reported lately. If it moves forward, higher production would serve a subsidized domestic market, rather than generate revenue for desperate governments at a higher international price. In the meantime, ISIS has launched a wave of new attacks. One on July 31 reportedly cut KRG production by 70,000 b/d.

matt reed opec

*Assumes 1.2 million b/d lost in Libya; includes volumes Iran has yet to regain and KRG production interrupted on July 31. EIA does not include Iraq’s re-injected crude or lost KRG volumes.

 

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