OPEC has agreed to extend cuts in oil production by nine months to March 2018, following their meeting on Thursday in Vienna. Exempting Nigeria from the cuts may have avoided political meltdown in West Africa.
Nigeria and Libya were once against exempt from making any such cuts, as they recover from militancy which has seen production plummet in the two countries. There was speculation on Monday that Iraqi support for an extension of the full nine-months – rather than six-months – may be conditional on Nigeria and Libya taking their share of reduced output.
Saudi energy minister Khalid al-Falih flew to Baghdad on Monday to secure Iraqi support for a nine-month cut in output. It was the first time the world's two largest oil producers had met in the Iraqi capital in nearly three decades.
Following the meeting, Iraqi oil minister Jabar Ali al-Luaibi said that “small oil producing countries” excused from the previous round of cuts may have to participate in a new deal.
The previous round of cuts was due to come to an end after an historic six-month agreement made in November 2018 with non-OPEC countries, led by Russia, to reduce global supply by around 2 per cent. The cut successfully buoyed prices, which had halved over three years.
Nigeria's best possible scenario
The timing for Nigeria could scarcely be better. Their output has risen from the Q32016 average of just 1.38 million barrels per day (bpd) to 1.5 bpd in May 2017; a figure still far below the country's peak production level of 2.2. million bpd.
The nine-month extension also neatly takes Nigeria up to the 2018 budget, allowing it to increase production and try to meet unrealistic spending obligations. Analysts from witin the country and abroad have also urged the Government to pass the long-awaited Petroleum Industry Bill (PIB). The Bill would provide root-and-branch reform of the oil sector and give clarity to investors, it is hoped.
On an almost weekly basis, the Nigerian oil minister Ibe Kachikwu has overpromised on just how soon Nigerian will return to – or even outstrip – its 2.2 million bpd peak. But with nine months to now boost its production, there is clear blue water for Nigeria to make headway and recover oil-dependent government revenues, which have been severely hit in the twin blow of low prices and halted production.
Potential unrest in Africa's oil king
With ailing President Muhammadu Buhari out of the country for medical treatment for a second time in the year, there are rumours circling of plans to oust the leaderless government by military means.
Had Nigeria been coerced into taking a share of cuts in Vienna today, the inevitable strain on Nigerian public finances may have been a fatal blow the Buhari administration. Given that the 2017 Nigerian budget was based overoptimistically on peak oil production levels, if Nigeria had been forced to cap production as it currently stands – barely 70 per cent of full capacity – it is hard to imagine that any increase in the price of oil would have made up for the shortfall in government revenues.
Given the inevitable economic meltdown which would have followed if Nigeria was forced to cap production, today's announcement from OPEC may have averted political and social turmoil in West Africa. As it is, it coincides with the announcement that the $14bn Dangote Refinery will open in 2019, and is set to produce 650,000 bpd. Nigeria must now pass the PIB to fully take the extended status and hit March 2018 with production booming and a reformed oil sector.