*Sylva Gets a Handle on Deal As 9.7 Million Barrel Cut Goes Into Effect May 1st

By Hamilton Nwosa(Head, The New Diplomat’s Business and Data tracking desk)

Finally, Saudi Arabia, Russia,  United States, Nigeria and 19 other countries have reached a historic deal to slash production by 9.7million barrels per day in a dramatic move to end Saudi-Russia tension on the one hand, and to resolve Mexico-Saudi stand-off on the other hand. Under this agreement, the 23 oil producing nations that struck the deal have committed to withholding 9.7million barrels a day collectively from the global oil market.

The deal which was  sealed on Sunday April 12, to end crippling effects of escalating oil glut came through after United States President Donald Trump stepped in to resolve open and tense differences between Saudi Arabia and Mexico which initially threw spanners in the works. The radical cut by 9.7 million barrels per day, a move  which energy experts say represents about tenth of global oil supplies, is designed to boost falling prices in the midst of  the current covid-19 pandemic and oil price war. But  still, experts say the cut  falls far short of market requirements to bring oil production in line with global demand. Following Trump’s intervention, Mexico was allowed to cut only 100,000 barrels a month.

The cut which would come into effect beginning May 1, is expected to stabilize oil prices, and help restore some stability to the global financial system. Recall that Oil prices have collapsed  following the crippling effects of Covid-19 as well as the protracted face-off between Russia and Saudi Arabia resulting in oil price war and glut.

The meeting  of the 23 Oil nations,  including OPEC members was conducted mainly through video conferencing.  In its reaction, the American Petroleum Institute  praised the agreement, stressing that it will help “get other nations’ state-owned oil production to follow the lead of U.S. producers that are trying to adjust to a “historic drop in demand.”

Nigeria’s Minister of State for Petroleum Resources, Chief Timipre Sylva in statement released by the Ministry of Petroleum Resources, said other planned cuts would stand in the deal, meaning “an 8 million barrel per day cut from July through the end of the year and a 6 million barrel cut for 16 months beginning in 2021.” The statement added: “This will enable the re-balancing of the oil markets and the expected rebound of prices by $15 per barrel in the short term.”

Recall that Mexico had initially blocked the deal. But diplomatic  sources revealed that  Trump, Russia President, Vladimir Putin and Saudi King Salman held talks behind the scene on the precarious global oil market situation, and the three men agreed to halt the crisis. Reacting to the deal, Trump said in a tweet: “The big Oil Deal with OPEC Plus is done. This will save hundreds of thousands of energy jobs in the United States.”  He added:  “I would like to thank and congratulate President Putin of Russia and King Salman of Saudi Arabia.”

However, some observers  have been wondering why Trump who has been a critic of OPEC stepped in to help resolve the crisis.  The reason is understandable. For a president who is facing a  tough  re-election campaign, a  struggling  United States  economy with many US  oil firms facing severe Oil price crash,  his attention would naturally be on how to  resolve the Oil price war and get the US energy sector back to life.

Experts Say Cut Not Enough to Stabilize Price…

With this development, energy experts have been reacting. Per Magnus Nysveen, Head of Analysis at Rystad Energy has this to say: “This is at least a temporary relief for the energy industry and for the global economy. This industry is too big to be let to fail and the alliance showed responsibility with this agreement…Even though the production cuts are smaller than what the market needed and only postpone the stock building constraints problem, the worst is for now avoided.”

Rystad added;  “ The deal should bring some relief to struggling economies in the Middle East and Africa and global oil companies including American firms that directly or indirectly employ 10 million workers.”  Analysts also project that prices might remain below $40 per barrel for the foreseeable future.  Recall also that some big oil nations like Canada, Norway and Brazil along with the United States have been cutting production before now.

But the war has ended with casualties. The Russia-Saudi Arabia stand-off, according to analysts  created self-inflicted economic  injuries. With the ravaging impact of the covid-19 pandemic across  the world,  markets were being shut down to demands for  Saudi’s crude.   Saudi also stored some oil in Egypt and was forced to let unsold crude sit in tankers along its coasts.  The situation was also not significantly different in Russia. In fact, energy analysts at Rystad put the crisis that faced both Saudi Arabia and Russia thus :

“The mounting glut became a threat to Saudi government finances…Saudi Arabia still has foreign reserves of $500 billion, but that has shrunk from $740 billion in 2013. Several years of depressed oil prices had already forced the kingdom to borrow money and reduce energy subsidies for citizens. Prince Mohammed is now counting on his reserves to help diversify the Saudi economy for the future.

“Russia is in far better shape financially than Saudi Arabia, especially with a flexible exchange rate — as the ruble depreciates, the value of its exports rises. While it would also lose billions of dollars in revenues with the drop in oil prices, the government has a much lower fiscal deficit than Saudi Arabia and has $550 billion in foreign reserves. But Russia has other liabilities. It has limited processing capacity and its refineries have insufficient storage facilities…”  Another key threat is the ravaging covid-19 with grave implications on global oil supplies in the coming weeks.  

Nigeria’s Role in the Deal…

Nigeria’s Minister of State for Petroleum Resources and former Bayelsa State governor  who participated  on behalf of Nigeria  said: “It is therefore pleasing to note that despite the production curtailments that this historic agreement will entail, all planned industry development projects will progress as they will be delivered after the termination of the 9th OPEC/Non-OPEC Ministerial Meeting Agreement on adjustments in April 2020”.

Energy analysts postulate that  based “on reference production of Nigeria of October 2018 of 1.829 Million Barrels per day of dry crude oil, Nigeria will now be producing 1.412 Million Barrels per day, 1.495 Million Barrels per day and 1.579 Million Barrels per day respectively for the corresponding periods in the agreement.” However, this does not include condensate production of between 360-460  KBOPD  which was exempted from OPEC  production cuts.

Industry experts  predict that the 23 oil nations deal sealed on Sunday  may lead to a rebound in crude oil prices “by at least $15 per barrel in the short term, thereby enhancing the prospect of exceeding Nigeria’s adjusted budget estimate that is currently rebased at $30 per barrel and crude oil production of 1.7 Million Barrels per day” .

Recall that prior to this historic meeting, Chief Sylva, who is also the APC leader in Bayelsa State and  a front-line player in the APC led federal government had  pledged  Nigeria’s readiness  for the  deliberations on output cut  as proposed by OPEC.   “As Nigeria’s Minister of State for Petroleum Resources, I will continue to monitor the impact of COVID-19 on our, and the global, economy. In our consultations with global industry stakeholders in the lead up to the OPEC+ meeting scheduled for Thursday, April 09, 2020, the Nigerian Government will take a position that is in the best interest of our short term and long-term economic forecast,” he said. To many, it’s like he got a firm grasp and grip of the situation!