OPEC’s giant strides and dwindling relevance

The Organisation of Petroleum Exporting Countries (OPEC) formed in 1960 had the mandate of coordinating and unifying the petroleum policies of its member countries and to ensure the stabilisation of oil markets in order to secure an efficient, economic and regular supply of petroleum products to consumers, steady income to producers, and fair return on capital for those investing in the petroleum industry.

In achieving this mission, OPEC, a 15-member organisation has, of late been faced with complex challenges arising from uncertain prospects for the global economy; excessive speculation, and the role of financial markets.The impacts of geopolitics; advances in technology and their impacts on exploration and production; as well as, environmental concerns are reportedly critical to the survival of the organisation.

Brief History
OPEC was established in Baghdad, Iraq, in September 1960 and was formally constituted in January 1961 by five countries- Iran, Iraq, Kuwait, Saudi Arabia and Venezuela.According to the organisation, the move became imminent due to transition in the international economic and political landscape, with extensive de-colonisation and the birth of many new independent states in the developing world. The international oil market was dominated by the “Seven Sisters” multinational companies, and was largely separate from that of the former Soviet Union (FSU) and other centrally planned economies (CPEs).

Reportedly, OPEC developed its collective vision, set up its objectives and established its Secretariat, first in Geneva, Switzerland, and then, in 1965, in Vienna. It adopted a “Declaratory Statement of Petroleum Policy in Member Countries” in 1968, which emphasised the inalienable right of all countries to exercise permanent sovereignty over their natural resources in the interest of their national development. Membership grew to 10 by 1969.

A report published on OPEC’s website showed that Qatar was admitted into the group in 1961, while Indonesia and Libya joined in 1962. Meanwhile, Indonesia suspended its membership in January 2009 and reactivated it in January 2016. The United Arab Emirates joined in 1967; Algeria (1969); Nigeria (1971); Ecuador joined in 1973, but suspended its membership in December 1992 and reactivated it in October 2007; Angola (2007); Gabon (1975) – terminated its membership in January 1995 but rejoined in July 2016; Equatorial Guinea (2017); and Congo (2018).

OPEC’s headquarters remained in Geneva, in the first five years of its existence before it was moved to Vienna, Austria, on September 1, 1965.Recently, Qatar announced that it would suspend its membership effective January 1, 2019 and focus instead on natural gas production.A decade after its establishment, OPEC member-countries developed their domestic petroleum industries forcing the group to take control of the pricing of crude oil at the international market.

At its Summit of Heads of State and Government in Algiers in 1975, which addressed the plight of the poorer nations and called for a new era of cooperation in international relations in the interests of world economic development and stability, the organisation launched the OPEC Fund for International Development in 1976, which enabled its members to carry out socio-economic development schemes, helping membership to grow to 13 by 1975.

The 1986 oil glut affected OPEC’s market, dropping its total petroleum revenue to a third of earlier peaks. This, according to OPEC left challenges, but an increase in price towards the end of the decade eased severe economic hardship as the group introduced a production ceiling, which was divided among Member Countries and a Reference Basket for pricing, as well as significant progress with OPEC/non-OPEC dialogue and cooperation, which has been essential for market stability and reasonable prices.

Though the concern for the dangers of fossil fuels mounted stronger in the 1990s with record shortfall, a solid recovery followed in a more integrated oil market, which was adjusting to the post-Soviet world, greater regionalism, globalisation, the communications revolution and other high-tech trends. The OPEC/non-OPEC relationship continued while the United Nations-sponsored climate change negotiations gathered momentum. After the Earth Summit of 1992, OPEC sought fairness, balance and realism in the treatment of oil supply.

In the past 18 years, the group has developed mechanism to deal with market instability. Speculation and other factors had transformed the 2004 downturn and enabled price of oil to increase. In mid 2008, oil price hit a record high before collapsing in the global financial turmoil and economic recession. The cartel’s second and third summits in Caracas and Riyadh in 2000 and 2007, established stable energy market, and sustainable development of the environment as guiding themes, and also adopted a comprehensive long-term strategy in 2005. Oil prices were stable between 2011 and mid-2014, but speculations and oversupply led to a drastic fall in 2014.

While the price rose sharply to $80 per barrel recently, it also crumbled to around $50 before regaining strength after the group reached an agreement to cut production by over one million barrels per day.

Growing Challenges In The Face Of Shift From Fossil Fuels
EXECUTIVE Director of Institute for Oil, Gas, Energy, Environment and Suitability (OGEES), at Afe Babalola University, Ado Ekiti, Prof. Damilola Olawuyi; President of the Nigerian Association for Energy Economics, Prof. Wumi Iledare; Director, Centre for Petroleum, Energy Economics and Law (CPEEL), University of Ibadan, Prof. Adeola Adenikinju; PricewaterhouseCoopers’s Associate Director, Energy, Utilities & Resources, Habeeb Jaiyeola; Research Analyst, MENA upstream, at Wood Mackenzie, Lynn Morris-Akinyemi; Technical Adviser to Nigeria Extractive Industries Transparency Initiative (NEITI) Dauda Garuba, Vice President, Macro Oils at Wood Mackenzie, Ann-Louise Hittle, and other analysts are of the view that OPEC has immense challenges and prospects to contend with.

Either on short- or long-term bases, or internally and externally, the cartel may continue to face challenges within the organisation, among member states and externally.Speaking at the 15th Ministerial Meeting of the International Energy Forum (IEF) recently, OPEC’s Secretary General, Mohammad Sanusi Barkindo, said issues around global economy; excessive speculation and the role of financial markets; geopolitics; advances in technology and their impacts on exploration and production; and environmental concerns were among the challenges that the organisation needed to accept and deal with.
Prof. Adenikinju, who noted that the group was not as attractive as it was in the past, believes that the prevailing situation has weakened OPEC’s impact, thereby reducing its level of political influence.

However, while oil-producing countries are on the increase, OPEC has not recently gained new members. Apart from the declining need for fossil fuels, the fear for most stakeholders is that OPEC’s market share may continue to decline, making the body less attractive, while its members seek needed investments to remain profitable since most of their economies are tied to oil.A survey conducted by the Middle East Economic, pointed out that while an accumulation of short-term considerations influences long-term choices, internal challenges and conditions in oil-producing states and in their relations with the organisation and the policies they adopt influence the way they deal with external threats that global economic growth and stability influence demand, while political developments influence supply.

The Implications Of Qatar’s Exit From OPEC
QATAR recently announced its withdrawal from OPEC effective Tuesday, January 1, 2019, to focus on gas production. But OPEC observers said the decision could be a reaction to current regional crisis, which led Saudi Arabia and the United Arab Emirates to impose an embargo on Qatar in 2017, a development stemming from a long-standing border dispute and other political frictions.Most stakeholders in the oil and gas sector, downplayed the implications of the decision maintaining that Qatar only adds about 600, 000 barrels of oil per day, which are less than two per cent of OPEC’s total production. Therefore, ending the 57-year membership would have limited impact on the organisation and the oil market.

That notwithstanding, the stakeholders feared that Qatar’s decision would further accentuate perennial debates on the future relevance and influence of
OPEC as a price modulating entity.Qatar, though a leader in gas production is OPEC’s smallest Middle East oil producer and the group’s fifth smallest producer overall. Its total 2018 oil production is estimated at between 600, 000- 650, 000 barrels per day (bpd), less than two per cent of OPEC’s oil output.

“Due to several factors, OPEC’s influence has evidently waned over the last few years. With the ongoing oversupply in the oil market, ongoing drop in oil price, rise in renewable energy production, internal fragmentation amongst OPEC members, and the rise in the influence of non-OPEC oil producing countries, such as Russia, OPEC member-countries may have to urgently go back to the drawing board to decide a strategic path to ongoing market relevance,” Olawuyi said.

The UK-based Nigerian professor insisted that Qatar made an informed decision that allows it to focus on its core comparative strength in the market, which is natural gas supply, especially liquefied natural gas.According to him, Qatar’s dominance and leadership in the natural gas market, coupled with its membership of the Gas Exporting Countries Forum (GECF) that is headquartered in Doha, arguably allows it to maintain its geometric growth and positive trajectory outside of OPEC. Jaiyeola, who equally noted that the decision would have limited implications, said Qatar won’t be the first OPEC member that left since the group was formed.

“Indonesia left in 2008 and rejoined in 2014 and left again in 2015. Similarly, Ecuador that joined in 1973 left in 1992 and also rejoined in 2007. We also have Gabon that joined in 1975, left in 1994 and joined again in 2016. This won’t be the first time a country is leaving OPEC. It is not impossible that a country that left will not join again,” he said.He noted that the exit would not have impact on fringe countries like Nigeria, considering Nigeria has about time higher production capacity when compared with Qatar.

For Hittle, who is Vice President, Macro Oils at Wood Mackenzie, since Qatar has minimal spare capacity, its exit won’t affect the volume of oil supply in the market in 2019, or risk OPEC’s goal of reducing output next year.“Rather than being a reaction to the 18-month long regional blockade against it, Qatar’s withdrawal is more likely a result of its effort to focus on its place as one of the world’s leading gas producers. The smaller nations of OPEC have a relatively quiet role in the group’s decision making and Qatar may also see that it has less to gain from its membership now that is not involved in the GCC,” Hittle added.

Morris-Akinyemi on his part said that Qatar’s OPEC exit underlines the country’s aim to maintain its place in the global gas market.“Since lifting the 12-year ban on development of the North Field in April 2017, Qatar unveiled ambitious plans to increase its LNG capacity from 77 million tonnes per annum, to 110 million tonnes per annum. This will be achieved via a new four mega-train LNG development due on stream in 2023,” she noted. Conversely, CPEEL’s director, Adenikinju, believes that Qatar’s exit would weaken OPEC’s alliance and the impact that it can exercise in terms of global oil market, noting that even though Qatar is a founding member of OPEC, it is more of a gas country than being part of OPEC.

“Qatar leaving will weaken the influence of the organisation. It will reduce the quota of OPEC,” he stressed.Since more countries are needed to offset production cut, Adenikinju, who is also a member of the Monetary Policy Committee (MPC) of the Centre Bank of Nigeria (CBN), cautioned that Nigeria could be affected by Qatar’s decision since its quota would have to be offset among members anytime there is need to cut supply.

In his contribution, Iledare said it would have been better for Qatar to remain in OPEC for geo-politics, adding that the country was expected to be the next president of the organisation according to the rotation.“I don’t foresee their coming out of OPEC making much difference because the group they belong to in OPEC is not prominent. The country is more of gas exporter,” he said.

Garuba equally noted that there won’t be radical or untoward consequences of Qatar’s decision to quit OPEC, adding the withdrawal of Qatar from OPEC does not imply a halt to the country’s oil production, nor amount to a radical increase in the global production figure.“What could possibly have a significant implication is if Iran follows suit as a close ally of Qatar. In other words, it may portend serious implications if Qatar’s exit from OPEC becomes the beginning of a process that will also see Iran’s exit. Iran produces a significant quantum of crude that its exit – either alone or along with Qatar – may affect international oil market price,” he said

Impacts Of OPEC On Countries Like Nigeria
TOO many experts are of the view that countries like Nigeria have benefited more from OPEC and therefore better off in the cartel. Though OPEC crude production statistics are less than the production figure of non-OPEC members put together, Garuba is of the belief that the former is such significant that it determines international price of oil.

“Most importantly, every time OPEC succeeds in adjusting production to stabilise prices, Nigeria benefits. In the midst of the cash crunch that Nigeria faced as a result of low oil prices since mid 2014, it took OPEC’s cut in production quota (including the waiver granted Nigeria in recognition of her peculiar challenges) to get the country on the track of economic recovery,” he added.While admitting that OPEC has successfully weathered many challenges since its establishment in 1960, Prof. Olawuyi insisted that Nigeria’s key challenge could be the need to sustain oil and gas production to a level that could drive the ongoing economic recovery process.

“While Nigeria may be able to live with a small production cut, any push for significant cuts in production could weaken the ongoing economic recovery process. Also, with Qatar becoming yet another oil producing country outside of OPEC’s fold, efforts to manage levels of global oil production, in order to sustain high oil prices had just suffered a huge set-back. This provides an uncertain outlook for the oil market generally, one which stakeholders in the sector will be monitoring very closely,” he noted. Jaiyeola equally believes that OPEC remains critical to the country’s economic stability, particularly with the leverage it enjoys in terms of recent production that enabled the nation exit economic downturn.

He said: “When you have a challenge it is good that you are a member of a group that ensures that while you are trying to sort out your internal problems, external issues are addressed because they will make things more difficult for you. I will say Nigeria has benefited from being a member of OPEC. There’s an OPEC fund, which is being given to Third World countries and Nigeria has benefited as well from it.”

Without the influence of OPEC, Iledare insisted that Nigeria would have flooded the international market with its crude, selling it at give away price since the country lacks a clear understanding of the market, stressing that OPEC provides an opportunity for the country to manage its production mechanism.

The Future Of OPEC
WHILE the demand for cleaner sources of energy is growing, some analysts believe that the impact of OPEC will continue to decline, but how soon this goes away remains a critical question. With the increasing number of oil producing countries and the gradual reduction in OPEC market share, Adenikinju said: “OPEC will at some point fight for market share. The world is turning away from fossil fuels, so countries are developing their economies towards carbon free energy. As we shift away from oil, the influence of OPEC will fall.”With the stability in global economy and increasing oil output from non-OPEC members, he noted that OPEC could loose relevance as it fights to cap production to defend price.

Just as the future of international and multilateral cooperation in oil and gas governance currently appears bleak, Olawuyi equally noted that the world faces complex challenges to energy security, which countries cannot effectively address in isolation. He however said: “OPEC must reassess and re-examine how it can better support and enhance international cooperation and harmonise the interests of oil producing countries.”

According to him, OPEC’s current and future relevance will to a large extent depend on its ability to better reflect the opinions, interests and viewpoints of all its members, while also forging strategic partnerships with non-OPEC oil producing nations. Iledare averred that the future of the organisation may not be what it used to be, but noted that it was in the interest of members to stay together, even if the purpose is to exchange information.

Garuba added that OPEC still has a bright future, although high-wire politics, especially the type that rears its head in the Middle East will continue to tell on how far the cartel can go.He said: “This is understandable, given that oil itself is naked politics. The quitting by Qatar effective January 2019 should not be seen as a final end in itself. It may just be the beginning of another phase of life signaling the dire need for respect among member states.”

Jaiyeola contends that the future of OPEC is not tied to oil alone. To him, there would be the continuous need for other by-products of oil for effective global economy.”Crude oil will still be a major community even though other forms of cleaner energy are coming. This means that countries that are into oil will still be relevant,” he disclosed.