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Addressing emerging challenges critical to determine OPEC’s continued relevance, says Olawuyi

By Kingsley Jeremiah
06 January 2019   |   3:31 am
The Director of the Institute for Oil, Gas, Energy, Environment and Sustainable Development (OGEES Institute) at Afe Babalola University, Ado Ekiti, Prof. Damilola Sunday Olawuyi, is also the vice chair of the International Law Association, London; member of the World Commission on Environmental Law; and expert member of the International Law Association Committee on Sustainable…

Damilola Sunday Olawuyi

The Director of the Institute for Oil, Gas, Energy, Environment and Sustainable Development (OGEES Institute) at Afe Babalola University, Ado Ekiti, Prof. Damilola Sunday Olawuyi, is also the vice chair of the International Law Association, London; member of the World Commission on Environmental Law; and expert member of the International Law Association Committee on Sustainable Natural Resource Development where he represents Nigeria. In this interview with KINGSLEY JEREMIAH, Olawuyi spoke on critical issues surrounding the impacts and continuous relevance of the Organisation of Petroleum Exporting Countries (OPEC). The don, who has served as a visiting professor at Columbia University, Oxford University, and the China University of Political Science and Law, also disclosed that an institutionalised partnership framework between OPEC and non-OPEC members would rebalance and stabilise the global oil market.

How will countries like Nigeria be affected by OPEC’s production cut deal, and how sustainable is this policy in the face of declining oil value?
OPEC’s recent decision to cut about 800, 000 barrels of daily output is a strategic response designed to address oversupply, stabilise the market and strengthen crude oil prices at the international oil market. After being exempted three times from production cuts, Nigeria now has to join efforts with other OPEC member-countries by also reducing its daily production output level. The key challenge for Nigeria has always been how to sustain oil and gas production at a level that can drive ongoing economic recovery process.

However, a minimal production cut, in the range of 40, 000 barrels per day, should not significantly alter or weaken Nigeria’s ongoing economic recovery process. Also, since Nigeria’s promise to cut production does not include condensates, an ultra-light oil, which is not classified as crude, then the short term economic impact of the production cut may be minimised in Nigeria by sizeable condensate production. Generally, a minimal cut in production level is a sacrifice that Nigeria, as well as other OPEC members have had to make in the face of declining oil prices.

How would you describe the relationship between OPEC and non-OPEC member countries, especially in the short and long terms?
The rise in the production output, as well as influence, of non-OPEC members such as Russia, the United States, China, Mexico, Canada, Norway and Brazil means that stabilising oil markets is no longer a task for OPEC alone. OPEC has therefore had to dig deep by building a shared understanding with non-OPEC countries known as the “Decoration of Cooperation.”

As part of this cooperation, non-OPEC countries have voluntarily committed to achieving production cuts of about 400, 000 barrels. This partnership is remarkable as it shows that international cooperation in oil and gas governance is not only just possible, but indeed very desirable if we are to stabilise the global oil market.

In the long term, the key challenge is how to sustain the cooperation, as well as, get other non-OPEC producers to align with the partnership. To achieve this, there is a need to institutionalise this partnership and move it from an informal alliance, to a formal and sustainable forum for international oil and gas cooperation and governance.

Do you foresee a sustainable cooperation between the cartel and major producers in addressing price volatility?
An institutionalised partnership framework between OPEC and non-OPEC members will be in the best interest of all concerned, to rebalance and stabilise the global oil market. Addressing market volatility is a challenge that no side can manage in isolation. However, moving from an informal alliance to an institutionalized partnership will require significant changes in OPEC’s Charter, mandate and governance framework, which could be some time away. For now, it is important for OPEC to continue to identify and accommodate the interests of non-OPEC countries while hoping that a more sustainable and permanent cooperation framework will evolve naturally over time.

Demand for gas and other alternative energy sources are on the increase on the backdrop of the environmental dangers of fossil fuels. Do you think OPEC will remain relevant in the near future?
The rise of climate change mitigation measures—primarily those targeted at reducing global dependence on fossil fuels—pose common long-term challenges to the future of the global oil and gas industry in general, and specifically to the ongoing relevance and future of OPEC. OPEC’s future relevance will to a large extent depend on its ability to formulate a coherent response to a rise in demand for competing and low carbon energy sources. As the advent of United States’ shale oil has shown, responding to new energy sources is something that requires a clear plan.

To remain relevant in the emerging alternative energy world order, OPEC must strategically evolve and develop response plans that reflect current broader oil market conditions and scenarios. For example, OPEC will have to devote increased resources and efforts to renewable energy research such that it can have clearer understanding of the different outlooks/scenarios with respect to how renewables may impact or result in structural shifts in global energy markets. OPEC will also have to be more proactive in integrating environmental considerations into oil and gas markets planning and scenarios. While the oil and gas industry will remain relevant for some years to come, OPEC would have to formulate concrete plans on how to remain a key player in a diversified global energy market.

Qatar has left OPEC. What are the implications of this, and what impact will it have on the organisation?
Qatar’s decision to leave OPEC will further accentuate perennial debates on the future relevance and influence of OPEC as a price-modulating entity. Due to several factors, OPEC’s influence has evidently waned over the last years. With 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.

Qatar has 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. Qatar’s dominance and leadership in the natural gas market, coupled with its membership of the Gas Exporting Countries Forum (GECF) arguably allows it to maintain its geometric growth and positive trajectory outside of OPEC.

How will this development affect countries like Nigeria, and the oil sector generally?
OPEC has successfully weathered many challenges since its establishment in 1960. The current events, however provide, tougher tests. For Nigeria, the key challenge is how to sustain oil and gas production to a level that can drive 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 pricing has 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.

Would you say that OPEC has succeeded in calming storms since it was established?
OPEC members know the enormity of the challenges at hand, and over the last few days have achieved historic production cuts, all aimed at calming the storm. This is similar to, and perhaps, even more ambitious than the arrangement put in place last year to address oversupply and to boost oil prices. Judging by some success recorded in implementing aspects of the last production cuts, there are reasons to be optimistic that the recently announced production cuts, agreed with Russia and other Non-OPEC players could stabilise the oil market and boost prices.

What do all these portend for struggling OPEC members?
For OPEC to remain strong and relevant, it must continue to recognise and accommodate the circumstances of its struggling members like Nigeria. OPEC has demonstrated its flexibility in this area. For example, in recognition of Nigeria’s current dire economic circumstances, especially attempts to recover from recession, Nigeria has successfully brokered and got exemptions from the production cuts about three times. Nigeria will need to strategically count on maintaining that exemption going forward, while of course contributing realistic and modest cuts to ongoing efforts to stabilise the market.

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