What does the Opec+ approach to the global energy mix say about the oil sector’s direction of travel?

18 Dec 2023 - by Jon Marks

Efforts by Saudi Arabia and other oil producers to water down commitments to phasing out fossil fuels dominated the climax of the COP28 global climate talks in Dubai. The final communiqué included – for the first time – a commitment to eventually phase out fossil fuels, going beyond previous declarations that focused on coal. However, there are few signs that Organisation of the Petroleum Exporting Countries (Opec) members and their Opec+ allies, led by Russia, have any intention of allowing their core source of revenues to disappear anytime soon.

So what can we learn from recent statements by oil producers – including Opec+’s quota commitments at a meeting on 30 November – and from leaks and comments made during COP28?

A very long last stand

Saudi Arabia and the United Arab Emirates are among the Opec producers with ambitions to be the ‘last men standing’ among major oil producers, as African Energy’s sister publication Gulf States Newsletter has long noted. Russia is similarly positioned. Sub-Saharan African (SSA) exporters arguably less so, while Algeria, Egypt and Libya still have considerable potential to expand their hydrocarbons offering.

The big producers have highlighted huge investments in carbon capture and storage (CCS) in an effort to show they can play a positive role in the energy transition.

The UAE also showed off its green credentials by unveiling a raft of African renewable energy (RE) projects at COP28, which underline its status as a fast-emerging ‘middle power’ to be reckoned with.

But, at the same time, major Opec producers have big crude production expansion plans. Led by COP28 president Sultan Al-Jaber, Abu Dhabi National Oil Corporation (Adnoc) is aiming to add 1m b/d to its domestic crude output to take it to 5m b/d, while also increasing its footprint in the African upstream (AE 493/20). And while Saudi Arabia continues to shoulder the burden of Opec+ cuts, Saudi Aramco’s plans to scale up crude output further, to around 13m b/d, are still high on the agenda.

The International Energy Agency (IEA)’s Net Zero by 2050 report issued in 2021 famously argued that no new oil and gas investments were needed if the world was to reach net zero emissions by 2050. The COP28 final communiqué and its ‘global stocktake’ of hydrocarbons production can be seen as a step along that route, but Aramco, Adnoc and Russia’s Gazprom and Rosneft are leading national oil companies that expect to take an ever bigger role in hydrocarbons markets.

The Net Zero by 2050 report argued Opec’s global market share would rise from 37% in 2019 to a high of 52% in 2050. This would be a bigger slice of a much smaller market but, as Saudi oil minister Prince Abdelaziz Bin Salman Al-Saud has gleefully predicted, it will still be a world in which internal combustion engines are widely used.

An IEA report released on 14 December said recent production cuts had reduced Opec+’s market share of  to just 51%, which was the lowest since the expanded cartel was established in 2016.

Opec and IEA forecasts, put together by Bloomberg Intelligence (see graphic below), show the extent that hydrocarbons will still dominate the global energy mix by 2030 – and the long road ahead before their replacement by RE, nuclear and other carbon-neutral technologies.

Higher for longer

Most oil and gas-dependent producers’ budget plansdepend on high oil prices. When the benchmark Brent crude falls below, say, $70/bbl it can cause problems for a gargantuan spender like Saudi Arabia as much as for cash-strapped SSA economies like Nigeria.

As a rule of thumb, a major measure of success for Opec+ is if the cartel can keen the Brent crude price above $80/bbl.

Saudi Arabia has recognised the budgetary implications by marshalling Opec+ producers into formal quota and ‘voluntary’ output cuts.

Abdelaziz Bin Salman on 30 November pushed some other members to join it in making more sacrifices – if nowhere near Saudi Aramco’s 1m b/d voluntary cut, first announced for just one month, last July, and now extended into Q1 2024. Six countries eventually agreed additional voluntary quota reductions for Q1 24, totalling 696,000 b/d, at the delayed Opec+ November meeting.

The next Opec+ meeting is scheduled for 1 June, but big decisions will be needed before then – not least on if and when producers can start to ease their voluntary cuts.

Also to be resolved in the longer term is how long free-riders – the exempt Iran, Libya and Venezuela, plus those who have avoided ‘voluntary’ cuts – can be reintegrated into a disciplined cartel.

Libya is now producing well over 1m b/d and National Oil Corporation (NOC) believes it can hold its recent 1.2m b/d output.

All this puts pressure on the cartel, but Russian President Vladimir Putin’s visits to Saudi Arabia and the UAE in early December showed how cohesive Opec+ remains, for all the western pressure applied by United States President Joe Biden and others. A joint statement from Saudi Crown Prince Mohammed Bin Salman Al-Saud (MBS) and his “cherished guest” Putin emphasised “the importance of continuing this co-operation, and the need for all participating countries to adhere to the Opec+ agreement”.

MBS has been piling pressure onto his half-brother, Abdelaziz Bin Salman, to maintain oil prices at a level that can support his huge spending under the Saudi Agenda 2030 banner.

Continental performance

African producers are deeply involved in this process. The 30 November meeting was the first to implement a new Opec+ framework that sets ‘required production’ levels for several SSA countries. This regearing of production quotas is based on external audits to show Angola, Nigeria and Republic of Congo what their output should be.

Angola appealed its assessment – which was one reason the Opec+ ministerial meeting was delayed – and got an increased quota of 1.11m b/d, up from the previous 1.08m b/d. But the rumbles on, as Luanda plans to produce 1.18m b/d (AE 496/22).

Angola produced 1.08m b/d in November according to official figures reported to Opec, but 1.13m b/d according to the regular survey of secondary sources included in Opec’s monthly oil market report issued on 13 December.

Nigeria remained the top African crude producer in November, according to the secondary sources survey, at 1.37m b/d. This compared to Libya’s 1.17m b/d and 962,000 b/d for Algeria. Official government reports put November output at 1.25m b/d for Nigeria, 1.2m b/d for Libya and 960,000 b/d for Algeria.

Nigeria wants more. Minister of state for petroleum resources Heineken Lokpobiri has pointed to plans to produce up to 1.7m b/d of crude in 2024. Lagos-based Nairametrics reported on 12 December that Nigerian Upstream Petroleum Regulatory Commission (NUPRC) data showed oil production at 1.47m b/d; however, that combines crude oil and condensate production, the latter falling outside Opec quotas. NUPRC put crude output at 1,25m b/d.

Markets react negatively

Even with the austere Q1 24 quota regime, traders did not respond as Opec+ might have liked, with Brent futures falling to $74.30/bbl on 6 December, their lowest level since June. Brent closed at $74.71/bbl on 14 December, as markets took on board the COP28 statement.

Opec+ hoped its continued cuts would prevent another stock-build of inventories in Q1 24, allowing a gradual unwinding of cuts thereafter. That this didn’t seem to work as planned shows how hard it is even for someone as well-schooled in energy realpolitik as Abdelaziz Bin Salman to control prices. The market view is that some producers will not adhere to their commitments, while others outside the cartel’s quotas are gearing up for production rises in 2024. Also impacting on market sentiment are concerns about the Chinese and United States economies.

These are traditional concerns of oil producers, who need to keep pumping crude for their economies to stay afloat while their diversification policies could take decades to come to fruition.

The COP28 statement recognising the need to transition away from fossil fuels was a step forward, that got formal (and grudging) buy-in from Saudi Arabia and other key players. But, as Al-Jaber commented, “an agreement is only as good as its implementation. We are what we do, not what we say… We must take the steps necessary to turn this agreement into tangible actions.”

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