The decision by the Organization of the Petroleum Exporting Countries and allies (OPEC+) to steep oil production cuts, has shoved the energy market in a conundrum that could very well push the global economy into a recession.
This was among the resolutions passed during the recently held 45th Meeting of the Joint Ministerial Monitoring Committee (JMMC), and the 33rd OPEC and non-OPEC Ministerial Meeting that took place in person for the first time since the pandemic, at the OPEC Secretariat in Vienna, Austria. OPEC+ announced that starting November, it would reduce oil production by 2 million barrels per day. Founded in 1960 by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela, they were later joined by the UAE, Qatar, Libya, Indonesia, Algeria, Nigeria, Ecuador, Gabon, Angola, Equatorial Guinea and Congo among other allies such as Russia.
"The world economy has entered into a time of heightened uncertainty and rising challenges, amid ongoing high inflation levels, monetary tightening by major central banks, high sovereign debt levels in many regions as well as ongoing supply issues," OPEC said in its monthly report.
To boot, OPEC forecasts that oil demand will increase by 2.64 million barrels per day (bpd) or 2.7 per cent from 3.1 per cent in 2022, down 460,000 bpd from the previous forecast. Moreover, the organization predicts that in 2023, oil demand could rise by 2.34 million bpd, 360,000 bpd less than previously forecast, to 102.02 million bpd. This is an equivalent of 2.5 per cent, with OPEC expecting demand to surpass the pre-pandemic rate of 2019.
OPEC was driven to make this decision by several factors like global inflation, soaring interest rates, geopolitical tensions, economic headwinds and effects of Covid-19 containment measures and their resurgence thereof.
Due to travel restrictions and lockdowns, the pandemic reduced demand for oil leading to production cuts thereby ensuring stability in the global market, and ensuring prices don't fall too low.
Prior to the decision, OPEC+ has been striving to increase oil output this year.
However, the move has been deemed highly political as opposed to economic. The move has dealt a heavy blow to the Biden administration, given that President Biden met the Crown Prince Mohammed Bin Salman (MBS), during his first trip to the Middle East in July, where he visited Saudi Arabia and Israel. MBS announced that the Kingdom would soon pump more oil to relieve high gas prices, to support global oil market balancing for sustained economic growth.
The US Secretary of State, Antony Blinken, called it both "shortsighted and disappointing," and said the administration is reviewing a "number of response options," when it comes to US-Saudi relations. In reiteration, US Treasury Secretary Janet Yellen, called it 'unhelpful and unwise' for the global economy, particularly developing and emerging markets already grappling with high energy prices.
This comes as the US and G7 allies edge closer to setting a price cap on Russian oil exports, to deprive the country of its much needed energy revenues. Higher oil prices make it harder for the West to enforce sanctions on Russia. Oil production cuts will inarguably drive up the price per barrel and generate more revenue and profits for the Kremlin. Consequently, the US has accused the Saudi Arabia of aiding Russia in funding its war on Ukraine.
Saudi's Foreign Ministry, rejected claims that the oil cut was 'politically motivated' against the US. The decision could not have come at a worse time. It came weeks before the US midterm elections where prices at the gas pump could impact voters, given that at present, his Democratic Party is struggling to maintain control of Congress.
Russia has praised OPEC+ for the decision to fight what it termed as 'mayhem,' sown by the US in global energy markets.
The US has consistently accused Russia of weaponising energy, exacerbating an already dire crisis in Europe that could trigger power rationing, given that winter is approaching. On the flip side Moscow has accused the West of weaponising the dollar and financial systems and that the US is keen to lower oil prices to deprive Moscow of oil revenues.
What does OPEC+ oil production cuts portend for African economies?
Undoubtedly, African countries will be largely impacted by the decision by the global cartel of oil producing countries to cut oil production given that only 14 out of 54 countries in Sub-Sahara Africa produce oil, which accounts for the lion's share of their annual export earnings.
Many African countries have to import refined oil and rely on oil products in power generation. A hike in oil prices will boost economies of oil producing countries, by gaining foreign exchange earnings to carry out development projects such as Nigeria, Angola, Gabon, Libya, Cameroon, and Congo among others.
Consequently, this will create more job opportunities and greatly aid in poverty alleviation. In addition, the revenues could be redirected to other sectors that make significant contributions to the respective economies. By example, in countries like Cameroon, Gabon and Congo, internet infrastructure and technology could largely benefit from re-investing.
Simultaneously, this will have detrimental effects to the economies of the non-producing countries, as the rate of inflation is likely to go higher driving up the cost of living by unimaginable degrees. In tandem, the sting of food insecurity which is a hurdle many African economies are currently grappling with, such as the Horn of Africa, exacerbated by the adverse effects of climate change, will all the more burn.
The populace living below the standard poverty threshold is projected to increase to a record high, given that the number had markedly shot up when the pandemic struck in 2020. Moreover, since the onset of the Russia-Ukraine crisis in February the number has been steadily rising. Development projects in the pipeline in many African countries, are more likely to stall due to reductions in FDI inflows. Therefore, the OPEC oil cuts presents a mixed bag of fortunes for African economies, some nations will win whilst others shall wallow in troubles instigated by the energy deficits.
During the recent Africa Oil Week Conference in Cape Town, opinions were divided with some delegates not fully aware of the impact the oil cuts would have in their nations. However, a majority expressed concern about the rising prices, given that non-members who also export oil, have slashed production targets. Africa has been under Europe's radar as a potential future gas supplier. Africa's energy powerhouses such as Nigeria, Angola and Senegal, which offer largely untapped potential for Liquefied Natural Gas (LNG); are garnering attention especially from EU countries. African LNG exports predominantly emanate from Nigeria and Algeria, with smaller volumes from Angola, Egypt and a fraction from Equatorial Guinea.
However, does Africa have the requisite capacity to meet European energy demands?
Even before the announcement of the oil cuts by OPEC+, Europe has been seeking alternative sources of gas and oil supplies to wean itself off Russian energy. In light of this, many nations have set their eyes on Africa to establish whether the continent's oil producing countries could help seal the gap. According to a recent Rystad Energy report, African nations are well placed to scale up their exports in gas supplies to Europe.
Among the projects expected to supply to European markets is the Greater Tortue Ahmeyim (GTA) LNG project offshore Mauritania and Senegal may only be 80 per cent complete as of June 2022, but has already drawn visits from EU countries such as Poland and Germany. Led by BP PLC and Kosmos Energy Ltd, production is expected to begin in the third quarter of 2023, with the first GTA LNG cargo targeted for 2024. An estimated 15 trillion cubic feet of gas were found in the waters of the two West African nations between 2014 and 2017 deeming the region a future hub of world LNG production. With this figure, it means production can continue for at least thirty years. Furthermore, the figure is five times more than what gas-dependent Germany used in 2019.
The GTA project has massive potential to transform West Africa into a new global energy hub. Phase 1, which is located around 115km from the Coast of Senegal and Mauritania, nears completion and is projected to produce around 2.5 million tonnes of gas per year. According to BP, extensions of the project could locate up to 100 trillion cubic feet of gas, pushing the region into the top 15 LNG fields in the world. BP additionally has the Yakaar-Terenga and BirAllah LNG projects in Senegal and Mauritania. Senegal's President Macky Sall recently met with German Chancellor Olaf Scholtz to discuss supplying gas to Europe. The country's LNG output is forecast to reach 2.5mmty in 2024 and 10mmmty by 2030.
With perspective that Africa is already in possession of existing pipelines connected with the wider European gas grid, across the Mediterranean, the traditional oil and gas suppliers in the continent have an upper hand in tapping into European markets and well poised to scale up their exports. Pipeline exports to Europe from Africa run through Algeria into Spain and from Libya into Italy.
However, discussions about long-distance pipelines connecting gas fields in Southern Nigeria to Algeria via the onshore Trans Saharan Gas Pipeline (TSGP), together with the offshore NMGP have gained momentum since the onset of the war in February. In addition, the report indicates that Africa is likely to reach peak gas production capacity by 2030 at 470B cubic metres, 75% of Russia's 2022 production capacity. Furthermore, the report reveals that the continent will still boost its gas output from 260Bcm this year to as much as 335 Bcm in 2030. In the scenario that oil and gas operators decide to scale operations, Africa's short and mid-term gas output will exceed the reported estimates.
Upon discovery of significant deposits in Mozambique, the Southern Africa country has the potential to become a major exporter of LNG. France's Total Energies invested US$20B and commence extraction in the northern Cabo Delgado province, but Islamic extremist violence forced the company out last year.
However, Eni an Italian firm established a platform in the Indian Ocean offshore, away from the violence in Cabo Delgado, making it the first floating facility in the deep waters off Africa, with gas liquefaction capacity of 3.4 million tonnes per year. According to Africa Energy, the platform liquefied its first gas on the October 2, and the first shipment is expected to depart for Europe in the second half of the month.
Earlier in the year, the Royal Cabinet of Morocco announced that King Mohammed VI together with Muhammadu Buhari, the President of the Republic of Nigeria have finally renewed their commitment towards the proposed construction of the Nigeria-Morocco Gas Pipeline (NMGP) touted as vital for the economic integration of both the West and North Africa. The project is a regional onshore and offshore gas pipeline which is projected to transport natural gas resources along the Atlantic Coast, traversing the maritime areas of 15 West and North African countries, and crossing over to Europe. It's an extension of the already existing West African Gas Pipeline (WAGP), which has been pumping gas from Nigeria to Ghana, Benin and Togo since 2010.
The 5,660-kilometre-long pipeline will ferry Nigerian gas to every West African coastline, ending at Tangiers in Morocco and Cadiz in Spain.
The construction of three multinational oil and gas pipeline systems measuring over 6,500km, in an effort to revolutionize energy access by boosting oil and gas supply. The network will also be shared by Equatorial Guinea, Cameroon, Chad, DRC and Angola. Into the bargain, the network is projected to comprise of at least three refineries and gas-fired power plants, liquefied natural gas terminals and storage depots. Despite Africa's vast gas reserves, the status quo of the infrastructure cannot support the ramping up of exports. Italy signed a US$4 billion gas deal with Algeria in July, a month after Egypt reached an agreement with the European Union and Israel to boost sales of LNG. Angola also has signed a gas deal with Italy.
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State of Africa's oil production
Angola has overtaken Nigeria as the biggest oil producer in Africa.
With over 9 billion barrels of proven oil reserves, for 2022, production stands at 1.16 million barrels per day (bpd). Nigeria is now the second largest producer following production declines from 1.3 million bpd, having produced approximately 1.02 million bpd in May 2022. Algeria is the third-largest oil producer in 2022 and production sits at 970,000 bpd, an increase from 2021 levels of 874,000 bpd. With upwards of 12 billion barrels of proven oil reserves, the second largest on the continent, the North African country is committed to maximizing reserves through the scaling up of exploration and investment.
Despite having the largest oil reserves on the continent at 46.4 billion barrels, political instability and lack of oilfield maintenance have seen production decline rapidly in Libya, which currently stands at 946,000 bpd. In 2021, the country produced approximately 1.17 million barrels per day, however, output has decreased given the political upheavals.
Egypt is the fifth largest oil producer in Africa with production estimated at 556,440 bpd in 2022. As demand increases from European markets, the country is looking at improving exploration, with specific emphasis having been placed on drilling new wells. Between 2014 and 2020, the country signed 84 petroleum agreements with international operators, and is looking at increasing exploration even further in 2022. At 275,000 bpd, Congo has welcomed increased production and renewed interest in producing fields.
Following its peak of 370,000 bpd in 1997, Gabon's oil production has decreased with 2022 levels showing daily output at 195,000 bpd. Largely attributed to ageing oilfields and lack of investment, the country is now committed to expanding exploration and increasing production. Through revisions made to the Hydrocarbon Code in 2019, Gabon aims to attract investment and development.
Currently standing at 172,000 bpd, Ghana has over 660 million barrels of proven oil reserves, making it the eighth biggest oil producer in Africa. Production is expected to shoot up to 420,000 bpd in 2023. Equatorial Guinea's production sits at 88,000 bpd for 2022, a sharp descent from 2021 levels of 153,000 bpd. Despite estimated reserves of one billion barrels of oil, production in Chad has been slow, with 2022 levels estimated at 68,000 bpd, a notable downturn from 2021 levels of 109,000 bpd.
