What Opec’s failure to curb oil output means for Kenya

Opinion and Analysis

Workers at an oil rig in Turkana County. PHOTO | FILE 

By GEORGE WACHIRA

As anticipated, the Organisation of Petroleum Exporting Countries (Opec) meeting last week failed to agree on production targets to limit crude oil production to strengthen prices.

This preserves the status quo taken by Opec at their November 2014 meeting when they voted to allow prices to be determined by market forces. As oil over-supply persisted over the past year, prices have dropped to around $45 from above $100 in June last year.

With the world currently over-supplied by about two million barrels per day (bpd), and without production targets to limit oil supply by Opec, the oil prices will likely remain below $50 in the next couple of years.

There will of course be the routine marginal price swings up and down depending on geopolitical and economic happenings across the world.

The outcome of last week’s Opec meeting was anxiously awaited by many oil and gas stakeholders who include investors, consumers, economic and budgetary planners of various nations. Investors want to see increased prices to boost investments and returns.

Consumers and net oil importing nations welcome continued low prices. Oil exporting nations will continue to worry about budgetary imbalances as revenues shrink. Climate change advocates will be upset with increased carbon emissions from higher consumption of cheap oil.

Reduced revenues

A year ago there was prediction that oil production in USA and Russia would decrease as a result of low prices. US shale oil production has decreased only marginally as producers responded with increased operational efficiencies to counter reduced revenues.

Russia has maintained production levels and indeed plans to increase supply. The Ukrainian related sanctions had only limited impacts on Russian oil production capacity.

The Middle East production has also increased over the past year and is expected to rise further next year as Iran and Iraq plan to add more barrels into the market. .There will also be new oil coming from fields around the world whose production development is in their completion stages.

Most of the predictions made a year ago in respect of the oil sector investments have mostly happened. Expenditure related to exploration and in some cases production development has either been cancelled or re-scheduled to later dates.

Most oil companies have gone through some form of equity and debt re-structuring as revenues reduced. Numerous mergers and acquisitions have taken place, while exploration acreage farm-outs have been on the increase. A number of bankruptcies have also happened. Above all many jobs have been lost.

Stabilise upwards

Decreased or cancelled investments now mean that in about five years time (say 2020) there will be reduced barrels available to meet the increasing demand which is prompted by cheap oil... So it is save to predict that prices will stabilise upwards around 2020.

How far upward is difficult to predict, but many planners have mentioned a $60-70 price range. This is the time when the new investment cycle will kick-in to meet an expected supply gap.

Of course anything can happen before then. For example the Opec may realise that the current over-production is not sustainable and that a “common-interest” compromise is prudent.

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They may therefore decide to leave more oil in the ground to boost prices, salvaging economies of the cash-weaker members. This is a strong possibility to ensure the institutional survival of Opec.

In this globalised and mostly politicised world, anything is possible, and other unforeseen factors may occur and reduce supply and boost prices.

Such factors may include the worsening political developments in the Middle East which have now significantly dragged in Russia and other North Atlantic Treaty Organisation members. Oil supply hates war-like situations.

There is also the un-quantified effect of the revised Chinese economic development model which may substantially reduce uptake of fossil fuels.

It is important to note that it was the Chinese over-heated economy that prompted increased global oil demands and prices over a decade ago.

Check inflation

So what does all this mean for Kenya? As a net oil importer we shall continue to enjoy reduced pump prices which will help to check inflation. There is bound to be increased lavish and inefficient use of oil.

It is when oil prices are low that governments across the world decide to increase taxes on petroleum products to discourage inefficient use of cheap oil.

For the National Treasury and the Central Bank of Kenya, reduced oil import bills shall continue to improve balance of payments while cushioning the exchange rate.

However, as an oil and gas investment destination Kenya will continue to experience reduced dollars from foreign direct investments. Upstream exploration work in Kenya has already been scaled down and a good number of jobs have been lost.

Investments to produce and commercialise the already discovered oil are likely to take longer to commit if the current price uncertainty continues.

Overall, Kenya immediately stands to benefit a lot more from continued low oil prices if the government and consumers can use the oil import savings prudently.

However, there is a minimum price that we are hoping for to resuscitate investments in the upstream oil exploration and production.

In the meantime we have hopefully learned a thing or two about the dangers of an economy heavily dependent on commodities like oil. Oil dollars come and go. Kenya needs to grow as a diversified and balanced economy with multiple revenue streams.  
Mr Wachira works at Petroleum Focus Consultants. Wachira@petroleumfocus.com