OPEC threatened by re-emergence African producers By Cyril Widdershoven, GESA vol. 3 - issue #01 - 1/15/2004 OPEC’s future is not bright in 2004. Not only does the oil cartel have to cope with growing non-OPEC production, but additional pressure is building up within the cartel itself. Current high oil prices additionally will increase international pressure from consumer countries, largely the USA, EU and Japan, to discuss possible export quota increases to stimulate a lower average oil price in 2004, which should stimulate further economic growth worldwide. African countries will play a major role in this constellation. OPEC producer countries such as Libya, Nigeria or Algeria have been already asking cartel to renegotiate current quota, which is currently constraining the aggressive and successful exploration and development programs in the respective countries. Until now, no real positive sounds have been heard in the corridors of the oil cartel’s headquarter in Vienna. The opposite is more easily to detect than what African producers are asking for. The last days, news has come out of Vienna that OPEC is not willing to even discuss a possible oil glut, which would definitely drive down current high oil prices. On January 5, OPEC even reiterated that the standpoint of the cartel is more that the world should get used to having higher oil prices. In the view of OPEC leaders, current high oil prices are not even as high as the majority of consumers think. Due to the ongoing devaluation of the US dollar, in relation to the Euro or Japanese Yen, the purchasing power of oil revenues are under pressure since the middle of 2003. For consumers in the EU and Japan, this is definitely the case, overall prices have been stabilised in dollars, while the costs (in euros or yens) have gone down. In the case of the USA, or most of the developing world, this is not the case at all. Purchasing power of the dollar has decreased, so overall income of export revenues of these countries is also under pressure. OPEC’s standpoint that the world should pay for the fact that its revenues are under pressure is a one-sided standpoint without any real base. The world should not pay for the mistakes, mismanagement or stubbornness of oil producers, but should reap the rewards of availability, market forces and liberal economic trade. The fact that OPEC is not even implementing its own price-band mechanism shows the lack of transparency or market orientation of some of the highly qualified leaders of the cartel. As stated by OPEC on January 5, the cartel refuses to implement the automatic supply increase they agreed would go into effect if prices remained above US$28 a barrel for 20 working days. The latter mechanism should have put into action already at the end of 2003, when OPEC oil prices stayed since November 26 above the US$28 per barrel price band. The reason behind this, as also stated by Abdullah bin Hamad Al Attiyah, Qatar's oil minister, is that OPEC feels that current high prices are largely based on trader speculation and international politics. According to officials in OPEC, the price band mechanism is meant to be put into force when normal market forces are pushing up the price, not when so- called not-normal factors are causing it. The latter approach shows that the total system could be a farce, just a political instrument to be used when the cartel members feel like it. It is time now that outside forces will come together to force this mammoth of old times to change its attitude and become a normal market force, not purely a play for Middle East rulers. That the decrease of overall revenues is caused by the low US dollar is normal, as we all know, they were not complaining when the Euro reached a low against the dollar, and prices rocketed sky-high. No complaints were heard than in Vienna, Riyadh or the Gulf. It is all in the mind, maybe OPEC should consider suggestions, such as have been done by Russia, Iran or even Iraq (Saddam) to change oil currency payments from US dollars to Euros. Politically, the current situation is not healthy for OPEC at all. Outside forces are building up to trick the cartel into overreaction on all sides. Non-OPEC producers are seeing a window of opportunity the last years, high oil prices have made almost all E&P operations worldwide feasible. Overproduction is becoming a major factor on which OPEC will not have a major influence anymore. Diversification of energy supply is also a factor that OPEC has not yet found an answer for. The change from crude oil based economy to natural gas economy is going on, forcing OPEC to defensive approach, which the cartel until now is not able to fight at all. International political circumstances also have changed. Political-strategic analysts agree that the demise of Saddam Hussein, the change in attitude of Libyan leader Ghadaffi, and the green leaves of cooperation between Iran and the USA, have not only changed dramatically the security situation in the MENA region, but indirectly have undermined part of the power of OPEC too. Insecurity, terrorism, autocratism and anti-Western political ideas have become a integral part of current business thinking. OPEC’s power over oil and energy is crumbling. Alliances based on mutual interests have been undermined by terror, fundamentalism and fear. Arab countries are currently feeling the crunch, OPEC will feel the same the coming years. Western companies, governments and financial institutions have opened their eyes for new regions, oil, gas and power can be found elsewhere too, without the risk of alienating people, religions or countries further. Africa’s future role in this new chess game is very important and looks extremely bright. Its top producing countries, Algeria, Libya and Nigeria have to cope still with the stranglehold of OPEC. However, even in the case of another year of constraints, E&P operations will become more and more attractive. Algeria’s natural gas operations are rolling from one success to another. Libya will reap the rewards of its change in international politics, the opening of its secrets to the world and liberalisation of the energy sector. Nigeria, when able to cope with domestic instability and vandalism, will stay on top. Deepwater offshore operations are already presenting a very shiny picture, onshore also could be attractive, nothing has been done for years, and time has come to approach this too. Other non-OPEC African countries are approaching their crunch time too. Mauritania, Morocco, Egypt, Sudan, Angola, Sao Tome & Principe, Ivory Coast, Kenya, Congo or Chad, all of them will bring additional quantities of crude oil and natural gas to world markets. Putting renewed pressure on OPEC to change will come out of Africa. This time, Europe, USA and even Asia can start to rely on some good news from the Dark Continent.