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AS SHE BECOMES A NEW OIL PRODUCER?
by Mohammed Amin Adam
Centre for Energy Economics and Policy (CEEP) Ghana
As Ghana is celebrated an emerging oil producer, there are serious issues regarding the management of her oil and gas resources which need to be looked at critically if the country is to derive maximum benefits from her oil find. One of the most serious issues is whether Ghana should join the Organization of Petroleum Exporting Countries (OPEC).
OPEC is a group of countries that have significant oil reserves and produces significant amount of crude oil for exports to the world consuming countries. It consists of 12 countries, namely, Saudi Arabia, Qatar, Kuwait, Venezuela, Iran, Iraq, Nigeria, Algeria, Libya, Angola, United Arab Emirate, and Indonesia.
The organization was formed by Venezuela, Saudi Arabia, Kuwait, Iran and Iraq in 1960 who at that time controlled 67% of world’s proved oil reserves but who produced over 37% of the world’s oil according to the Centre for Energy Economics. The objective of the organization was to influence the prices of oil. Other members of the organization joined during the 1960s and 1970s.
It has been estimated that the share of OPEC ownership of reserves increased from 67% in 1960 to 70% in 1973 and by 1992, it stood at 78%. At the same time, their share of production declined from 53% in 1973 to 40% by 1992.
According to the Commodity Futures Trading Commission, World oil production in 2005 was 82,268 thousand barrels per day (tbd). Out of this, OPEC countries produced 33,979 tbd (41.3% of total world oil production), while OECD countries and Europe (25 countries) produced 20,317 tbd (24.7%) and 2,631 tbd (3.2%), respectively. Therefore, OPEC’s stature and influence in the global oil industry cannot be understated.
Ghana as an Oil Producer
Ghana recently found commercial quantities of oil and gas reserves. Oil exploration in reality is not new to the country. Exploration for oil resources started in the 19th Century in the Western basin of the country by two companies - Societe Francaise de Petrole of France, and the African and Eastern Trade Corporation, which was a subsidiary of the UAC. These companies drilled wells in onshore Tano areas in the western regions of the country.
The recent oil find is however, the most successful so far in view of the large commercial quantities of reserves discovered and the possibility of significant levels of production after the development phase. The current oil field under development - the ‘Jubilee Field’ consisting of two blocks - West cape three point and Deep water Tano; is estimated to have a recoverable reserves of about 800 million barrels at 90% probability with an upside potential of about 3 billion barrels according to projections released by the Ghana National Petroleum Corporation. Production is likely to begin in the third quarter of 2010 with initial levels of 120,000 barrels daily and to be increased to 250,000 barrels by 2012. As Ghana joins the league of oil rich countries, one question which is outstanding is whether Ghana should join OPEC.
Should Ghana Join OPEC?
There are no doubts potential benefits for Ghana if she joins OPEC. As a small producing country, the country cannot influence the world market conditions of oil. As a result, its effect on oil prices will be negligible. A membership of OPEC will therefore protect the interest of Ghana in ridding over the organization to benefit from her oil production. OPEC will also increase its development assistance to Ghana to neutralize the revenue reductions that may accompany production cuts, a quota system given to its members.
In spite of these benefits, it is important Ghana analyses the operations of OPEC, the international politics of the oil industry, and the fast changing structure of the global oil market before taking a decision to join OPEC or not. OPEC itself is faced with survival questions which tend to reduce its powers and influence over the oil market. The current and future states of OPEC do not only make it unattractive to emerging oil producers but also signal it to change its operations if its present non-core members are to continue to play any significant roles in the market. Certainly, OPEC is a group of unequal members and described variously as the ‘core’ versus the ‘non-core’; ‘spenders’ versus ‘savers’ and ‘large reserves with low population’ against ‘small reserves with high population’; to mention just a few. Ghana’s group is quite predictable, which thereby demonstrates the country’s potential standing in the global oil market. Perhaps a diagnosis of OPEC in terms of its strengths and threats will assist Ghana in appraising its decision to join the organization as she prepares to start her first commercial production of oil.
Diagnosis of OPEC as a Player in the International Economics and Politics of the Oil Industry
One major threat to OPEC which is increasingly reducing its potency as a cartel is the drift of the oil market towards competition. OPEC as a fringe supplier has not been able to control the market consistently as a result of the competitive production behaviour of some of its members. Some OPEC members have violated the quotas and thereby rendering worthless the strength of cartelism in the oil market. OPEC has not been able to enforce its rules nor is it able to punish cheating members. Some members have therefore determined production levels along the behaviour of non-OPEC members who produce competitively. The future role of OPEC is therefore questionable and whether it is prudent for Ghana to join an organization which is losing its strength is an important question to answer.
OPEC production cuts tend to favour developed member countries. Countries such as Nigeria, Angola, Venezuela and Indonesia that have very serious development challenges and thereby require large production sizes to raise more revenues are often disadvantaged. By obeying the quotas, these countries are postponing development initiatives and worsening the poverty levels of their people. It is therefore not surprising that these poor members of OPEC are also the countries with high proportion and incidence of ‘resource curse’. Is Ghana going to be another candidate for this experience?
OPEC has even lost its market power over oil prices. For instance, it looked helplessly when its reference price decreased from $140.73/barrel on 3rd July 2008 to less than $40/barrel by year end. In an attempt to recover oil prices, OPEC embarked on production cuts by approving daily production cuts of 1.5 million barrels/day beginning from 1st November 2008. At its 151st extraordinary meeting on 17th December, the members again agreed that production cuts would amount to 4.2 million barrels/day from actual September 2008 OPEC-11 production of 29.045 million barrels/day. Despite these cuts, crude prices were not recovered. Some attributed this to the global economic crisis which negatively affected global demand for oil. A country’s dependence on OPEC power of influencing prices may therefore not necessarily serve her interest. Furthermore, countries do not need to belong to OPEC to benefit from its market power if any exist.
Another factor that reduces OPEC’s relevance is the stock levels of major consuming countries. The industrial oil stocks of the Organisation for Economic Cooperation and Development (OECD) countries reduced in January 2003, to around 211 million barrels which was lower than the levels recorded a year earlier. The US commercial crude stocks also declined in 2003 to their lowest levels since 1975. However, beginning 2005 stock levels in both the US and OECD countries begun to increase. This accommodated the volatility effects of OPEC production behaviour. Thus the real advantage of belonging to OPEC which profits from such volatilities is defeated.
Even though crude oil is mostly homogenous, the OPEC reference basket over the years has shown some degree of differentiation among the various crudes. The following table shows OPEC reference basket as at 25th June 2009.
Table 1: OPEC Reference Basket by Crude Oil Quality
COUNTRY CRUDE OIL APIo SULFUR CONT.
ALGERIA Saharan Blend 44o 0.09%
ANGOLA Girassol 31.6o 0.32%
ECUADOR Oriente 30o 0.88%
IRAN Iran Heavy 30.9o 1.68%
IRAQ Basra Light 33.7o 1.95%
KUWAIT Kuwait Export 31.4o 2.52%
LIBYA Es Sider 37o 0.45%
NIGERIA Bonny Light 37o 0.14%
QATAR Qatar Marine 36o 1.42%
SAUDI ARABIA Arab Light 33.4o 1.77%
UAE Murban 39o 0.78%
VENEZUELA Merey 18o 2.28%
Ghana’s oil is said to be in the category of sweet crude alongside Nigerian Bonny Light and Arab Light. The quality of Ghana’s crude therefore provides another advantage for the country irrespective of her membership of any producer group. If Ghana does not join OPEC, it could still free-ride higher prices resulting from any condition in the oil market including the effect of OPEC production cuts if it is ‘effective’ anyway. The problem here is that when OPEC increases production in order to reduce prices, Ghana will lose revenues because of its small production levels. If Ghana however, has guaranteed market due to the high quality of its crude, she could still sell at prices higher than OPEC reference price in line with ‘Stackelberg’ game prescription; but yet still the small size of its production will not bring in much revenue.
It must be noted also that the internationalization of National Oil Companies (NOCs) poses another challenge to OPEC membership. Most NOCs are now moving beyond their boundaries to acquire oil blocks in other countries. Most of these NOCs are from the major oil consuming countries and yet own significant amount of reserves. As an illustration, PetroChina, Petrobras of Brazil, China National Petroleum & Chemical Corporation (SINOPEC), Oil and Natural Gas Corporation Ltd (ONGC) of India, and China National Offshore Oil Corporation (CNOOC) are globally ranked 15, 18, 31, 26-gas and 44 respectively by oil reserves.
Also, it has been observed that the short term focus of Chinese NOCs is to expand their current overseas investments in the oil sector whiles planning to aggressively acquire new overseas capital investments in the medium to long term. Data from Chatham House indicate that between 1995-2006, Chinese companies invested at least US$27 billion in overseas upstream projects. Also, major US companies invested US$29.8 billion in foreign upstream activities in 2004 alone. Japan also wants her oil volume ratio in exploration and development by Japanese companies to be raised to around 40% by 2030. ONGC Videsh Limited (ONGC VL) of India, the wholly-owned subsidiary of ONGC, also has substantial investments in Vietnam, Sudan, Russia, Syria and Colombia. Mostly, these investments are located in Nigeria and Angola, Russia and Kazakhstan; and Asia; but limited in the Middle East due to limited upstream opportunities especially in Arabian fields which are strongly restricted. However, there have been renewed interest by Chinese and Japanese NOCs in the Middle East with major investment agreements recently signed with Iran, Libya and United Arab Emirates. These overseas investments by NOCs from oil consuming countries is creating a platform for consuming countries to strongly influence the global oil market. If Ghana is to get ‘good deals’ for her oil resources, it is important to look up to the major consumers with substantial investment resources and flexible terms rather than join an organization whose members are fast entering into ‘agreements with same countries for economic and political purposes’.
It is safe to argue that diplomatic and political concerns have shaped most of the current commercial agreements with oil suppliers mostly from OPEC members. Whiles the United States considers oil supply as a national security issue, China and Japan see it not just as energy security matter but also a major part of their foreign policies. For example, the United States influenced the China National Oil Company’s loss of its bid to invest more than US$4 billion in the US oil sector in 2007 apparently for security reasons. China’s interest in oil rich countries that are not democratic by western standards may also be in pursuit of its foreign policy. Thus both the US and China are reaching out to establish partnerships with some of the oil rich nations to secure their interests. They are therefore ready to deal directly with oil producing countries with substantially attractive terms. This makes Ghana and the West African sub-region an attractive zone for US and Chinese interests whether they belong to OPEC or not.
The domestic policy of major oil consuming countries is another factor. The US, the largest oil consumer in the world is pursuing a new energy policy which seeks to attain energy independence from countries mostly OPEC members in the Middle East which the US considers unfriendly states. These countries are also politically unstable and therefore are likely to disrupt oil supplies to the US. The effect on the US economy as well as its national security of supply disruption cannot be overemphasized. Thus, the force behind President Obama’s green technology will likely affect OPEC dominance of the global oil market since the policy is aimed at reducing the consumption of fossil fuel by 30% by 2030.
On her part, Japan seeks to reduce her oil dependence to less than 40% by 2030, from the current approximately 50%. As the second largest consumer of oil from the Middle East particularly, Japan’s move will likely erode some of the influence of OPEC majority of whose members are from the region. The import of this argument is that OPEC may control supply but not demand. As it reduces production, consumers of oil also adjust demand by a combination of energy diversification programmes. Even though the adjustment cost of diversification especially in terms of consumer attitudes may be higher, consumers in both industrialized and developing countries do not prefer the opportunity cost either, that is, expensive fuels, increased subsidies, inflation and generally macroeconomic dislocations.
In conclusion, it must be noted that the power and influence of OPEC are being threatened and weakened by both economic and political factors including the fast changing structure of the global oil industry. The competitiveness of the global oil market is being shaped by market forces of demand and supply. The non-cooperative behaviour of OPEC is further undermining its strength. This has made OPEC very difficult to operate as a cartel and eventually eroding the benefits associated with cartelism. Ghana is in the same group as the Equatorial Guinea, Cameroon, and Egypt; which are small producers of oil and have remained outside OPEC since they begun oil production. The country should therefore share the experiences of these other countries in order not to take hasty decisions regarding her membership of OPEC. As indicated earlier, if Ghana joins OPEC, it may not be of a significant commercial reason. It will indeed swell up the membership of OPEC but may not significantly swell up the reserve and production capacities of the organization if Ghana remains at the production target of 250,000 barrels per day. Further, the weakened position of OPEC market power does not make it attractive for small oil producing countries to join. Politically, the country may however benefit from OPEC, which may extend more development assistance including sharing technology with Ghana.
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