• Market Watch

Cautious approach for Namibia before considering joining OPEC

• 5 Months Ago - 2024-06-10 00:00:00

As Namibia anticipates its emergence as a potential player in the global oil and gas markets, discussions about joining the Organisation of the Petroleum Exporting Countries (OPEC) have surfaced. However, a decision of this magnitude requires a cautious and well-considered approach, carefully taking into account Namibia's current stage of its oil and gas development and the broader implications of OPEC membership.

Namibia's oil and gas potential
Over the last three years, Namibia has made significant strides in oil exploration, with notable oil and gas discoveries by companies such as Total Energies, Shell and Galp Energia. These discoveries have brought considerable excitement about Namibia's potential to become a notable oil and gas producer, possibly the biggest producer in sub-Saharan Africa. Wood Mackenzie had earlier this year estimated the Venus discovery by Total Energies to hold 3 billion barrels of oil, with the Graff-Jonker discovery by Shell estimated at 1.35 billion barrels of oil and the Mopane discovery by Galp Energia estimated to hold 3 billion barrels of oil.
However, it is crucial to note that Namibia has yet to produce a single drop of oil commercially. Moreover, the nation does not have precise knowledge of its actual oil reserves, as companies like Shell, Galp Energia and Total Energies are still in the process of completing appraisals to determine the amount and scale of the oil reserves.

OPEC

OPEC is an intergovernmental organisation comprising major oil-exporting nations, aiming to coordinate and unify petroleum policies among its members to stabilise oil markets. The organisation currently includes thirteen (13) member countries: Algeria, Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, United Arab Emirates, and Venezuela.

In 2022, OPEC produced an estimated 28.7 million bpd of crude oil, accounting for 38% of total world oil production. In recent years, OPEC has collaborated with non-OPEC oil-producing countries, forming OPEC+. Member countries of OPEC+ include Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, Sudan, and South Sudan. These countries commit to regulating their oil production levels to support stable oil prices in global markets.
The main objective of OPEC is to safeguard the interests of its member countries by preventing steep declines in the price of crude oil in the international market. By regulating the supply of crude oil, OPEC aims to maintain oil prices at an optimum level. OPEC's policies and actions are designed to stabilise the global oil market, ensuring a fair return on investments for member countries while avoiding the economic turmoil that can accompany oil prices.

According to the US Energy Administration (EIA), OPEC and OPEC+ countries combined produced about 59% of global oil production in 2022, amounting to 48 million bpd.

From time to time, OPEC+ imposes production cuts and allocates them to individual members' production capacities. At their latest meeting held on June 2, 2024, OPEC+ agreed to extend their production cuts of 3.66 million bpd by a year until 2025 and prolong the cuts of 2.2 million bpd by three months until the end of September 2024.
This entails that OPEC+ members are currently cutting production output by almost six million barrels of oil per day to strengthen flagging oil prices. When the OPEC+ production was extended on June 2, 2024, UBS analyst Giovanni Staunovo, in his comments, stated that negotiations about production quotas of member countries have constantly been a source of discontent in the past, triggering heated debates and even shock departures by some members of OPEC.

Lessons from former OPEC member states

Ecuador

Ecuador, which sits on 0.5% of global oil reserves, joined OPEC in 1973. It was the first country in OPEC’s history to leave the organisation in 1992; however, it rejoined in 2007 and exited again in January 2020.
When Ecuador left OPEC on 1 January 2020, its main reason for departure was that it wanted to avoid continuing to join production cuts imposed by OPEC so it could sell more barrels and thus increase its income to get out of its financial status and grow its economy. The government of Ecuador indicated that it could not save its economy from sinking if it continued to produce oil as per its quota allocation from OPEC.

Qatar

Qatar, a significant player in the global energy market, left OPEC in January 2019 to focus more on its liquefied natural gas (LNG) production, according to media reports. Qatar’s departure highlights the limitations that OPEC membership can impose on countries looking to diversify and expand their energy production capabilities beyond oil. By leaving OPEC, Qatar aimed to enhance its strategic focus on LNG, which offered greater economic benefits and growth opportunities.

Angola

Angola, one of Africa's biggest oil producers, joined OPEC in 2007 but left in 2023 due to disagreements over production quotas. Producing about 1.1 million bpd, Angola's economy heavily relies on oil and gas, which constitute 90% of its exports. The obligatory production cuts imposed by OPEC had severe economic implications for the country as its revenue from oil was reduced, leading to its departure from the organisation. Angola’s minister of natural resources, Diamantino Azevedo, openly stated that OPEC no longer served the country’s interests.

Indonesia

Indonesia, a country with substantial oil reserves, joined OPEC in 1962 but suspended its membership in 2009 due to declining production and the need to increase its exports. The country rejoined in 2016 but suspended its membership again later that year. Indonesia found that OPEC's production quotas restricted its ability to maximise production and export oil, which was critical for increasing its revenue to accelerate economic development.

Considerations for Namibia

While OPEC membership could offer Namibia access to a platform for dialogue and potential influence in global oil markets, there are significant considerations to evaluate. Such considerations cannot be left as an afterthought; there must be thorough planning and discussion before joining the organisation. It’s too early for Namibia to rush into discussions about joining OPEC, considering that the industry is still at the exploration and appraisal stage and a long way before commercial production. The country still does not have an accurate measure of its oil reserves or its exact production capacity per day. Estimates from analysts and commentators’ range between 600 000 to 700 000 bpd, but these are speculative, and a lot of work remains to determine actual figures. Without precise data on reserves and production potential, any commitments to OPEC would be premature and potentially detrimental to the industry before it even has a chance to fully mature and add the much-needed revenue to the government coffers.

Membership in OPEC is not just a matter of signing papers and shaking hands, it comes with an annual fee of US$2 million, which translates to about N$37 million per year in the local currency. Namibia’s increasing debt currently stands at N$154.2 billion, and the profits from oil production will come in handy to assist in reducing the debt. Joining OPEC would mean Namibia would have to adhere to production quotas set by the organisation.

These quotas are designed to stabilise global oil prices but can severely restrict a country's ambition to maximise the production of its oil. For a country like Namibia, which is still in the nascent stages of its oil and gas industry, such restrictions could inhibit the country from yielding maximum profits from its oil production and its ability to respond to market opportunities.

Maintaining flexibility in production capabilities is crucial for Namibia as it navigates the early stages of developing its oil and gas sector. Namibia’s budding oil industry has attracted significant interest from international oil companies (IOCs) such as Total Energies, Shell, Exxon Mobil, Chevron, Qatar Energy and Galp Energia. These companies bring not only capital investment but also technological expertise and industry knowledge that are essential for developing Namibia's petroleum industry. Hence, it is vital for Namibia to maintain an attractive environment to further attract more investors at this early stage of its petroleum industry.

Oil exports have the potential to generate significant foreign currency earnings for Namibia, which can be used to support economic development, facilitate cross-border transactions, maintain stability in domestic currency, and provide access to global markets. However, OPEC membership could limit these earnings by imposing production quotas that restrict the volume of oil Namibia can export. For a developing country with pressing economic needs and the desire to access global markets, maximising foreign currency earnings from oil exports should be a priority.

The revenue from Namibia’s newfound petroleum resources will help the country immediately attend to its pressing social and economic issues as well as its development needs, which are detailed in the country’s policies, strategies and plans, if it’s not inhibited by production cuts.

Conclusion

While the prospect of joining OPEC might seem attractive, Namibia, whether directly or through other intermediaries, should not be in discussion about joining OPEC at this nascent stage of its oil and gas industry for several critical reasons, as highlighted above. The country’s oil reserves have yet to be confirmed, since more appraisals still need to be done. Without precise knowledge of our reserves, making commitments to OPEC would be premature and potentially detrimental. Namibia is also yet to determine its daily production capacity to see how it will align with or conflict with the quotas imposed by OPEC. Understanding our production capabilities is crucial before considering membership.

To maximise revenue output from oil and gas, Namibia should focus on attending to its pressing developmental needs as per its developmental imperatives outlined in its policies and strategies, such as NDP5, Vision 2030, and the Harambee Prosperity Plan. Joining OPEC hastily could limit the flexibility needed to allocate resources effectively towards these goals. Namibia may also consider and prioritise using its oil and gas revenue to pay off its national debt, which currently stands at N$154.2 billion, as quickly as it can. Economic prosperity should be a priority over potential production cuts and restrictions associated with OPEC membership at this early stage of Namibia’s oil and gas industry.