Impending African quota cuts to test OPEC unity amid volatility, falling prices

A fresh row is brewing within OPEC+ as African members baulk at the prospect of investment-sapping quota reductions, with the producing alliance preparing to meet on Nov. 26 at a time of extreme market volatility and armed conflict in Europe and the Middle East.

After six hours of tense discussions in June's ministerial meeting in Vienna, most of OPEC+'s sub-Saharan African contingent, which includes Nigeria, Angola, Equatorial Guinea, Republic of Congo, Gabon, Sudan and South Sudan, agreed that their 2024 quotas would fall unless they could demonstrate higher production capacity before November.

While African members are confident they have done just that, S&P Global Commodity Insights understands that all but Gabon and South Sudan are on course for substantial quota cuts, which some would find hard to accept.

"They are going to see severe cuts, because they have not been able to ramp up production," said a source familiar with the process.

One African OPEC delegate told S&P Global that while a minor reduction would be tolerable, a significant cut was "not even an option", adding: "We are looking at a quota that would help us attract investors. If investors hear that our quota has been slashed, that is not a good signal."

"There are big troubles if the value is too low," said another delegate. "It has a direct impact on the revenue of our countries. It is a delicate matter."

A third said flatly: "No we are not," when asked if their country was preparing for a quota cut, despite the African nation failing to significantly boost crude output in recent months.

Waning influence

Previously a significant voice within OPEC, particularly under former secretary-general Mohammed Barkindo, African members have seen their influence wane in recent years due to production declines and the formation of OPEC+ in 2016.

Faced with underinvestment in ageing oil fields, IOC divestments, inadequate exploration activity, operational issues, instability and in the case of Nigeria rampant crude oil theft, African countries have consistently missed their production quotas.

Nigeria, sub-Saharan Africa's biggest producer, pumped 1.38 million b/d on average in the first half of 2023, according to the Platts OPEC Survey from S&P Global, well below its 1.782 million b/d OPEC quota and its 2.2 million b/d capacity. Angola has seen output fall from a peak of 1.9 million b/d in 2008 to 1.08 million b/d on average in H1 2023, but has a 1.46 million b/d quota. The Republic of Congo and Equatorial Guinea have also underproduced, with the latter pumping just 42% of its OPEC target.

At the same time, African crude exporters have faced pressure for market share in Asia from cheaper Russian barrels, since Russia invaded Ukraine. Sanctions against Russia have seen its key crude grade Urals trade at discounts of as much as $40/b to Dated Brent as a result of Western sanctions imposed in response to the invasion.

A communique released following June's meeting -- when Angolan minister Diamantino Azevedo stormed out -- said Nigeria's quota would fall to 1.38 million b/d, Angola's to 1.28 million b/d, Congo's to 276,000 b/d, Equatorial Guinea's to 70,000 b/d and Sudan's to 64,000 b/d in 2024. Only Gabon and South Sudan emerged unscathed.

Illustrating the internal competition for market share, the UAE was handed a 2024 quota increase of 200,000 b/d.

African delegates, however, were confident they could show increased capacity by November to avert baseline and quota cuts. "You can ignore [the 2024 quota]," one told S&P Global at the time.

Five months on, the African contingent has failed to convince OPEC that they can significantly increase production in 2024 -- despite plans for new wells and oil fields -- and are therefore facing quota downgrades. Nigeria pumped 1.46 million b/d of crude in October, according to the Platts survey, while Angola produced 1.15 million b/d, a slight increase since June.

"The issue here is the numbers don't lie," said NJ Ayuk, chairman of the African Energy Chamber, "They have not been able ramp it up." Ayuk said the key issue was the slow approval process of acquisitions in many African countries. "The Saudis are not trying to hurt us, OPEC are not trying to hurt us, we are hurting ourselves," he said.

Three upstream consultancies -- S&P Global Commodity Insights' crude oil marketing division (formerly IHS), Wood Mackenzie and Rystad -- have already submitted African production capacity numbers to the secretariat, but how they will be interpreted is not clear and no specific meeting on the numbers - which differ across the secondary sources -- has been planned, delegates said. "We may have a strategy to not necessarily do the average but may be take the higher value," said one delegate.

The OPEC secretariat declined to comment on how the quota revisions would be calculated.

Representatives of African members insist they are willing to make sacrifices for the sake of market stability. "I think all parties are aligned on that and willing to do whatever is required to ensure the market is stable," said one delegate.

However, large-scale quota reductions could provoke a bitter response at Sunday's meeting in Vienna. In what could be an early sign of trouble, sources told S&P Global that Angola's Azevedo will skip the meeting altogether.

A confab between African members to discuss strategy before the meeting remains a possibility, sources said. "Probably yes, in the coming days, because it would be strange not to talk," said one delegate.

Volatility and war

Disagreement over quotas and production baselines -- which sources said would take place for all OPEC+ members in mid-2024 -- is something that the Saudi Arabia and Russia-led alliance can ill-afford amid serious market volatility and ongoing wars in Ukraine and Gaza.

Although fears of a wider regional war in the Middle East have cooled since the onset of fighting between Israel and Hamas in early October, attempts by Yemen's Houthis and other Iranian proxies to enter the fray, as well as Iran's calls for an oil embargo against Israel, continue to rattle markets.

Meanwhile, disappointing economic data from China has fueled concerns of continued sluggish demand, ending a period of strengthening oil prices, which reached an eight-month high and flirted with the $100/b mark in September.

Riyadh and Moscow have led the group in a series of production and export cuts since the summer, but they have not been sufficient to support falling prices.

Platts, part of S&P Global, last assessed Dated Brent at $82.61/b on Nov. 15.