At the beginning of July 2016 Gabon rejoined the Organisation of Petroleum Exporting Countries (OPEC) after an absence of more than two decades. This comes as Gabonese authorities look for enhanced coordination with other global oil producers to alleviate some of the pressure of low energy prices and help cultivate an environment more conducive to expanding domestic production.
Back Into The Fold
While Gabon is the cartel’s smallest producer – contributing just 0.3% of the global oil supply, amidst OPEC’s combined 40% – officials are hoping the benefits gained from closer international coordination, as well as technical and other assistance, will outweigh the substantial cost of OPEC’s membership fee, the original reason the country left the organisation. As a member of OPEC, Gabon will be able to better coordinate with other members that are also dealing with the economic fallout of weaker energy receipts. The country has already trimmed its budget two times in response to lower crude sales, but its economy remains highly dependent on oil, accounting for over 80% of exports, two-thirds of state revenue and 43% of GDP.
In late September 2016 Gabon took part in its first OPEC meeting since rejoining the organisation. Held alongside an energy conference in Algeria, the informal meeting was held to address the ongoing supply glut. Just two months before the Algeria talks took place, OECD crude stockpiles surpassed the 3.1bn barrel mark, while global demand growth in 2016 has been projected to slow at a faster rate than initially forecast by the US Energy Information Administration, for a gain of just 1.3m barrels per day (bpd).
The outcome of the meeting, although not binding, was significant, with OPEC members reaching a preliminary deal to set the output ceiling at 32.5m-33m bpd, with the date of the output freeze expected to be decided at the end of November 2016. Although no production target levels were established for individual countries, the news of a possible cap led to global oil prices rising by over 5% after the meeting.
Any concerted effort to trim supply could help rebalance the market, giving producers greater fiscal breathing room after prices neared breakeven levels in 2015-16. At the time of publication, Brent crude was priced slightly above the $40 per barrel threshold laid out in Gabon’s 2016 budget, trading at around $50 as of late October 2016. Significantly, Iran – which has ramped up its production to 3.6m bpd since sanctions were lifted in early 2016 – also attended the Algeria talks, bolstering hopes of reaching a production cap deal before the end of 2016. Iran’s ongoing commitment to increasing its output to pre-sanctions levels of around 4m bpd have been widely seen as a stumbling block to collective action to defend flagging energy prices.
Lower oil prices have coincided with a broader decline in Gabonese production due to maturing oil fields and a lack of new projects. The country produced around 219,000 bpd of crude in 2015, down from 222,000 in 2014 and a peak of 370,000 bpd in 1997. In the first half of 2016 average output was around 218,000 bpd, according to OPEC data. Gabonese authorities are looking to stabilise production at around 250,000 bpd in the short term and double it by 2025, relying on increased output from offshore blocks. According to official estimates, without new discoveries, production is expected to ease to 100,000 bpd by 2024.
These goals are seen as somewhat ambitious given the high exploration costs that are associated with the country’s offshore formations. International oil companies Total, Shell and Eni all announced offshore discoveries in the middle of 2013; however, many of these blocks are located in deep or ultra-deep waters, which in turn necessitates high levels of capital spending before commercial production can begin.