OIL OF THE YEAR: WINS AND LOSSES

The end of the year did not bring the desired stability to the global oil market, but was rich in surprises.

The oil-producing countries bound by OPEC+ commitments at the last meeting on November 30 kept the official production quotas for 2024 unchanged. A number of countries also confirmed their readiness to continue voluntary production cuts, which began back in April. In addition, Brazil, a rising star in the oil platform, joined OPEC+.

At the same time, Angola, which had been a member of OPEC for 16 years, suddenly announced its decision to withdraw from the organisation.

The cost of benchmark oil grades remains high, with Brent trading at $80 and WTI at $74.62 per barrel. However, the situation with oil quotations in December could be more correctly described as a chaotic up-and-down movement.

The domestic oil industry is preparing for the launch of the new Central East Azeri (CEA) platform at the Azeri-Chirag-Guneshli (ACG) field block. Drilling of the first production well has already commenced. On December 12, 2023, the total volume of oil produced from the West Azeri platform reached 1 billion barrels. Meanwhile, the Norwegian company Equinor has decided to leave the ACG project, ceding its stake in it, as well as in the Karabakh field and the Baku-Tbilisi-Ceyhan (BTC) oil pipeline to the State Oil Company of Azerbaijan (SOCAR). The signing of a memorandum of understanding with SOCAR on cooperation in green energy suggests that Equinor has not lost interest in the Caspian region, but rather has changed its priorities in favour of clean energy.

Stability and priorities

The OPEC+ countries made almost no changes to the quotas for 2024 at the talks held on November 30. The organisation confirmed all the decisions adopted back in June regarding next year's production quotas. Adjustments affected only three African countries - Angola, Congo and Nigeria. The new quota for Angola is set at 1.11mbpd (previously 1.28mbpd), for Congo 277,000 bpd (previously 276,000), and Nigeria 1.5mbpd (1.38mbpd). The total agreed OPEC+ production for January 1-December 31, 2024 remained almost unchanged at 40.45mbpd.

In addition, Russia will voluntarily reduce production by 500,000 bpd from February 2023. Several other OPEC+ countries, including Saudi Arabia (500,000 bpd), Iraq, Kuwait, Kazakhstan, Oman and Algeria - a total of 1.66mbpd - then joined these restrictions. It was decided that they will be extended throughout 2024.

In the first quarter of 2024, voluntary production cuts by these countries will amount to 2.2mbpd to balance the oil market during the seasonal decline in demand.

"Subsequently, in order to maintain market stability, these voluntary cuts will be gradually returned depending on market conditions," OPEC emphasised.

Russian Deputy Prime Minister Alexander Novak said that the decision on additional voluntary cuts by some OPEC+ countries made at the November 30 summit was positive information for the market. According to him, during the period of low demand, supplies to global markets will be reduced in order to balance supply and demand and ensure stable operation of the oil industry. Novak also did not rule out the possibility of adjusting the OPEC+ decisions in the future.

The next OPEC+ meeting is set for June 1, 2024 in Vienna, but members of the organisation will monitor the market for earlier intervention.

However, the decisions did not significantly influenced the market, which reacted with barely noticeable growth, and then a decline to $73 per barrel. Only thanks to a number of factors such as weakening of the US dollar, reduction of oil reserves in the US, etc., quotations rose to $75 per barrel.

"It seems traders either don't believe OPEC+ countries will honour the agreed terms or don't think the production cuts are sufficient," said Craig Erlam, chief analyst at Oanda.

Attacks and price growth

The growth of Brent quotations up to the current $80 per barrel is connected with the attacks of Yemeni Houthis in the Red Sea and the Bab-el-Mandeb Strait, which connects the sea with the Indian Ocean.

Up to 12% of the world's maritime traffic and up to 5% of hydrocarbon volumes are transported via this route to the Mediterranean Sea.

Increased attacks by the Houthis on ships travelling through the Red Sea increase the risk of disruption to oil supplies. Instead of this route, ships have to be diverted via the long route around Africa, which dramatically increases shipping costs and significantly increases delivery times. New shipping and insurance costs, supply disruptions and queues at ports will inevitably lead to higher prices for end consumers - petrol at the petrol station and goods in shops.

A number of major Western container shipping operators have already stopped using the conventional route.

"Geopolitical risks associated with attacks on ships in the Red Sea will support the market in the short term," Maybank analyst Chuck Reungsinpinya believes. High inventories, as well as production growth in the US will remain restraining factors, the expert claims.

"These attacks are nothing new, but their intensity has increased. The Houthis have insufficient forces for a blockade in the region, but they could disrupt shipping and change risk assessments," says Robert Fraser of Schneider Electric.

"Problems with major trade routes are usually temporary, and the US is likely to take more drastic military action to address the threats," said John Driscoll, founder of consultancy JTD Energy Services.

Time will tell how real these forecasts will turn out to be. We hope that the problem will be solved peacefully and the blockage of the main trade route between Europe and Asia will not last long. Otherwise, the current situation may have very serious consequences for world trade and lead to an increase in energy prices.

Brazilian triumph

Perhaps the biggest surprise of the last OPEC+ summit was Brazil joining the alliance in January. This is good news for oil-producing countries, which joined the alliance with only one goal - to prevent prices from falling and the market from becoming saturated. Brazil is one of the nations actively increasing production. According to OPEC, among the countries outside the cartel, the US, Canada, Brazil, Guyana, Norway and Kazakhstan will be the main drivers of oil supply growth in 2024.

Brazil's Ministry of Mines and Energy is developing a programme to increase investment in the oil and gas sector and turn the country into the world's fourth largest oil producer. According to the latest IEA report, which cites data from Brazil's National Agency for Petroleum, Natural Gas and Biofuels, the country's oil production was at 3.7mbpd.

Obviously, by becoming a member of the OPEC+ deal, Brazil will assume obligations similar to the other participants, but it is still unknown what exactly they are. It is only confirmed that the country will not participate in the alliance's voluntary cuts in the first quarter of the new year.

Leaving the Angolan way

Another surprise for the world oil market was the decision of Angola, one of the largest oil producers, to withdraw from OPEC. The reason is the country's disagreement with its small role in the organisation.

Angolian Oil, Gas and Mineral Resources Minister Diamontino Azevedo said that OPEC membership is not in the national interest of his country. Instead, it intends to focus on its own goals. He criticised the fact that they had "so far had no influence" on the quotas regularly set by OPEC, but had to adhere to them and bear the burden of decisions made by the cartel. If Angola had remained a member, sooner or later it could have been forced to reduce oil production, which is against the country's interests, he emphasised.

Angola was a member of OPEC for 16 years. After the withdrawal, the organisation of oil-exporting countries will have 12 members.

By the way, the November 30 summit of OPEC+ ministers was preceded by fierce negotiations with Nigeria and Angola, which were dissatisfied with the oil production quotas planned for them. Angola's production level caused the greatest disagreement. The final decision may have been the last straw that pushed Luanda to leave the oil club.

Throughout 2023, Angola asked OPEC to raise oil production quotas, but received the opposite: in June, the country's oil production target for 2024 was lowered by 175,000bpd, and in November by another 170,000bpd.

Although Angola accounted for only 2% of OPEC production, which is going to have an insignificant impact on oil producers after its withdrawal, experts believe that this is a serious blow to the cartel's image. OPEC's influence on the pricing process is decreasing. Plus the unity in the organisation has been replaced with serious contradictions.

It is assumed that Angola will have more opportunities to increase co-operation with major Western oil companies after the withdrawal. With oil and gas accounting for about 90% of total exports, the country cannot afford to cut production as OPEC has demanded of it.

Azerbaijani surprises

At the last meeting, OPEC+ kept Azerbaijan's oil production quota for 2024 at the level of 551,000bpd. Commenting on the results of the ministerial meeting, Azerbaijani Energy Minister Parviz Shahbazov said that "the goal of these decisions is to maintain stability in the oil market". That is, Baku sees no problems with the fulfilment of obligations under the deal. In fact, there  should not be any problems, as there have been no new oil discoveries in the country in recent years. Currently, all efforts are focused only at maintaining oil production at a stable level. The year 2024 will not be an exception, although a new, seventh platform on the Azeri-Chirag-Guneshli block of fields is almost ready for launch. Thus, BP-Azerbaijan started drilling the first production well from the new platform on December 4 and expects to receive oil from it by early 2024.

In general, the Central East Azeri (CEA) project is the next phase of development of the ACG block. It is planned to drill 48 wells for daily peak production of up to 100,000 barrels of oil and 350,000 cubic feet of gas. The launch of the new platform will make it possible to compensate to some extent for the decline in oil production at the block observed in recent years.

OPEC also expects that with the launch of CEA, production from the field will get a boost next year.

By the way, the billionth barrel of oil was produced from West Azeri on December 12. This is the second platform on the block, which produced a total of 1 billion barrels of oil. The first was Central Azeri, which reached this milestone in July 2021. Currently, daily production from West Azeri is 85,000 barrels.

Another surprise at the end of 2023 came from Norway's Equinor, which announced the sale of its stake in the ACG block, Baku-Tbilisi-Ceyhan oil pipeline and Karabakh field development projects to SOCAR.

The deal was signed in Baku by SOCAR President Rovshan Najaf and Equinor Executive Vice President for International Exploration and Production Phillipe Mathieu. It will be finalised in compliance with all regulatory requirements and contractual obligations. No price has been announced, which means we will have to wait for Equinor's annual report to find out how favourable the sale of assets in Azerbaijan was. The companies have been co-operating on major oil and gas projects since 1994. It became known in August 2023 that Equinor was studying the possibility of selling its assets, including a stake in the country's largest oil project, ACG. At that time Bloomberg estimated the value of the Norwegian company's assets at about $1b.

"Equinor is in the process of reorganising its international oil and gas business and the sale of assets in Azerbaijan is in line with our strategy to focus our international portfolio," Mathieu said commenting on the deal with SOCAR.

"Azerbaijan has been an important part of Equinor's international portfolio for the past 30 years. Together with SOCAR and other ACG partners, we have created significant value for the partnership and for Azerbaijani society. SOCAR is well positioned to add value to the assets over the long term and we value the close co-operation over the years," he said.

Remarkably, in addition to the share purchase agreement, SOCAR and Equinor also signed a memorandum of understanding on cooperation in the areas of decarbonisation and green energy. This implies that the company does not intend to completely leave Azerbaijan, it is just changing the vector of activity.

The development of renewable energy sources (RES) is a key priority for Equinor. The company has committed to achieving carbon neutrality by 2050, including emissions from oil and gas end-use. And as part of this strategy, it plans to increase its RES portfolio to 12-16GW by 2035. Azerbaijan's RES potential and willingness to develop this area create prerequisites for mutually beneficial co-operation in the implementation of investment projects along the lines of BP and Total.

Thus, the year 2023 was quite eventful in terms of oil production and promises a worthy continuation in 2024, with new and upcoming projects and an agile market.