Global excess oil supply still looks likely to average 0.5m bpd in 2016 – sufficient, it would seem, to stop oil prices rising much above $50/bbl and therefore to forestall a recovery in E&P activity and the offshore markets. On the supply side of the equation, US shale production and Saudi policy tend to be seen as the key “swing factors”. However, an appreciable degree of relief could also come from elsewhere.
Taking A Swing At Production
West Africa, a fairly mature oil producing region, accounted for 6% (5.3m bpd) of global oil supply in 2015, including 17% (4.4m bpd) of world offshore oil production. To put this in context, world oil oversupply in 2015 stood at around 1.7m bpd – 2% of total supply, i.e. 95.8m bpd, to which the US contributed 12.6m bpd (13%) and Saudi Arabia 12.4m bpd (13%). Saudi Arabian production so far in 2016 has been stable, while US shale oil production in May 2016 was down just 8.9% on May 2015, representing a far slower decline than many observers anticipated. It follows, then, that a severe disruption to West African oil production could have significant implications for the global oil supply-demand balance. Such a scenario seems to be unfolding in Nigeria, which in 2015 produced an estimated 2.3m bpd – 43% of West African oil production. In a series of high-profile attacks, the Niger Delta Avengers (NDA, a new permutation of the old militant group MEND) have sabotaged pipes and wells in the Niger Delta, crippling onshore and shallow water output. At the same time, only 12,000 bpd of offshore capacity (from the Antan field) is set to start up in 2016, and even fixed platforms further from shore, like “Okan NWP PRP”, have come under attack. As a result, Nigerian oil production reportedly fell to 1.1m bpd in May, and 2016 production is projected to average 1.8m bpd – a production loss equivalent to 28% of oversupply in 2015.
In Full Swing No Longer
Political risk is thus one reason West Africa can be a “swing factor” in oil production; another is project economics, especially over the medium term. Angola, for instance, accounts for 43% of West African offshore oil production and 33% of projects in the region yet to reach EPC. However, most of these are deepwater FPSO hubs with high breakevens. In fact, the last project sanctioned off Angola was the $16bn Kaombo Ph.1 project in April 2014, with a reported breakeven of $74/bbl. Given the dearth of project FIDs since 2014, a paucity of start-ups is expected in 2018-21, which would feed into weaker world oil supply growth.
The Swinging Sixties
In the long term though, West Africa has the potential to act as a swing region for (offshore) oil production in the opposite direction. Given stronger oil prices, c.$60-$80/bbl, prolific projects such as Chissonga (Angola, 150,000 bpd) could be feasible again, while an oil price of c.$90/bbl would unlock the potential of many of the 39 Equatorial Margin frontier fields discovered offshore since 2010. West Africa could thus, in a favourable price environment, make an important contribution to world oil supply growth once again.
Of course, political risk and costly projects make West Africa a challenging region at present. But taking a macro view, that could actually be positive for oil prices. West Africa is clearly one among a range of important swing factors in the world oil supply-demand balance.