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OPEC meets, Sudan ponders

September 12, 2006 — The just ended OPEC meeting is important for Sudan in two ways: It shows clearly why Sudan should not join the organization and more importantly it has to start preparing for an expected price drop.

 

In May, Nigeria as OPEC chair, extended an invitation to Sudan to join the organization, a move that was met with typical political PR fanfare, seen as a tacit recognition of the country’s oil abilities.

 

Luckily enough nothing happened as far as membership is concerned and one hopes it’ll never do.

 

Simply put, the time for OPEC reckoning in form of a price drop, is approaching. And it’s unprepared as ever.

 

Signals are all around. For the past eight months since the beginning of this year, OPEC managed only twice to meet its self set ceiling of 28 million barrels per day (bpd) for the ten countries, excluding Iraq, agreed to that ceiling. That is a good indication of supplies exceeding demand.

 

Prices were kept above $70 for the US crude West Texas Intermediate simply for political reasons and fear of supplies disruption.

 

But after several months the market seems to have to recognize itself to that fact despite more than 2 million bpd are shaved out of the market from Nigeria, Iraq, Venezuela and others. And even the expected showdown between western countries and Iran over its nuclear program, is not expected to be translated into cut of oil supplies, at least in the near future. After all, the United States, the biggest oil consumer in the world, is keeping inventories at more than 5-year average.

 

And that’s why prices started their slide. In the week preceding OPEC meeting, they dropped 4.2 percent to below $67 a barrel, a five months low level, and it lost 15 percent since July, when at one time it closed near $80.

 

How far prices can go? Nobody knows and more worrying is that OPEC does not yet have a price floor to defend and even if it did historical record shows that its performance is terribly weak.

 

Despite a Long-Term Strategy adopted by the organization last year, but so far OPEC does not define what is the just price for its crude and as such it does not have a mechanism to address that issue.

 

The last effort was the price band between $22-28 a barrel deserted early last year, when prices kept pushing up for a combination of demand growth and political tension. As such OPEC has enjoyed several months avoiding the crucial issue of what price it wants.

 

But the honey moon seems to have come to an end and tough choices lay ahead: To determine what price level it wants and how to defend that level through the painful exercise of production cuts.

 

This comes at the time Sudan’s production is on the rise.

 

After a delay of a year, Petrodar started finally in August pumping some 200,000 bpd from Blocks (3) and (7) to the oil market. The White Nile Petroleum Operating Co. came onboard when it started last month exporting from its Thar Jath field from Block (5-A). Even Greater Nile Petroleum Operating Co., which started oil export in Sudan in 1999, added a new, light crude from its new Neem field in south western Kordofan.

 

All in all, Sudan seems to be pumping now more than 500,000 bpd, well above of what it used to pump when it received the Nigerian invitation to join OPEC.

 

If it’s ever going to join, it has to decide how much to cut and from where.

 

Sudan’s oil is being produced under the typical sharing agreements, whereby foreign companies invest and then recover their spending though what is called cost oil. The only oil left to cut from to satisfy OPEC requirements is what is called profit oil, or the share split by the government and companies as profit.

 

With growing dependence of the country’s economy on oil revenues, it has only to increase its supplies to compensate for the drop in prices, but more important it has to address the issue of diversifying the economic base and give agriculture., the backbone of the economy a more serious attention in terms of policies, resources and detailed plans to make a difference.

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