Olusola Bello
The World Bank has said the global economy is experiencing an uneven recovery, with the risk that it will worsen inequality and leave low- and middle-income countries behind, stating however that the path of the COVID-19 pandemic remains uncertain, with obstacles to vaccination in many countries.
The World Bank said developing economies face challenges that could slow their recovery for years to come, and to help, it stated that World Bank Group has mounted the largest crisis response in its history, and it is uniquely positioned to help ensure that all countries can participate in a green, resilient, and inclusive return to stability and growth.
These were key messages from the Development Committee, a ministerial-level forum that represents 189 member countries of the World Bank Group and the International Monetary Fund, in a communiqué issued at the institutions’ Annual Meetings.
The Bank at the annual meeting in Washington resolved that there would be need for stronger policies, institutions and resources to bolster resilience of low and middle income countries following ravaging effect of Covid 19 pandemic which has made them vulnerable.
The committee noted that the pandemic has compounded long-standing development challenges; low- and middle-income countries face acute vulnerabilities and need stronger policies, institutions, and resources to bolster resilience.
World Bank Group President David Malpass who shared in these concerns, said with reversals in development threatening people’s lives, livelihoods, and long-term prospects, agreed that “This drastic narrowing of economic and social progress is creating a time of upheaval in economics, politics, and geopolitical relationships.”
He therefore called for new approaches and urged that the development community “focus it efforts more, set clear priorities by measuring what works and what doesn’t, and rapidly scale up successes.”
The committee and Malpass underscored the urgency of expanding access to COVID-19 vaccines, both to save lives and to help restart economies.
The Bank Group is partnering with COVAX, the African Union, and UNICEF to help countries purchase and deploy vaccines, with IFC helping finance manufacturers of vaccines and related supplies, particularly in Africa.
In addition, the Multilateral Leaders Task Force has brought together the Bank Group, IMF, WHO, and WTO to help speed the delivery of vaccines and finance testing, diagnostics, and treatment.
The committee underscored its support for the Bank Group’s comprehensive approach and rapid financing for recovery, tailored to the needs of its clients, from the poorest countries served by IDA to middle-income countries that have been hard hit, as well as those facing distinct challenges, such as fragility, conflict, and violence. In his speech, Malpass outlined four key focus areas for determined action: achieving economic stability, leveraging the digital revolution, taking strong action on climate change, and investing in people through health and education. Both there and in remarks at the Annual Meetings’ opening press conference, he also noted the critical importance of continuing efforts to make countries’ debt more sustainable and transparent.
On climate, Malpass emphasized the need for action on a much bigger scale: “we need thousands of large public-private projects that combine the world’s resources – from governments, MDBs, foundations, private investors, and the buyers of carbon credits” to reduce emissions, expand access to electricity, and adapt to a changing climate.
For its part, the committee welcomed the stepped-up ambitions of the Climate Change Action Plan, which increases Bank Group climate financing to an average of 35% over the next five years and offers countries additional support in meeting their Paris climate commitments and transitioning to cleaner energy.
The meetings took place with the 20th replenishment of IDA well underway. The COVID response has brought Bank Group support for the poorest countries to an all-time high, largely through the IDA grants and highly concessional loans that donor countries help fund. But with the 74 IDA countries’ economic output expected to remain 5.6% below pre-pandemic projections in 2022, a strong replenishment is vital to providing resources at a scale that can keep them from falling farther behind.
Despite the immense global challenges, the committee expressed its support for Bank Group’s role and approach in advancing recovery for its low- and middle-income clients. In his speech, Malpass struck a positive note: “I feel optimistic that we will help countries avoid a lost decade.” He added, “By working together, we will build a better development path.”
How Much Oil Can OPEC Realistically Add?
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Two weeks ago, in a short and terse affair that did nothing to address the spill-over from overheating gas markets, OPEC+ confirmed that it would stick to its July agreement to boost output by 400,000 barrels per day (bpd) each month until at least April 2022 to phase out 5.8 million bpd of existing production cuts.
The group agreed in July to boost output by 400,000 bpd a month until at least April 2022 to phase out 5.8 million bpd of existing production cuts–already much lower compared to the huge curbs that were in place during the worst of the pandemic.
The organization has lately come under pressure to ramp up production at a faster clip from several quarters, including the Biden administration so as to ease supply shortages and rein in spiraling oil prices. OPEC+ is scared of spoiling the oil price party by making any sudden or big moves with last year’s oil price collapse still fresh on its mind.
But maybe we have been overestimating how much power the cartel has to jack up production on the fly.
According to a recent report, at the moment, just a handful of OPEC members are capable of meeting higher production quotas compared to their current clips.
Amrita Sen of Energy Aspects has told Reuters that only Saudi Arabia, the United Arab Emirates, Kuwait, Iraq, and Azerbaijan are in a position to boost their production to meet set OPEC quotas, while the other eight members are likely to struggle due to sharp declines in production and years of underinvestment.
Under investments stalling recovery
According to the report, Africa’s oil giants Nigeria and Angola are the hardest hit, with the pair having pumped an average of 276kbpd below their quotas for more than a year now.
The two nations have a combined OPEC quota of 2.83 million bpd according to Refinitiv data, but Nigeria has failed to meet its quota since July last year and Angola since September 2020.
In Nigeria, five onshore export terminals run by oil majors with an average production clip of 900,000 bpd handled 20% less oil in July than the same time last year despite relaxed quotas. The declines are due to lower production from all the onshore fields that feed the five terminals.
In fact, only French oil major TotalEnergies‘(NYSE:TTE) new deep offshore oilfield and export terminal Egina has been able to quickly ramp up production. Turning the taps back on has been proving to be a bigger challenge than earlier thought due to a shortage of workers, huge maintenance backlogs, and tight cash flows.
Indeed, it could take at least two quarters before most companies can work through their maintenance backlogs which covers everything from servicing wells to replacing valves, pumps, and pipeline sections. Many companies have also fallen behind on plans to do supplementary drilling to keep production stable.
Angola has not been faring any better.
In June, Angola’s oil minister, Diamantino Azevedo, lowered its targeted oil output for 2021 to 1.19 million bpd, citing production declines at mature fields, drilling delays due to COVID-19 and “technical and financial challenges” in deepwater oil exploration. That’s nearly 11% below its 1.33 million bpd OPEC quota and a far cry from its record peak above 1.8 million bpd in 2008.
The southern African nation has struggled for years as its oil fields steadily declined while exploration and drilling budgets failed to keep up. Angola’s largest fields began production about two decades ago, and many are now past their peaks. Two years ago, the country adopted a string of reforms aimed at boosting exploration, including allowing companies to produce from marginal fields adjacent to those they already operate. Unfortunately, the pandemic has stunted the impact of those reforms, and not a single drilling rig was operational in the country by May, the first time this has happened in 40 years.
So far, just three offshore rigs have resumed work.
Shale decline
But it’s not just OPEC producers that are struggling to boost oil production.
In an excellent op/ed, vice chairman of IHS Markit Dan Yergin observes that it’s almost inevitable that shale output will go in reverse and decline thanks to drastic cutbacks in investment and only later recover at a slow pace. Shale oil wells decline at an exceptionally fast clip and therefore require constant drilling to replenish lost supply.
Indeed, Norway-based energy consultancy Rystad Energy recently warned that Big Oil could see its proven reserves run out in less than 15 years, thanks to produced volumes not being fully replaced with new discoveries.
According to Rystad, proven oil and gas reserves by the so-called Big Oil companies, namely ExxonMobil, BP Plc. Shell, Chevron , TotalEnergies, and Eni S.p.A are all falling, as produced volumes are not being fully replaced with new discoveries.
Granted, this is more of a long-term problem whose effects might not be felt soon. However, with the rising sentiment against oil and gas investments, it’s going to be hard to change this trend.
Experts are warning that the fossil fuel sector could remain depressed thanks to a big nemesis: the trillion-dollar ESG megatrend. There’s growing evidence that companies with low ESG scores are paying the price and increasingly being shunned by the investing community.
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According to Morningstar research, ESG investments hit a record $1.65 trillion in 2020, with the world’s largest fund manager, BlackRock Inc. with $9 trillion in assets under management (AUM), throwing its weight behind ESG and oil and gas divestitures.
Michael Shaoul, Chairman and Chief Executive Officer of Marketfield Asset Management, has told Bloomberg TV that ESG is largely responsible for lagging oil and gas investments:
“Energy equities are nowhere close to where they were in 2014 when crude oil prices were at current levels. There are a couple very good reasons for that. One is it’s been a terrible place to be for a decade. And the other reason is the ESG pressures that a lot of institutional managers are on lead them to want to underplay investment in a lot of these areas.”
In fact, U.S. shale companies are now facing a real dilemma after disavowing new drilling and prioritizing dividends and debt paydowns, yet their inventory of productive wells continues falling off a cliff.
According to the U.S. Energy Information Administration, the United States had 5,957 drilled but uncompleted wells (DUCs) in July 2021, the lowest for any month since November 2017 from nearly 8,900 at its 2019 peak. At this rate, shale producers will have to sharply ramp up the drilling of new wells just to maintain the current production clip.
If we need any more proof that shale drillers are sticking to their newfound psychology of discipline, there is recent data from the EIA. That data shows a sharp decline in DUCs in most major U.S. onshore oil-producing regions. This, in turn, points to more well completions but less new well drilling activity. It’s true that higher completion rates have been leading to an uptick in oil production, particularly in the Permian; however, those completions have sharply lowered DUC inventories, which could limit oil production growth in the United States in the coming months.
That also means that spending will have to increase if we are to see shale keep pace with production declines. More will have to come online, and that means more money.
