•Nigeria faces production temptation as ECA, reserves stagnate
•Relying on rising prices could be costly, says Adigun
•Exploration hopes dampen as oil rigs count drops to six
What appears to be a blessing to Nigeria in terms of improved earnings owing to extended production cuts by OPEC and OPEC+, leading to rise in crude oil prices, might end up becoming a problem for the nation’s ‘managed’ downstream deregulation, which allows the price of petrol to be remote-controlled.
Oil prices soared yesterday, crossing $67.56 for the Brent Crude, following the cartel and its allies’ decision to roll over current production quotas for another month.
At about $65 a barrel, government expressed hesitation in adjusting the pump price of fuel for fear of protests from Nigerians and Labour Unions already contending with rising inflation, therefore leading to a return of fuel queues.
If oil exceeds the $70 mark, Nigerians would have to prepare for higher pump prices of at least N200 a litre in the coming weeks, without subsidy from the Nigeria National Petroleum Corporation (NNPC).
Oil marketers had warned that the poor implementation of downstream reforms is responsible for the present fuel price dilemma, noting that government’s inability to follow through the implementation of the petroleum sector reforms is partly responsible for the present challenges in the country, adding that government should be transitioning to a market-driven environment through policy-backed legislative and commercial frameworks.
Also, pushed by the need to improve its earnings in line with its budgetary estimates and finance its growing debts alongside the re-emergence of fuel subsidy, Nigeria faces a huge temptation of ‘cheating’ on its crude production output, at a time oil prices appear to have sustained a rally above $60 a barrel.
Nigeria’s commitment to January cuts was acknowledged at the OPEC meeting yesterday, as the conformity was described as ‘compensating its entire overproduced volumes’. With compensation achieved, the country might be tempted to increase production to take advantage of higher prices.
With a daily oil production estimate of 1.86 million barrels (inclusive of condensates of 300,000 to 400,000 barrels per day) for the 2021 fiscal year amid a capacity to do at least 2mbpd, Nigeria’s production output is below 1.4 million barrels a day, according to OPEC report for January, owing to cuts from the cartel and its allies in a bid to stabilise global oil market due to demand uncertainty.
As oil prices regain momentum, many producers eye increased revenues, even though OPEC warns of cautious optimism about demand, as the cartel approved a continuation of the production levels of March for the month of April, with the exception of Russia and Kazakhstan, which will be allowed to increase production by 130,000 and 20,000 barrels per day respectively, due to continued seasonal consumption patterns.
For the government, actual revenue performance in the first quarter of 2021 is expected to receive a boost from the recovery in oil prices. So far, in the first three months of 2021, oil prices have averaged $58.5 per barrel and about 47 per cent above the 2021 budget benchmark of $40 per barrel. This implies an inflow of over $20 a barrel into the excess crude account.
However, these changes are yet to be experienced as Nigeria’s Excess Crude Account (ECA) balance as at 20th January 2021 stands at $72,411,197.80, a little change from what was reported in July last year, while external reserves have continued a southward momentum, dropping as much as $1.5 billion. From $36.52 billion on January 25, 2021, the reserves fell to $34.99 billion at the beginning of this week.
Given the fragile rebalancing of the oil market on a lower demand outlook and measures to contain the COVID-19 virus, which weighs heavily on recovery prospects, the shocks to oil prices would significantly drag revenue performance in 2021, resulting in wider deficits.
With rising oil prices, Nigerians should be paying a higher pump price under a deregulated environment but the emergence of subsidy due to freeze in pump prices, might mean recourse to withdrawal from excess oil earnings. This is a luxury that the government cannot fund going by its high deficits.
Similarly, having reportedly shut-in some oil wells in compliance with OPEC quota and crash in oil prices last year, some stakeholders are concerned about the challenges and the additional costs oil firms may incur if the country would have to increase production amidst rising insecurity across the country.
Already, stakeholders are pessimistic about the exploration activities in the country as reserves continue to decline.
Data from Baker Hughes Incorporated had noted that crude oil rigs in Nigeria decreased to six in January this year from seven in December of 2020. It was about 14 this time last year but went down by about 57.14 per cent.
Although the Federal Government has been making efforts to bring down the cost to about $10, Minister of State for Petroleum Resources, Timipre Sylva had said that Nigeria still spends around $30 in producing a barrel of crude oil, making the current cost for Joint Venture production stand at about 300 per cent higher than the projected target. This development casts aspersion to the expected revenue despite the increase in price and projected increase in volume.
OPEC had raised production by 500,000 b/d in January, and Russia and Kazakhstan alone were allowed to add another 150,000 b/d in February and March. This has left 1.35 million b/d shut in that the original deal had envisaged returning to the market in early 2021, which OPEC+ instead agreed in January to hold back.
Saudi Energy Minister Prince Abdulaziz bin Salman, stressed on Thursday, that the “right course of action” for the Organization of the Petroleum Exporting Countries (OPEC) and its allies (OPEC+) is to“keep our powder dry”at the moment, hinting the cartel is not likely to ease the crude output cuts in the near future.
Speaking at the 14th meeting of OPEC and non-OPEC ministers, the Saudi minister noted there is “no doubt” that the global oil market improved since January, though the market hasn’t fully rebounded from the crisis and uncertainty surrounding the recovery remains.
According to him, the recovery of the global oil demand is“closely connected”with the potential success of vaccinations against COVID-19 across the world.
“I would once again urge caution and vigilance. We have elected to follow a careful, proactive approach,”he claimed.
On his part, Russia’s Deputy Prime Minister Alexander Novak said that the oil market has not fully recovered yet but that it is “in a much better shape now.”
Novak added that forecasts and demand for oil have to be evaluated in light of the involving circumstances.
However, he also stressed the importance of sticking to already agreed voluntary obligations and“maintain full conformity”with the Declaration of Cooperation.
An energy expert, Henry Adigun said the country needs to be cautiously optimistic about OPEC’s decision, stressing that with heavy borrowing, the country is burdened by debt and may not see any significant impact as gains in oil price and possible volume would not improve the excess crude account.
Adigun noted that relying on the increase could be costly, as the development may not last, except help the economic situation in the country, especially in easing existing tensions.
He also noted that the development in the U.S. shale market might not have significant impact on Nigeria or the market, considering the high cost of producing shale oil.
For him, if OPEC pushes about 1.5 million barrel into the market, while it is not high, it could leave serious impact in the market.
Adigun said a government that has not met its basic obligations or continues to borrow, may find it difficult to save in the Excess Crude Account, especially as the volume of oil production has declined.
Another energy expert, Madaki Ameh said the country would not always become trapped in the oil market volatility if the industry were not unexciting, insisting that, “it has been consistently a loss-making business for over a decade.”
According to him, the elusive state of the industry makes economic realities in other countries inapplicable here.
Ameh said the drastic reduction in rig counts in Nigeria was an indication of reduced exploration activities in the country while adding that being poorly managed, the sector failed to become a cash cow as with other oil producing countries.
PricewaterhouseCoopers’s Associate Director, Energy, Utilities and Resources, Habeeb Jaiyeola said: “We expect OPEC to utilize data and forecasts to enable the organisation make the most informed decision. The Nigerian economy remains dependent on these decisions and their impact on global prices as government revenues are affected.
“This also has implications on decisions to be made by the crude oil production companies as costs are incurred to ramp up production and this cannot be short term, to enable adequate profitability and cost control measures,” he stated.
According to him, adequate cost control measures might be difficult to achieve with repeated production volume cuts and the change requirements.
