Slide in oil price threatens 2016 budget benchmark

Stakeholders  in the Oil and Gas industry  have expressed   concern  over the  $38 per barrel benchmark  set for Nigeria’s  2016 budget, saying it is too risky for the country  to operate with, given uncertainties about how low the price of oil will fall in the weeks and months to come.

Meanwhile, oil prices fell below the $40 a barrel mark on Tuesday, with internationally traded Brent crude dropping 80 cents to $39.94 a barrel in afternoon trading, sending alarm bells ringing in Nigeria where the economy is already in a tailspin.

The US benchmark, West Texas Intermediate, declined 91 cents to $36.74 a barrel.

Both markers fell to the lowest since February 2009, writes FT’s oil and gas correspondent Anjli Raval and it comes a day after Nigeria’s federal executive council fixed the benchmark oil price for 2016 at a “conservative” $38 per barrel.

Industry stakeholders in Nigeria  are also not sure  if  it would be feasible  for the government  to  meet the 2.2 million barrels  per day  production of crude oil  and urged the country  take  precautionary measures because of the volatility of the price of crude oil and the constant disruptions of  crude oil production in the Niger Delta.

They said the  current scenario where by the  Organisation of  Petroleum Exporting  Countries (OPEC)  has insisted on increasing  production level and the price of Crude fluctuating between $40 and 42 per barrels with no assurance that its price would not decline further, it would have been better for the  government  to make  the benchmark  much lower that  what it is proposing.

On the crude oil production projection, they said 2.2million barrels per day production is over ambitious because the country has not  been  producing  closing  to  two million barrels per day   for some time because  of of oil  theft, vandalism and community  instigated  disruptions.

Toyin  Akinosho, the Publisher of Africa Oil and Gas Report, said  with the  glut  in  oil the  market,  it  would have been better  for  government  to be more  realistic in  budget benchmark.

Akinosho further says  that  “the $38 per barrel benchmark is  too much on the edge. It looks that the government does not want to be conservative. It is not good for the government to play within the value in which OPEC would cut. There is a lot of oil in the market”.

He further observes that if the government had played around $30 per barrels, it would not be out of place. So that if the price comes below $38 there would still  be some room to manoeuvre.

On the daily output benchmark of  2.2 million barrels  of  crude  oil, Akinosho says   he   is not sure if that is  achievable  now, given  that we  have  not been able to achieve  that  for a long time.

He further observes that some of the fields are under the captivity of the communities which have prevented operators  from entering   the place. “We have been constantly doing less than this figure and it may not be achievable  immediately”.

An official  of  an international oil company  who also spoke to BusinessDay  but does want to be named, says  the price of crude oil is difficult to predict because it is very fluid and that benchmarks are best made leaving a wide margin from the current price and with careful considerations of present circumstances and unforeseens.

He says there must always be enough elasticity in the benchmark, so  that  when there is crisis  something would trigger correction within that system and reduce the impact of any  sudden changes.

Eddy Wikina, managing director of Treasure Energy Resources  and  former external  Relations Manager  of Shell  Nigeria Exploration and Production Company, asked,  “have we  gotten to the  bottom  of price  decline? Wikina said  globally  the  price  of  crude  oil  is within  the band  of  $41 and $42   per barrel  and  for  the  government  to  have  put   $38 as benchmark  threshold is too  slim.

“The  price might  go down below $38 and  if  it goes  below  that  figure,   the  country might  be in   serious   deficit. We should not  forget  that  Iran  is  pumping  its  own oil  into  the market any time soon and this would  further affect  the price of  crude oil in the international market”, he said.

He said  the margin  between the real price and benchmark is too slim for comfort, adding  that  the only  good thing about  this  is that there is no windfall and this to a certain extent would reduce corruption.

Olusola Bello with agency report