$292bn oil export potential suffers as reforms stall

Nigeria, Africa’s largest oil producer, is currently producing only 25 percent of its potential capacity and missing out on an opportunity to earn up to $292 billion in oil exports revenue as a lack of reforms stymies growth in the sector.

The country’s oil production, which has never risen above the 3 million barrels per day (b/d) mark, now hovers below 2 million b/d, putting its reserves-to-production ratio at 52 years, higher than is observed in other mature oil-producing nations, according to Ildar Davletshin, an oil and gas analyst at Renaissance Capital.

“We think this indicator suggests that the country is under-producing due to a lack of investment and security issues. Applying a 12-year reserve life indicator commonly observed by global oil majors, we estimate that Nigerian production could well be in excess of 8Mb/d, in line with the world’s third-largest crude producer, the US,” Davletshin said in a note released May 26.

“Adjusting for lack of sufficient infrastructure and various risk factors, we still consider production of 4-5Mb/d as theoretically achievable in the medium term,” he said.

The potential production of 8Mb/d by Nigeria would yield N46.7 trillion ($292 billion) in oil exports revenue per annum, using a base price of $100 per barrel. This compares with the Federal Government’s 2014 budget of N4.962 trillion ($31 billion) signed into law by President Goodluck Jonathan, last Friday, and based on projections of 2.39 million b/d production and $77.5 per barrel.

Nigeria ranks number-one in sub-Saharan Africa by the US Geological Survey in terms of size of undiscovered oil and gas resources.

But the oil and gas industry, which accounts for 75 percent of the government revenue and up to 95 percent of dollar earnings, makes up only 14.4 percent of gross domestic product (GDP), according to data from the National Bureau of Statistics (NBS).

The country is passing up on the opportunity to earn more money from increased oil production even as it struggles with security and properly equipping its military, funding healthcare and education, and setting up a social security safety net that could help reduce poverty, put at over 60 percent by the NBS.

Reforms such as passing the Petroleum Industry Bill (PIB), scrapping the fuel subsidies, as well as improving security and the rule of law are seen by analysts as steps that could help get the sector to soar.

“Nigeria won’t achieve a substantial increase in production until it passes the long-delayed Petroleum Industry Bill,” Ravi Bhatia, an analyst at Standard & Poor’s (S&P), said in a recent interview.

The PIB, which aims to increase Nigeria’s share of profit from oil pumped off its shores, has been stalled in parliament since 2008. The bill could help reverse lost or deferred investments in the sector of at least $28 billion since 2010.

The country is typical of large mature oil-producing nations such as Indonesia, Venezuela, Mexico, Iran, which are all facing challenges of offsetting base declines in oil production, with new production either from new hydrocarbon areas (offshore, unconventional) or by increasing recovery rates at existing fields.

Davletshin says the urgency for a solution to Nigeria’s declining resource bases comes from two major factors.

“The first relates to the widely discussed US shale revolution, which essentially creates risks for traditional suppliers of being squeezed out of the global oil market. The second factor calling for changes in the Nigerian oil sector is rapidly rising domestic consumption, which squeezes out available barrels for export as production remains flat or declines. This problem is further exacerbated by the fact that domestic consumption is mostly subsidised by the Federal Government, thus indirectly taking an additional toll on crude exports,” says Davletshin.

He adds that while Nigeria and other traditional producers cannot influence the development of US tight oil, they can change conditions in their own sectors to gain an edge in the competition with tight oil projects.

PATRICK ATUANYA