Growing domestic energy demand cuts oil available for export

The rapidly increasing Nigeria’s domestic energy demand combined with an inability to boost output is cutting into the OPEC member’s crude oil that is available for exports.

“Oil production available for export declined by 0.5mb/d in 2005-2013 (equivalent to $20 billion of export revenue at $110/barrel Brent), and we expect it to shrink further as local demand continues to grow, assuming no changes to the pattern of declining production,” said Ildar Davletshin, an energy analyst at Renaissance Capital in a May 26 report.

“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,” said Davletshin.

Demand for refined products such as petrol, diesel and aviation fuel among Nigeria’s 170 million people is growing amid a booming economy forecast by the International Monetary Fund (IMF) to expand by 7.1 percent this year, up from 6.4 percent in 2013.

The fuel subsidy payments cost the Federal Government about N1 trillion ($6.5 billion) in 2013.

Nigeria’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.

The oil and gas industry accounts for 75 percent of the government revenue and up to 95 percent of dollar earnings, meaning a further cut in available crude exports may shrink Nigeria’s current account surplus or turn them into deficits.

United States deliveries of gasoline to Nigeria more than doubled in 2013 from a year earlier, according to recent U.S. Energy Information Administration data.

The problem of diminishing exports and a rising fiscal burden on the economy is even bigger if oil theft – estimated to be in the range of 100-200kb/d – is taken into account, say analysts.

“With GDP historically growing at an average rate of 7 percent over the past decade and pre-election spending likely to rise in the forthcoming year, we cannot see this issue becoming any less urgent in the near term,” said Davletshin.

The Nigerian National Petroleum Corporation (NNPC) sets aside 400,000 barrels a day out of Nigeria’s current daily production of about 1.9 million barrels for its four refineries and crude for products swaps.

Nigeria exchanges 60,000 barrels a day of crude for products with Trafigura Beheer BV and a similar amount with Societe Ivoirienne de Raffinage’s refinery in Ivory Coast, according to NNPC.

The challenge of diminishing domestic production available for export could be a catalyst for transforming the Nigerian oil sector if steps are taken to raise domestic oil production by optimising performance at mature fields and scaling up offshore operations, say analysts.

Measures should also be aimed at reducing oil theft, they said.

Nigeria lost $7 billion in revenue in 2011 to oil theft, about a quarter of this year’s national budget, according to the central bank.

Drilling activity has materially declined in Nigeria in the past decade compared with previous decades, falling to just over 20 exploration and appraisal wells per year, having peaked at over 200 wells during the 1970s, according to data from Wood Mackenzie.

Regulatory incentives to stimulate new investments such as passing the long stalled Petroleum Industry Bill (PIB), bringing natural gas into the Nigerian energy equation to reduce oil use in the domestic economy and promoting the development of the domestic gas sector would help increase the amount of oil that can be sold on international markets at a higher profit.

“Companies’ ability to sell gas on commercial terms should increase the value of developing oil reserves, thus providing an additional stimulus for investment into the upstream sector,” said Davletshin.

Patrick Atunaya