Oil price rally upsets Nigeria’s finances

Crude oil rally does not look to slow anytime soon as Brent crude sold $123 on average a barrel Tuesday and market conditions are forcing analysts to predict that the trend may slip into 2023, a development that does not bode well for Nigeria’s finances.

Normally, crude rally should be a windfall to a country with Africa’s biggest reserves, especially as its crude grades like Bonny Light, which sold for $126 a barrel, are highly sought after, but the biggest measure of Nigeria’s failed economic policies is that neither a rally nor a slump is enough to nurse its economy on life support back to life.

Analysts say there seems to be no end in sight for the price spike as supply struggles to keep up with demand.

The Organization of the Petroleum Exporting Countries (OPEC) and its allies, including Russia, agreed to boost monthly production growth target from 432,000 barrels per day (bpd) to 648,000 bpd in the first week of June but this had a muted effect on oil prices because it is now an open secret that spare capacity is shrinking.

The United States Energy Information Administration defines spare capacity as the volume of production that can be brought on within 30 days and sustained for at least 90 days.

Western countries’ decision to cut investments into new oil exploration has hindered the ability to add new production. Saudi Arabia, the largest oil producer within OPEC and the world’s largest oil exporter, historically has had the greatest spare capacity. Saudi Arabia has usually kept more than 1.5-2 million bpd of spare capacity on hand for market management but even that is shrinking.

Estimates put OPEC’s spare capacity at between 1 and 3 million bpd, and analysts at Energy Aspects put the spare capacity of the extended OPEC+ group at about 1 percent of global daily demand, which is currently at around 102 million barrels.

Analysts say this is not a whole lot of oil production that can be tapped within 30 days.

The warnings that underinvestment in new oil exploration, in large part a result of the investor shift to ESG opportunities and government policies discouraging more investment in oil, will lead to lower spare capacity were ignored.

The situation has been worsened by outages from OPEC members. Libya is losing oil production at the rate of 1.1 million bpd, the country’s oil minister Mohammed Aoun has said, adding that almost all of the country’s oil fields were shut down.

Libya’s largest field, El Sharara, was shut down last month along with El Feel, with reports saying that it was groups affiliated with the eastern parliament that shut down oil production, among them the Libyan National Army of Halifa Khaftar.

Nigeria’s oil production is threatened by technical and operational issues along with mounting security concerns as key oil fields, terminals and facilities have been challenged with renewed resurgence in attacks by Niger Delta militants.

“Nigeria may drop further in status as Africa’s biggest producer if the government does not urgently address the situation,” Abiodun Adesanya, CEO of Lagos-based oil consultancy Degeconek, told S&P Global Platts. “Already the country has fallen behind Libya in terms of output.”

Nigeria has the capacity to pump around 2.2 million bpd of crude and condensate but in recent months, its output has been languishing below 1.55 million bpd.

Read also: World Bank sees oil price rally eluding Nigeria on N3trn subsidy

The OPEC member only pumped 1.23 million bpd of crude and 300,000 bpd of condensate last month, according to its official data, as it remains hamstrung by operational setbacks, with key pipelines facing persistent sabotage.

Nigeria has been unable to meet its OPEC production quota since November last year and the production constraints are said to be worsening.

Bonny Light, Escravos and Forcados have all faced production issues in 2021, while the output of other key grades, such as Qua Iboe, Brass River, Agbami, Akpo and Egina, has also remained consistently low this year.

According to Platts Analytics, Nigerian crude output is unlikely to achieve the January-April 2020 average of 1.9 million bpd for a while, as ongoing field and pipeline issues will keep its production much below its OPEC quota. It forecasts supply to rebound to 1.55 million bpd by December and 1.70 million by April 2022.

The implication of this for the country’s finances has been described as troubling. Already, Nigeria spends a significant chunk of its oil revenue paying subsidies and servicing debt.

“It could mean increased gross revenue, especially from oil however; the net revenue may or may not increase (especially substantially) if we do not refine our oil because as oil prices increase, prices of refined products too will increase” said Ayodele Oni, energy lawyer and partner at Bloomfield law firm.

Oni said Nigeria needs to improve production overall to enjoy substantial benefits but current developments in the sector make this possibility appear remote.

International oil companies are abandoning onshore and shallow water fields in the troubled Niger Delta region and the government is throwing a monkey wrench into their plans to divest from these fields.

The President withheld ministerial assent to the bid by Mobil Oil Producing, the Nigerian unit of American oil giant ExxonMobil, from selling its stakes valued at $1.2 billion in its onshore and shallow water assets to Seplat Energy.

Shell is also in talks with local companies, including Heirs Holding and ND Western, to sell off its stakes in its onshore and shallow water fields. But if ExxonMobil’s experience were to serve as a guide, it may yet face teething challenges from a government that seems to want to hand the assets to its national oil company bogged down by debts and inefficiency.