Nigeria’s 2023 budget threatened as OPEC+ makes big oil cut
The Organization of Petroleum Exporting Countries (OPEC) and its allies, including Russia, have agreed to cut production by 2 million barrels per day (bpd), after a meeting in Vienna on Wednesday to discuss output cuts for November, a move that could dampen Nigeria’s spending plans.
New cuts could spur a recovery in prices that have fallen to about $90 from a high of $120 three months ago due to concerns about a global recession.
However, Nigeria’s inability to raise production above 1 million bpd apparently weighed on the decision of how much cap is placed on its supply.
According to the new production schedule agreed at the virtual meeting, Africa’s largest economy’s quota for November will be reduced to 1.747 million bpd.
Nigeria’s expected output quotas for August, September, and October were 1.826 million bpd, 1.830 million bpd, and 1.826 million bpd, respectively.
The country has struggled to meet previous quotas due to crude theft and waves of divestments by oil majors from onshore and shallow water assets in the country, having lost its top oil producer spot to Angola in the last four months.
In August, Nigeria dropped to Africa’s third biggest oil producer from the top spot after recording the lowest crude production in its history.
This development does not bode well for the government ahead entering into the new year with budget assumptions that seem off the mark. The Nigerian government has proposed an aggregate expenditure of N19.76 trillion for the 2023 fiscal year with a budget deficit of about N12.41 trillion.
It assumes an estimated oil benchmark of $70 per barrel and average crude oil production at 1.69 million bpd, with an aggregate exchange rate of N435.57/$ and an inflation rate of 17.16 percent.
These assumptions struggle at reconciliation with reality. Nigeria underperforms in meeting output caps and has failed to meet its supply quota since November 2021. This could not only impair budget assumption for 2023 but could leave a new government starting off on a poor footing.
To have any real chance of benefitting from these proposed cut, “it [Nigeria] must raise its production,” said Ayodele Oni, an energy lawyer and partner at Bloomfield law firm.
“I think the cut is to sustain crude prices. If prices are higher than the $70 and percentage cut compared to our forecasts and estimates are low, then we should still be fine,” he said.
However, Nigeria’s oil sector has been anything but fine. The sabotage of crude oil facilities in the Niger Delta has forced many producers to shut in oil wells.
On Wednesday, Eroton Exploration & Production Company Limited announced an uncontrolled flow of fire in one of its wells. This is the fourth attack in three months.
“This is the fourth incident of confirmed and suspected sabotage and vandalism in the last three months experienced by Eroton Exploration and Production Company Limited and it is snowballing into an existential threat,” Mercy Max-Ebibai, a company spokesperson, said in a statement.
Oil majors are leaving onshore fields and are in a hurry to offload their assets ceding the space for local operators that lack the financial and technical capacity to run these fields profitably under the spectre of sabotage.
Meanwhile, OPEC+ acknowledged the negative impact of volatility and a decline in liquidity in the current oil market, as well as the need to support market stability and efficiency.
One delegate at the ministerial meeting confirmed that this two-million-bpd reduction is from baseline levels. Because current actual production levels are already below quota, the direct production cut is less than 2 million bpd. It is, however, a significant cut.
Also, Suhail Al Mazrouei, energy minister, United Arab Emirates, said in Vienna that the decision taken is a “technical decision, not a political decision.”