In August and September, Nigeria will cut oil production by over two hundred thousand barrels per day to compensate for overshooting the country’s OPEC+ allotted production quota.
According to data cited by the Nigerian National Petroleum Corporation from the Ministry of Petroleum Resources, Nigeria’s crude production stood at 1.61 million barrels per day in May, a full 200,000 bd above its May-june OPEC+ 1.41mn bd output quota.
However, as of early August, Timipre Sylva told Energy Intelligence in an interview that Nigeria is currently producing a little over 1.3 million barrels per day.
“We agreed according to the plan that we were going to cut (an additional) 45,000 b/d in July and we have actually done more than that. And in August we are expected to cut 114,000 b/d. In September, another 114,000 b/d,” Sylva said. Both the $40 per barrel and 1.3 million barrels per day of oil are suboptimal and leave Nigeria exposed to external shocks.
Sylva estimated that the optimal price and volume for Nigeria will be “2 million barrels per day at $70 per barrel.” Why is this so?
Nigeria is more of crude sales than an oil and gas economy. There is no viable downstream sector and the midstream hardly exists. This explains why the oil and gas sector accounts for less than 10 percent of the gross domestic product (GDP) but 65 percent of government revenue and at least 90 percent of foreign exchange.
With Brent crude oil price averaging $40 per barrel and Nigeria producing 1.3 million barrels per day, there will be a shortage of foreign exchange because there is no accretion to the reserves. This means the Central Bank of Nigeria’s ability to defend the naira will be challenged. Nigeria’s foreign reserve fell from $36.57 billion in June 1st, 2020 to $36.12 billion on July 15th, 2020.
Already, some banks have sent out notifications to their customers informing them that the maximum expenditure on their dollar Mastercard is $100 per month, a sign of dollar liquidity crisis.
Nigeria doesn’t have the buffers it did in 2008 to shrug off an oil-induced global recession, leaving the economy more vulnerable to a fiscal and monetary crisis this time around. This is an incentive for Africa’s biggest oil producer to comply with OPEC+ production cuts.
“In the last 40 years, Nigeria has depended on oil and gas as a major source of earnings for its revenue account, stabilisation of the currency and to promote and diversify the economy,” Ademola Henry Adigun, team lead, Facility for Oil Sector Transformation said. “But Nigeria has mismanaged the oil and gas sector is currently in a mess.”
Nigeria has long had a reputation for poor compliance with OPEC and OPEC+ production cuts, but it has gradually been showing greater discipline since the latest round of deep cuts was announced in April.
