How oil output decline, troubled deepwater operations drove Nigeria into recession

A mishmash of deeper production cuts by the Organisation of Petroleum Exporting Countries’ (OPEC), troubled deepwater operations marked by shut down of oil wells due to huge production costs amidst low oil prices, uncertainty created by lack of reforms have plunged Nigeria’s oil production to a four-year low of 1.6mpd in third quarter of 2020, sending the economy into a recession.

Thanks to lower oil production, Nigeria’s oil sector contracted by –13.89percent in Q3 2020, indicating a sharp contraction of –20.38percent points relative to the rate recorded in the corresponding quarter of 2019, the National Bureau of Statistics (NBS) said in its Quarterly report released on last week.

NBS data revealed Q3 oil production of 1.67 million barrels per day (Mbpd) was the lowest since Q32016. Q3 oil production was 0.37 mbpd lower than the average production recorded in the same quarter of 2019 and 0.14mbpd lower than production volume recorded in the second quarter of 2020.

Deeper OPEC’s cut

Africa’s biggest crude oil producer failed to fully comply with the initial cuts of 1.4 million bpd when the cartel cut production by 9.7 million barrels a day to shore up prices amid the pandemic-induced unprecedented price crash.

“OPEC+ cuts continuing to decimate oil and gas GDP,” Seun Smith, a research analyst tweeted on Saturday. “Q3 included compensation cuts so even more acute pain.”

Compliance from Nigeria was at 66 percent in July according to OPEC data, which was an improvement to from the 50 percent compliance rate seen in May, the first month of the pandemic-related slash in production.

“The slowdown in the oil sector reflected partial compliance to OPEC output cuts,” analysts at Afrinvest, a Lagos-based investment banking firm said.

Postponed operations in Nigeria’s deepwater fields

Due to lower oil price in q3 2020, decisions on developing new deepwater fields, which have a breakeven price of around $60/bl have all been postponed. Similarly, short-term projects that provide quick returns and are based on discretionary spending are also on hold.

“Nigeria’s deepwater projects are already delayed because of a lot of fiscal uncertainty, and this increase in government share from deepwater production makes it harder for IOCs to sanction new projects,” Charles Akinbobola, analyst Sofidam Capital said.

Shutdown of oil wells

Although, the coronavirus pandemic has had little effect on oil companies’ operations in Nigeria, with much of the Niger Delta supply chain based locally, however, international contractors have been unable to fly in engineers from abroad due to travel restrictions, which has impacted projects under development more than ones already onstream.

To cope with the price plunge, oil companies have filled storage to capacity, aggressively cut costs and trimmed production. The next stop will be to shut in wells.

“Shutting in a well is easy. The challenge is that if it remains shut for too long it will have a negative effect on the whole value chain,” says Akinbobola.

Uncertainty surrounding PIB

Another major challenge is the continued uncertainty surrounds the Petroleum Industry Bill, which was first brought before the National Assembly in 2008 but has yet to become law. The government has changed the bill’s structure several times, and in February stated that it hoped it would be passed before the end of 2020. That now seems improbable.

President Muhammadu Buhari has sent a new PIB to the bicameral National Assembly, where the Senate, along with the House of Representatives, must sign off on it before it can become law. The bill passed its first reading in the Senate on October 1.