Why benefits of rising oil prices keep eluding Nigeria

Nigeria is struggling to swing the current rally in oil prices in its favour due to the inability to attract investments for active exploration and perennial operational issues that have curbed production.

If oil prices remain bullish, as they currently are with Brent crude trading above $76 per barrel, the government earns more money and can fulfil its financial obligations.

When it earns less, as it did last year when crude prices bottomed out, its financial capacity shrinks, sending the economy, which is reasonably dependent on government spending, to tailspin.

But the dynamics of oil is much deeper. Nigeria’s crude oil production has been languishing at only two-thirds of its full capacity this year, especially many of its large oil fields in the Niger Delta.

Key Nigerian grade, Forcados, had been disrupted for almost a month until Shell lifted the force majeure on loadings September 10. Industry sources say the suspension of exports was due to an oil spill near the Forcados terminal.

Other Nigerian crudes such as Bonny Light, Escravos, and Qua Iboe have also faced production issues in recent months due to operational and technical reasons.

These developments have exposed the sorry state of Nigeria’s oil industry, and the government’s ability to use the sector as an engine to supply new jobs for Nigerians and improve the social and living standards of its over 200 million population, just like other petrol-dollar economies.

Dolapo Oni, an international oil and gas expert familiar with Nigeria’s petroleum industry, says Nigeria’s top 10 oil fields over the last decade have shed over 25 percent of output.

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“These top oil fields were mostly replaced with many smaller oilfields, which were not fully optimised, therefore not sustainable,” according to Oni.

Industry data have also revealed Nigeria’s crude oil reserves declined by about 600 million barrels on the back of reduced investment in the last few years.

Information from the British Petroleum (BP) Statistical Review, 2021, indicated that between 2017 and 2020, Nigeria’s reserves did not grow, but rather fell from 37.5 billion barrels to 36.9 billion barrels in 2020.

“When was the last time a 100kbd field came online in Nigeria?” Oni asks.

According to data from Organisation of Petroleum Exporting Countries (OPEC), Nigeria self-reported crude output of 1.27 million bpd in August, down from 1.44 million bpd in July.

“The sad twist to our above-ground issues is that we’re likely to see $100 oil again soon and we might not enjoy it as much as if we had our 2.4 million bpd back,” Oni says.

Analysts at multi-asset investment management firm Cardinal Stone say the oil sector weakness reflected lower oil production due to OPEC+ supply restrictions, depressed drilling activities and pipeline downtimes during the period.

“Throughout 2021, we’ve struggled to achieve less than 1.3 million bpd, which is abysmal for a country depending on crude oil revenues to feed over 200 million people,” Kelvin Atafiri who runs Cavazanni Human Capital Limited, an investment firm exposed to the oil and gas sector, states.

Timipre Sylva, Nigeria’s minister of state for petroleum resources, also admitted Nigeria’s oil fields were struggling. He however claimed that this were due to technical problems from re-tapping reservoirs that had been shuttered to comply with the stringent OPEC+ cuts of the past 17 months.

“We had some issues from shutting down the reservoirs,” he told SPglobal, and “when you shut down a reservoir, to restart it, sometimes there are challenges.”

He noted that output could rebound to around 1.7 million bpd by November and 2 million bpd by the end of the year.

The minister told journalists on the side-lines of the Gastech 2021 conference in Dubai that Nigeria had requested a higher production quota under the OPEC+ accord, claiming that technical problems that had hampered its output would soon be resolved.

But rhetoric alone won’t cut it. Most industry experts say Nigeria needs more proactive actions to fix technical or maintenance issues obstructing some of Nigeria’s biggest oil fields from producing above normal levels.

Other stakeholders say the passage of the new Petroleum Industry Act, which commercialises the operations of the Nigerian National Petroleum Corporation (NNPC), could provide an easier path to unlocking private capital that could have a positive effect on Nigeria’s oil GDP.

But global rating agency, Fitch Ratings, says the impact of the newly signed Act will depend on details of implementation, and “the bill is unlikely to have a significant near- to medium-term impact on Nigeria’s creditworthiness”.

Fitch adds, “We expect the PIA could boost oil-sector investment, helping to stabilise the sector, which has long suffered from underinvestment, and potentially reverse the downward trend in oil production.”

With public revenues at dangerously low levels and lower production output, stakeholders say the Federal Government must overcome its inertia, safeguard critical infrastructure, and pull out of the downstream oil sector to concentrate on its security and regulatory roles.