Oil rally eludes Nigeria as pipeline breaks surge 24%

Nigeria is currently unable to participate in the move to a 6 month high by crude prices, as what was once Africa’s largest producer sees its daily crude output slide by 36 percent to 1.4 million barrels per day (bd), due to sabotage by militants in the Niger Delta region.

A total of 959 vandalised points have been recorded between January and March 2016 on Nigeria’s oil infrastructure – a 25 percent increase from the 768 vandalised points recorded in the corresponding period of 2015, according to data from investment firm, Cardinal Stone Partners.

Yesterday Exxon Mobil closed its Qua Iboe crude oil terminal, and evacuated workers, traders said.

A market source said that the evacuation was caused by the threat from militants and that tanks had been emptied of crude.

Qua Iboe is Nigeria’s largest crude oil stream and exports usually amount to more than 300,000 barrels per day.

“It’s a pathetic situation we have found ourselves not being able to take advantage of the rally in oil futures,” said Ayodeji Ebo, head of investment research at Afrinvest.

“Not only will our FX reserves come under renewed pressure, but if the situation persists, it will expand our budget deficit and may even disrupt its implementation since there’s a limit to what we can borrow.”

Nigeria’s 2016 budget is hinged on estimated daily oil output of 2.2 million barrels per day and a $35 per barrel benchmark.

Unless the price of crude appreciates significantly to make up for the shortfall in production, the government may be under pressure in meeting its budget obligations.

Crude futures which are currently hovering around $47 to $50 per barrel rallied for most of the past two weeks due to a combination of Nigerian, Venezuelan and other supply outages, as well as declining U.S. production and virtually frozen inflows of Canadian crude after wildfires in the Alberta’s oil sands region.

BusinessDay calculations show that renewed hostilities in the nation’s Niger Delta region could be costing the country as much as $29 million daily following the 600,000 bpd dip in output.

It has also put more pressure on its reserves.

Nigeria has run down its reserves from a peak of $42.8 billion in 2014 to $26.6 billion, the equivalent of 6.0 months of imports, in a failing bid to maintain a hard dollar peg and in the process reducing its external buffers against future shocks.

With the new wave of pipeline vandalism threatening to crimp total earnings in 2016, analysts express fresh concerns on the sustainability of the currency peg by policy makers in the $492 billion economy.

On the implication of hostilities in the Niger-Delta on the national budget, Bongo Adi, a senior economist with the Pan Atlantic University says, “it will certainly affect the budget.”

“For now, nobody knows how long the current hostilities will last, as long as the army cannot reign in the militants, the country could be in for a bumpy ride,” says Adi.

Militant attacks in the last few weeks have hit platforms belonging to Chevron Nigeria Limited and Shell Petroleum Development Company (SPDC or Shell) which has led to the declaration of force majeure by SPDC and Exxon Mobil, occasioned by production shut-in of about 800,000 barrels of oil per day leading to a loss of about N8bn daily at the price $50.

“With oil production dropping to 1.4 million bpd (and assuming this rate going forward for the 2016/2017 fiscal year), the federation may be entitled to 0.5 million barrels per day, translating to N1.32 trillion – a revenue decline by 36 percent or N0.75 trillion. Applying the revenue sharing formula percentage of 52.26 percent, the Federal Government may receive N695 billion instead of N1.09 trillion as its share of proceeds from the Federation account,” the research unit of Cardinal Stone Partners, an investment firm said in a May 18 note to investors.

The estimated oil revenue in the 2016 budget is N820 billion translating to a 15 percent decline in oil revenue to the federal government.

With oil receipts accounting for more than 90 percent of Nigeria’s foreign exchange earnings, a continued slump in oil production will add further pressures on FX reserves, which in turn would undermine the naira.

Statements from key officials in Shell appear to suggest that repair works to the damaged installations may extend beyond June which implies that oil production will remain low for a while, thereby substantially reducing Nigeria’s FX receipts at a time when the country is in a dire FX situation.

With this development, the federal government may have no choice than allow some currency adjustment or flexibility which it has been averse to in the last few months, analysts say.

“The general consensus is that there is a need for currency adjustment to allow the naira weaken, even Yemi Osinbajo, the Vice President, admits. However, the timing is unclear,” said Yvonne Mhango, sub-Saharan Africa economist at Renaissance Capital, in an interview with BusinessDay.

“From our conversations with the Central Bank, an adjustment will not happen anytime soon. In the interim, resolving pipeline insecurity challenges may be one way to redress the slump in oil revenues.”

With next week’s Monetary Policy Committee (MPC) meeting fast approaching, analysts have attempted to pre-empt a policy change on the current exchange rate mechanism, which they say is a viable way of easing the threat posed against the country’s 2016 oil earnings.

The IMF projects that Nigeria’s oil and natural gas exports earned $52 billion in 2015, $35 billion less than in 2014, which is mostly attributed to the fall in oil prices but with the resumption of hostilities in the region, total earnings in 2016 could be less than in 2015.

With an estimated 37.2 billion barrels of proven oil reserves, Nigeria was until the recent resumption of hostilities in the Delta, the largest oil producer in Africa and the world’s fourth-largest exporter of LNG in 2015.

Ayo Teriba, CEO of Economic Associates, however, says the dip in oil earnings may be temporary.

“For our current production output of 1.4 million bpd to disrupt the projected oil revenue in 2016, it must ensue significantly,” Teriba said.

OBODO EJIRO, LOLADE AKINMURELE & ISAAC ANYAOGU