Drone attacks on the world’s most important oil processing plant has caused Brent crude, the benchmark for Nigeria’s crude oil, to surge worldwide, a development that brings short-term benefit and long-time headache to Africa’s biggest oil producing country.
An attack on Saudi Arabia that shut 5 percent of global crude output triggered the biggest surge in oil since 1991 as prices rose as much as 20 percent to $71.34 a barrel, its biggest jump in 28 years. A swarm of drones set off a chain of explosions on the Saudi Aramco oil production facilities at Abqaiq and Khurais in eastern Saudi Arabia on 14 September, 2019.
The Abqaiq facility is not a refinery or a petrochemicals plant, but is a crude separating facility where impurities like hydrogen sulphide are removed from the crude prior to export. The Iran-backed Houthi militia in neighbouring Yemen has taken responsibility for the attack.
The Houthis have tried to attack Saudi oil installations before, and have launched missile attacks on Saudi airports.
Analysts say the success of this drone strike is a serious escalation, and one that the Saudis are going to be enraged by. Initial reports suggest that damage is extensive and that at least 5.7 million barrels of crude oil per day (approximately 5 percent of global supply) will be off the market.
There have been further contradictory reports as to how long this supply disruption will last. Some reports suggest that normal operations will resume this week, others suggest that normal operations will take at least a couple of weeks, perhaps even months.
“First, given what has happened in Saudi Arabia, OPEC is unlikely to enforce the production cuts until the Saudis are back in the market,” analysts at Lagos-based SB Morgen said in a note to clients, Monday. “However, internal instability and insecurity mean that Nigeria’s ability to take advantage of any major conflict in the Middle East is very limited. In the short term, however, oil prices are likely to jump above $70 per barrel,” SBM analysts said.
“Nigeria’s strategy of essentially accommodating theft of what amounts to almost 10 percent of daily official production numbers by the actors in the Niger Delta has guaranteed the unbroken flow of supply from the Nigerian oil fields in the delta. So the country stands to gain a bit if this holds. However, given that the US has said it would release oil from its strategic reserves in order to balance supply, there will be no windfall for Nigeria,” they said.
Higher oil prices have often meant Nigeria, Africa’s biggest oil producer, can earn more in foreign exchange and fund its budget deficit. This is because oil accounts for 90 percent of Nigeria’s foreign exchange and 85.6 percent of Nigeria’s total export.
Nigeria relies heavily on earning from oil exports, and even more cherry for members of the Organization Petroleum Exporting Countries (OPEC), who have had to bear the brunt of oil production cut in the past in a bid to shore up prices.
A higher oil price would be good news for Nigeria which is currently struggling to meet its revenue targets, but economists have also said that the fuel subsidy regime could neutralise potential benefits.
“Oil prices will go up and then level out in the short run, so Nigeria should make more money from crude sales. But it is not necessarily going to be a net positive for the country. We will clearly pay more for subsidies and let’s pray there are no production disruptions in the Niger-Delta region,” Ayodele Oni, energy partner at Bloomfield Law Practice, said. Nigeria reportedly spent $5 billion to subsidise imported petroleum products in 2018 as all its refineries are either down or performing poorly.
“We need to be wary of this trend, and think long term because the Nigeria production is susceptible to the same impact, and recovery would not be as quick as the Saudis. So we should reflect and not celebrate,” Bolaji Ogundare, CEO of NewCross Exploration and Production Limited, said.
Other sources said benefits of higher oil prices hardly count as the government has to spend much of the extra revenue to keep the official pump prices. “Those who already have volumes can benefit from the short-term rise in oil prices. But Nigeria isn’t well positioned to take full advantage due to lack of investments and clarity regarding legal and fiscal frameworks governing the sector,” Israel Aye, senior partner, energy & commercial contracts, Primera Africa Legal (PAL) and director at Aspen Energy Nigeria, said.
Aye said irrespective of the movement in crude oil prices, “the downstream is really where the money is made and so far Nigeria has been doing poorly”. “The Middle Eastern nations have aggressively courted investors over the years as the best investment destination; Nigeria now has a chance to make a case,” Aye told BusinessDay.
In the 2019 budget, the projected revenue expected from the oil sector is about 52 percent of the total revenue profile of the budget with the Federal Government projecting about N3.73 trillion as oil revenues while N710 billion is expected from government equity in Joint Ventures The 2019 budget was benchmarked at $60.
However, despite fluctuation below and above the projection, the government has been trying to make up for falling revenues by increasing taxes and borrowing both from foreign and local sources.
There are also concerns as to whether the situation in Riyadh will allow Africa’s biggest oil producer pump more oil into the market. Mohammed Barkindo, OPEC secretary-general, however, said the situation is “under control”. “I have had series of meetings with the leadership of Nigeria and Iraq and they have assured me they will be faithful to their obligation,” Barkindo told Bloomberg TV.
“There is no unilateral action that will be taken by both Nigeria and Iraq; I have been in contact with the countries.” Iraq has been pumping 4.8 million bpd in recent months instead of its target of 4.512 million bpd. Nigeria produced 1.84m bpd in August versus its target of 1.685 million bpd.
How quickly Saudi Arabia resolves its production challenge is still unknown as Riyadh promised that it would provide much-needed information about the scope and severity of its damaged facilities within 48 hours, yet has so far failed to do so, leaving commodity traders scrambling and dependent on rumors and innuendos, to evaluate just how long the output shortage would last and how much oil would be taken offline for at least a few days.
Some industry sources said it might take weeks and not days while others said there won’t be a detailed update any time soon because the Saudis themselves have no idea what is going on, and are seeking “clarity on damage”
Also, Goldman Sachs warned clients an extended Saudi oil outage could push Brent crude prices north of $75 per barrel as the historic attack on the country’s processing plant disrupts one of the globe’s largest energy supply chains. “The magnitude of such a price rally is difficult to estimate in the absence of official comments on the timeline and scale of production losses,” Currie and Courvalin wrote.
“An extreme net outage of a 4 mbd for more than three months would likely bring prices above $75 to trigger both large shale supply and demand responses.” OPEC members and non-members including Russia agreed in December to reduce supply by 1.2 million bpd from Jan. 1 this year. OPEC’s share of the cut is 800,000 bpd, to be delivered by 11 members, exempting Iran, Libya and Venezuela
LOLADE AKINMURELE, STEPHEN ONYEKWELU & DIPO OLADEHINDE
