Nigeria’s oil GDP hits lowest since 2016 as OPEC cut pain, lack of reforms bite deeper

A combination of higher Organisation of Petroleum Exporting Countries’ (OPEC) cut and perennial challenges due to lack of reforms has sent Nigeria’s oil GDP to -13.89 percent, the lowest since Q3 2016.

A combination of lower oil price and lower oil production has often meant Nigeria, Africa’s biggest oil producer, earn less 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.

In Q3 2020, the oil sector contracted by –13.89percent (year-on-year), indicating a sharp contraction of –20.38% 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 Saturday.

The sector contributed 8.73percent to total real GDP in Q3 2020, down from 9.77percent and 8.93percet respectively recorded in the corresponding period of 2019 and the preceding quarter, Q2 2020.

“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.”

Nigeria joined OPEC+ to cut supply by up 10 million barrels per day between May and June 2020, 8 million barrels per day between July and December 2020, and 6 million barrels per day from January 2021 to April 2022, respectively.

As a result of the output cut, Nigeria’s oil production was pegged at 1.412 million barrels per day, 1.495 million barrels per day, and 1.579 million barrels per day respectively for the corresponding periods in the agreement; as against the 1.829 million barrels per day of dry crude oil that was the reference production in October 2018.

Uncertainty often surrounds how Nigeria plans to implement crude production cuts after it has agreed with OPEC, due to its big impact on investment plans.

“In past cuts, there was never any great expectation that African countries would comply fully with them,” Niyi Awodeyi, CEO at Subterra Energy Resources Limited said. “The regulator has been busy drawing up instructions for operators to comply, but the key point is that following the price crash in mid-March we have seen very deep cuts in CAPEX by all major operators in Nigeria.”

IOCs are also trimming output due to lower 2020 oil price, depressed demand, and limited storage, and some analysts suggest some foreign firms may further reduce their presence in Africa’s largest oil producer.

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“Unless there are marked improvements in the business and investment environment and security”, warns Awodeyi.

NBS data also 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.

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, most industry experts say 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,” Charles Akinbobola, analyst Sofidam Capital said.

Also, 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,” says Akinbobola.

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.