OPEC, allies’ output hike agreement raises hope for Nigeria’s 2021 budget

The agreement, Thursday, by the Organisation of Petroleum Exporting Countries (OPEC) and its allies, led by Russia, to raise production by up to 500,000 barrels per day (bpd) gradually over a three-month period beginning from January may give Nigeria some relief from its fiscal worries.

The compromise bridges differences among Nigeria and other OPEC over whether the time was right to start rolling back cuts they and oil-producing allies agreed to earlier in the year in an effort to stabilise prices.

More than any other oil-producing country, Nigeria needs a combination of higher oil prices and favourable OPEC cut to fund its N13.083 trillion 2021 budget and survive its economic recession, which is the worst in recent history.

In 2021, Nigeria is expecting an oil revenue of N2.01 trillion based on a production of 1.86 million barrels (inclusive of Condensates of 300,000 to 400,000 barrels per day) at a crude price of $40 per barrel.

At the Thursday meeting, OPEC’s delegates agreed to gradually raise production by up to 500,000 bpd over a three-month from January, while production levels would be re-evaluated monthly as producer countries seek to cautiously release more barrels into the market despite new waves of coronavirus persistently weighing on demand.

“Negotiations within the Opec+ group did not prove to be as smooth as expected,” Bjornar Tonhaugen at Norway-based Rystad Energy said in a note seen by BusinessDay.

“It is well-understood that not all members are aligned and several differences need to be bridged today to settle on a common direction,” Tonhaugen said on Thursday.

Earlier this week, OPEC was leaning toward recommending keeping existing cuts of 7.7 million barrels in place for as much as three more months, according to people familiar with their deliberations. That ran up against opposition from some members who wanted to start pumping again as oil prices begin to recover.

That view is shared by Russia, which leads to another big bloc of oil producers. OPEC and this Russia-led group, known as “OPEC-plus”, have acted in concert in recent months to stabilise oil markets after the pandemic closed swaths of the global economy, walloping demand.

Oil experts said the sanctioning of a modest production increase would represent a middle ground between a Saudi plan to extend curbs for three months and the group’s original plan to boost output of 2 million barrels a day in January.

Sources at the meeting also stated that the output boost would result in an increase of 1.5 million bpd at the end of the first quarter of 2021, with Russia, Iraq, Nigeria, and the United Arab Emirates expressing interest in supplying the market with more oil in 2021.

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.

Before Thursday’s meeting which began two hours later than anticipated, 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.

Citing weak economic indices and slow growth, Africa’s biggest crude oil producer had requested ahead of Thursday’s meeting to be exempted from production cuts such as Iraq is. Both Iraq and Nigeria have had lacklustre compliance with their quotas.

However, the OPEC+ Joint Ministerial Monitoring Committee (JMMC) has declined an informal request from Nigeria to re-evaluate the baseline from which its crude output cuts are calculated.

Brent crude prices, the benchmark for Nigeria’s crude oil, rose 0.8 percent to $48.68 a barrel on Thursday by late evening trading after news of the rollout of vaccines fuelled a market rally last month.

A combination of lower oil price and lower oil production has often meant Nigeria, Africa’s biggest oil producer, earns less in foreign exchange and therefore has to fund its budget deficit. This is because oil accounts for 90 percent of Nigeria’s foreign exchange and 85.6 percent of its total export.

Blend of higher OPEC cut and perennial challenges due to lack of reforms sent Nigeria’s oil GDP to -13.89 percent, the lowest since Q3 2016.