Why naira stability hinges on 2m bpd of oil

The Nigerian government is counting on oil to help shore up the battered naira, and industry operators say it must decisively ramp up oil production to two million barrels per day (bpd) consistently to achieve that objective.

The country’s oil and gas sector, which has generated a significant chunk of government revenue and foreign exchange earnings for many years, is teetering and in desperate need of rescue.

The naira has hit record lows against the dollar and other major currencies following recent economic reforms, and the government is struggling to ramp up foreign exchange (FX) inflows due partly to low oil production.

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Olusegun Omisakin, director of research and chief economist at the Nigeria Economic Summit Group, said Nigeria can’t get better when crude oil production is below two million barrels daily.

“We are barely touching what we have, you know. For some years now and currently, we are doing below two million barrels of oil production per day. We cannot continue to dream of a better country when we don’t know how to optimise our national resources,” Omisakin said at a quarterly macro-economic outlook webinar monitored by BusinessDay.

Security for oil assets, many analysts say, has not been treated with the seriousness it deserves, considering that oil is responsible for the nation’s revenue. Militants routinely kidnap oil workers, especially expatriates, and sabotage of oil pipelines occurs too frequently to absolve government officials, including security personnel, of collusion with criminals.

Some oil operators are also calling on the government to begin actively courting independent producers in the wake of the exodus of international oil companies (IOCs) from the Niger Delta’s land and shallow water assets.

Bolaji Ogundare, group executive director of Newcross Group and Pan Ocean Oil Corporation (Nigeria), in a recent interview, told BusinessDay that the future of Nigeria’s oil industry rests on investing in exploration.

“Investing in exploration is crucial for future growth and because it is risky and expensive. For exploration to take place, most companies need more incentives to do true exploration because, as we know, they are very high-risk and highly capital-intensive with million-dollar investments,” Ogundare said.

He added, “Achieving two million barrels, or better still 2.6 mbd of oil production, requires a long-term perspective, not just a short-term sprint that cannot be sustained year on year.”

For Atiku Bagudu, minister of budget and economic planning, Africa’s biggest oil producing country needs more than the proposed 2.3 million bpd of oil output, given its huge population and economic challenges.

According to Bagudu, Nigeria was producing about 2.3 million bpd of crude oil as far back as 25 years ago when it had a population of just over 100 million people.

“Not only that we need to be at 2.3 million bdp, we need to be higher because 25 years ago when our population was 119 million, we were doing 2.2 million bpd. But cumulative years of underinvestment, whether it’s security challenge or lack of production, has brought us to where we are,” Bagudu said on a live programme on TVC monitored by BusinessDay.

Golden age of stable exchange (N155-N156/$)

From 2011 to 2014, BusinessDay’s findings showed Nigeria experienced an economic boom fuelled by a thriving oil industry.

Brent, the benchmark of Nigeria’s crude oil, soared to an average of $109.75 per barrel, which helped the Central Bank of Nigeria (CBN) to maintain a largely stable currency, as the naira traded within a range of N155-156/$ between 2012 to 2014.

In 2014, Nigeria attracted the largest amount of foreign direct investment (FDI) of any African country, with inflows exceeding $22.1 billion. This influx of capital fuelled major projects, including deepwater exploration and development of new oil fields.

From 2011 to 2014, Nigeria maintained an average oil production of 2.1 million barrels of crude oil per day.

Oil was selling for more than $100 a barrel, as much as twice the production costs in Nigeria’s trickiest deepwater fields and several multiples of those in its shallow water and onshore fields.

Nigeria’s oil rigs, which depict the level of oil fields, averaged 35 rig counts in 2014, a development that translated to increased crude production as Nigeria’s output averaged 2.2 million barrels per day.

In August 2014, “the perfect storm of collapsing oil prices began,” said Carlos Hardenberg, lead portfolio manager of Templeton Emerging Markets Investment Trust. The naira fell, investors fled and Niger Delta militants, who wanted a greater share of the country’s energy wealth, struck.

In 2015, amidst a sharp decline in oil prices, the naira weakened to an average of NGN193 against the US dollar. Despite dwindling reserves, the government maintained a fixed exchange rate of N197, rejecting experts’ recommendations for devaluation. Emphasising agricultural and solid mineral development, the government aimed to counter the impact of the global oil market downturn.

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In June 2016, the CBN ended the fixed exchange rate between the Nigerian naira and the US dollar, causing a substantial devaluation exceeding 40 percent. The decision aimed to alleviate mounting pressure on the nation’s foreign reserves due to falling oil prices. As a result, the naira weakened to N280/$, and by year-end, it declined further to an average of N315/$, marking a significant 64.5 percent drop from the previous year.

With oil prices averaging $43.58 per barrel and hitting a low of $26.21 per barrel, the Nigerian economy faced formidable challenges. To manage the devaluation, the Nigerian central bank introduced multiple exchange rates, including the Nigerian Autonomous Foreign Exchange Rate Fixing (NAFEX), which established a market-driven rate for investors and exporters (I&E).

Since 2018, the central bank has implemented numerous devaluations in pursuit of financial stability, yet by October 4, 2024, the exchange rate had reached N1, 631.21/$.

Need for higher oil production

Data gleaned from the Organisation of Petroleum Exporting Countries (OPEC)’s monthly oil market report for August 2024 showed that Nigeria’s average daily crude oil production in June rose marginally by 3.4 percent to 1.35 million barrels.

The 1.355 million barrels average crude oil production in August means that for the first eight months of 2024, Nigeria has consistently failed to meet its OPEC production quota of 1.5 million barrels daily and its budget target of 1.78 million bpd.

“Oil production has got to be ramped up to the level that will carry the economy. I think we are all on-going witnesses to the efforts that are being made in that sector. It has to happen,” Olayemi Cardoso, governor of the Central Bank of Nigeria (CBN), said after the monetary policy committee’s 297th meeting in Abuja.