The technical problems hampering Nigeria’s oil output have further heightened calls for genuine diversification of the nation’s oil-dependent economy, writes GIDEON OSAKA
On 10th December 2016, non-OPEC oil producing countries and members under the Organization of Oil Producing Countries (OPEC) agreed to cooperate in an effort to stabilize the global oil market through voluntary cut in the overall production of crude oil to a maximum of 1.8 million barrels per day (bpd), with OPEC countries making the biggest cut of 1.2m bpd and non-OPEC, 600,000 bpd.
The understanding which imposed a limit on production became effective on 1st January 2017 and was for a six-month period. The deal was further extended for another nine months (effective July 1, 2017) at the second joint OPEC-Non-OPEC Producing Countries Ministerial Meeting of 25th May 2017. Nigeria, an OPEC member, was unanimously granted exemption from the oil production restrictions due to the volatility of its output stemming from disruptions in the Niger Delta. The country whose production at the time oscillated between 2 million to 2.1 million barrels per day, was granted further exemption from the oil output cut at the May 2017 by the Ministerial Conference.
With the extension of the exemption period for Nigeria for up to three times, the expectation was that the country would ramp up production, consolidate on crude exports that would lead to more revenue earnings following the appreciable rebound in oil prices to around $57 a barrel compared to the $30 per barrel oil price crash period in 2016.
When on Easter Sunday, April 12th, 2020 Nigeria eventually joined the OPEC+ historic cut in crude oil output after enjoying three exemptions starting from January 2017, the deal became a concern for the country which had been struggling to meet its budget benchmark, considering the prevailing economic situation as anything below current production quantity could frustrate implementation of existing and future budgets.
With the historic resolution in April 2020 by OPEC and its allies (OPEC+) to cut its members production after weeks of deliberations and negotiations, Nigeria agreed to limit its output to 1.412 million barrels per day between May and June 2020 in the first phase of the group’s agreement.
Between July and December 2020, Nigeria would produce about 1.495 million barrels per day in the second phase of the agreement, and another 1.579 million barrels per day between January 2021 to April 2022 in the third and final phase of the agreement. The agreement would be subject to a review during the December 2021 meeting of the Joint Ministerial Monitoring Committee (JMMC) charged with the responsibility of monitoring the impact of the decision.
Nigeria’s full production capacity before the cut was closer to 2.2 million bpd, as against the 1.829 million barrels per day of crude that it will now be producing in addition to condensate of between 360-460,000 bpd of which are exempt from the OPEC curtailment.
The expectation from the historic cut was that when implemented, oil prices would rebound by at least $15 per barrel in the short term. Crude oil price did rebound as the average price of Brent crude, the international benchmark against which Nigeria’s oil is priced, rose and hovered largely around $60 and $70 U.S. dollar between April 2020 and the first half of 2021. Brent futures hit a near three-year high last week as global output disruptions have forced energy companies to pull large amounts of crude out of inventories. Goldman Sachs forecast crude oil prices could hit $90 per barrel from $80 by year end, as a faster fuel demand recovery from COVID, Delta variant, and Hurricane Ida’s hit to production led to tight global supplies.
However, despite the rally in oil price since Nigeria joined the OPEC cut deal, significant under-production by the country against the OPEC quota means that Nigeria is unable to benefit from the gains of the rally in oil price.
Struggling to produce despite price rally
Oil accounts for 90 percent of Nigeria’s foreign exchange earnings and about 85 per cent of its revenue earnings. Thus, an increase in oil prices and output volume is highly desirable for the country to be able to boost its external reserve position. But Nigeria has continued to suffer from deteriorating production capacity and technical disruptions.
OPEC oil market data analyzed by Valuechain showed that on the average, the nation produced 1.343 million barrels per day (bpd) in the second quarter of 2021 (Q2’21) compared to 1.517m bpd produced in Q2’20. This also compares negatively with the OPEC quota of 1.4m bpd. Specifically, the country produced 1.372m bpd, 1.344m bpd and 1.313m bpd in April, May and June, 2021 respectively, compared to 1.705m bpd, 1.436m bpd and 1.411m bpd, produced in the corresponding months of 2020.
On September 21, 2020 Minister of State for Petroleum Resources, Chief Timipre Sylva confirmed Nigeria had officially written OPEC, requesting a higher production quota under the OPEC+ accord.
OPEC and its allies are scheduled to meet October 4, 2021. The current OPEC+ agreement calls for the group to collectively raise output by 400,000 bpd each month through the end of 2022, with a review of the pact scheduled in December 2021.
“We’ve just put a request on the table, and we expect that to be looked at,” Sylva told reporters on the sidelines of the Gastech 2021 conference in Dubai. “We have capacity for more production than we are producing right now. Unfortunately, we are constrained by the quota.”
Though data showed that Nigeria’s production contrast with her request to OPEC for a higher production quota under the OPEC+ accord, Sylva maintains that the technical problems that have hampered Nigeria’s output will soon be resolved.
Nigeria’s 1.614m bpd for September, which covers only crude oil and not condensate, was scheduled to rise by roughly 17,000 bpd each month, in line with the OPEC+ alliance’s plans to gradually ease back on production cuts implemented in the pandemic. However, Nigeria still struggled to produce the current allocation.
According to S&P Global Platts, Nigeria self-reported crude output of 1.27m bpd in August, down from 1.44m bpd in July, one of the lowest in the last few years.
Despite the expectation that the country would fall back on condensate by increasing production as condensate is exempted from the OPEC cut, the country’s estimated condensate output has fallen to 400,000 bpd against the about 500,000 bpd estimated in the 2021 budget, indicating a likely significant shortfall. But the minister insists the country deserves a higher quota, noting that aside its efforts to fix the technical difficulties, the basis for the current production quota, which was mainly because of the problems in the Niger Delta at the time, no longer exists. Despite the production curtailments by OPEC, Chief Sylva assured that all planned industry development projects would progress after the termination of the OPEC/Non-OPEC adjustments in April 2022.
Should Nigeria be able to ramp up crude oil sales to the assigned levels of including condensates, then it could have been able to shore up its foreign exchange and revenue earnings. The 2021 N13.588 trillion budget signed by President Muhammadu Buhari retained key parameters of oil production and price benchmarks at 1.86 million barrels per day and $40 per barrel. The inability to meet the crude production target may continue to expand the N5.6 trillion deficit in the budget, making the budget largely difficult to implement. Barely two months after the National Assembly approved the federal government request to borrow $8.3 billion loan in the initial 2018-2020 borrowing plan, the government recently requested the approval to borrow another $4 billion loan to fund the deficit in the 2021 budget.
Slump in investment in the sector to keep up with the current production levels much less ramp up to higher levels is one of the reasons why Nigeria has struggled to meet the OPEC quota.
Despite the production curtailments by OPEC through the latest agreement, Chief Sylva assured that all planned industry development projects would progress after the termination of the OPEC/Non-OPEC adjustments in April 2022.
End of crisis in sight
Sylva attributed Nigeria’s production struggles to technical problems from retapping reservoirs that had been shut to comply with the stringent OPEC+ cuts of the past 17 months adding that output could rebound to around 1.7m bpd by November and 2 million bpd by the end of the year.
“We had some issues from shutting down the reservoirs. When you shut down a reservoir, to restart it, sometimes there are challenges”, he said.
Key Nigerian grade, Forcados had been disrupted for almost a month until Shell lifted force majeure on loadings Sept. 10. Industry sources said the suspension of exports was due to an oil spill near the Forcados terminal. Other Nigerian crudes such as Bonny Light, Escravos, and Qua Iboe have also faced production issues in recent months due to operational and technical reasons. Growing threats by militants to renew attacks on oil infrastructure in the restive Niger Delta remain a concern.
It was sabotage and oil theft by those militants in 2018 that had caused great volatility in Nigeria’s crude production that year, which Sylva said penalized the country when OPEC+ production baselines were set. “The basis for giving us this quota was [that Nigeria was in] a crisis,” Sylva said. “Right now, we don’t have any crisis anymore, and we believe we can produce more.”
Gas to the rescue
Production challenges have heighten the focus for Nigeria to shift its upstream work towards natural gas liquids (NGLs), natural gas and other revenue streams to tackle the revenue challenge arising from the OPEC+ production cut arrangement.
Data showed that gas proved to be a steady and reliable revenue stream during the height of the Covid-19 pandemic in 2020. Gas production and utilization should be a key priority for Nigeria in 2021.
Experts have insisted that unless the economy is diversified and value is added to crude oil and gas, Nigeria would always struggle to generate needed revenue from the sector.
Like other forecasters, the EIA continues to warn that lower oil revenues will have a strong negative impact on OPEC economies.
“The decrease in revenues could be detrimental to member countries’ fiscal budgets, which rely heavily on oil sales to import goods, fund social programmes, and support public services,” the agency said.