As the economies of oil-dependent countries stifle, Nigeria’s dependence on oil has been brought into cross-examination for the umpteenth time. With a growing population of over 200million people, a struggling economy, and fall in oil price, can we continue to depend on this black gold?
Nigeria first discovered oil at Oloibiri, Bayelsa in 1956 – four years before independence, and began production of crude oil the following year. By 1960, about 847,000 tonnes of crude oil was exported. The country became a member of Organization of the Petroleum Exporting Countries (OPEC) in 1971. Notably, Crude Oil accounts for about 10% of Nigeria’s GDP, and 90% of total exports revenue; which begs the question, for how long?
Experts and economists have clamored for the diversification of an economy that has been subjected to volatile oil price fluctuations. In April 2020, when oil was sold at negative prices, supply crippled, and cargoes of oil were stuck on water; eyebrows were raised as to how long our economy will survive on this dependency. Forex inflows diminished, as the CBN was forced to devalue the naira in line with global realities, after several months of playing hardball. To exacerbate issues, OPEC+ could not agree on reducing market supply and in some weeks of recklessness, member countries created a supply glut that could bury the oil markets. But for the intervention of the US President, Donald Trump, Nigeria would have been in the middle of an oil crisis, even though the OPEC Secretary, Mohammed Barkindo, is a Nigerian national.
During the recent oil crisis, Russia and Saudi Arabia said they could afford low oil prices. Both economies had other sources of revenue, and deep cash reserves they can use to support their economy. Which begs the question? Can Nigeria boast like these other nations?
Nairametrics had earlier questioned if agriculture can replace oil, and a breakdown of agricultural exports showed it would take a lot of investments for it to generate the revenues that oil currently commands.
Nigeria is faced with revenue decline, as we have been compelled to reduce output to stabilize the oil market. Although the country was accused (albeit true) of cheating quotas and output cuts with other countries, as OPEC and its allies decided to reduce global oil supply. The recent deal required OPEC member countries, including Nigeria to cut their output from 9.6 million bpd to about 7.7 million bpd in a bid to stabilize the oil market. Consequently, the FG adjusted the budget benchmark to about $25 per barrel.
How efficient are the country’s refineries?
Nigeria has four major oil refineries. Namely, the Warri Refinery and Petrochemical Plant, which has the capacity to process close to 125,000 barrels of crude per day. The new Port Harcourt Refinery, with a capacity to produce 150,000 barrels per day. There is also the ‘old’ Port Harcourt Refinery, with subpar production and lastly, the Kaduna Refinery.
Early this year, the Nigerian National Petroleum Corporation (NNPC) published audited financial statements. In a report by Bloomberg, the corporation has been censured for years for not publishing audited reports.
In 2018, the first three refineries reported a combined loss of N154 billion, while the Kaduna refinery recorded zero revenue.
The country still cannot refine petroleum products to supply her internal demand, and that is why the imminent Dangote Refinery, expected to open in the next few years, is targeting a daily capacity of 650,000 barrels.
NNPC led by Malam Mele Kyari, the Group Managing Director, published online the 2018 audited accounts for its 20 subsidiaries and business divisions for the first time. According to the statement, National Petroleum Investment Management Services (NAPIMS), is the group’s most profitable division.
It reported revenue of N5.04 trillion ($13 billion) in 2018 and profit of N1.01 trillion. That compared with a loss of N1.65 trillion in 2017.
The report shows total assets managed by NAPIMS at N18.6 trillion, with the oil and gas components valued at N14.2 trillion.
Its oil production subsidiary, the Nigerian Petroleum Development Company (NPDC), reported a post-tax profit of N179 billion in 2018.
Outlook for the short-term
Nigeria has sought to diversify the economy, however there is still huge focus on its main export – Oil. The coronavirus (COVID-19) has changed how the oil economy will operate forever. In 2020, global oil demand contracted for the first time since 2009 global recession. With restrictions imposed in some cities, demand might not reach pre-pandemic levels, as global air travel still grapples with the effect of lockdown.
Although recovery improved in the second half of 2020, prices have failed to reach the $50 mark. Ultimately, the outlook for the oil market will depend on how coronavirus can be contained, because economic activity depends on the global health crisis. On the supply side, Libya seems to be back in the foray, as tensions are easing in the area. Even before the pandemic, markets had been over-supplied, leading to OPEC+ producers cutting output with competition from American Shale oil. There are indications that the oil market looks supplied through 2025.
Given the cycle of the industry and the demand contraction in 2020, a rebound in 2021 is expected. Forecasts shows that between the periods 2019 and 2025, global oil demand will grow at an average annual rate of just below 1 mb/d.
Crude oil prices drop by over 5%
Crude oil prices dropped more than 5% and falling below the key $40 per barrel support, at the American trading session mid-week
The slide is attributed to unexpectedly large U.S. crude oil inventories for last week reported by the government, which reinforced concerns about depleting demand for fuel amidst the worsening global outbreak of Covid-19.
At the time of writing, Brent crude traded at $39.44/Barrel down more than 5%.
Why crude oil prices are falling heavily now?
The macros weighing down on oil prices are reports coming from the EIA showing U.S. crude stockpiles gained 4.3 million barrels, against an increase of 1.23 million barrel as anticipated by energy analysts, showing there is soft demand for gasoline in the world’s largest economy.
What next for Oil amid rising COVID-19 cases?
The market is feeling pressure amid rising COVID-19 cases in the United States and Europe, and also due to Libyan oil production.
Crude futures fell 1.9% in New York on Friday and posted their first weekly decline in three, according to Bloomberg. Libya lifted force majeure on its Ras Lanuf and Es Sider ports and oil output will surpass 1 million barrels a day in four weeks, according to the state-run National Oil Corp. A further increment in Libyan oil production will lead to more supply to an oversupplied market that is wrestling with a pandemic-induced sales decline.
This declaration comes in the wake of the ongoing tussles in the North African region, which marked a lasting truce arrangement.
Finance Minister, Faraj Boumtari, told Al-Jazeera that in recent years, the regular oil barricades in Libya have cost the nation a sum of US$130 billion in lost incomes.
The truce in Libya is just going to empower more production there and keep it consistent for some time, as the COVID-19 circumstance is not generally improving. Libya’s oil industry has been tormented by battles, as opponent groups have been battling for authority over zones in Libya and its oil terminals and ports since the overturning of Muammar Gaddafi in 2011.
In other news, Russia downplayed the likelihood that OPEC+ could expand its present 7.7 million barrels everyday production cuts in one year from now, as per Russian President Vladimir Putin. The remarks could be only jawboning to a market that is urgently looking for consolations that oil production will not increase excessively. However, Russia has in the past been hesitant to keep up its part of the oil production cuts; So, any notice that it is contemplating a slower tightening of the cuts is critical.
Russia had neglected to cut its own oil production to the level it consented to in 2019 and mid-2020. Given how oil production in the United States bounced back two weeks ago, however, it was still down from its March 13 high of 13.1 million bpd. U.S. oil production presently sits at 10.5 million bpd – 2.6 million bpd under those March highs, as indicated by the Energy Information Administration –
China has assumed a critical function in supporting global oil demand as of late, by bringing in its most volumes since May. In contrast, there is a slow recovery in the remainder of Asia and poor refining margins. But how long would China be able to help the fragile global oil market, when demand outside China is weak, with the second wave of COVID-19 contaminations wrecking world economies.
In recent months, China’s unrefined petroleum imports have not fallen under 11 million barrels per day (bpd), with June orders of 12.9 million bpd crushing the past record from May by more than 1.5 million bpd. The market is feeling pressure amid rising COVID-19 cases in the United States and Europe, and also due to Libyan oil production.
A few U.S. states detailed daily record increments in COVID-19 infections on Thursday, raising worries about future gasoline interest, while France extended curfews as the second wave of the pandemic compasses across Europe. Oil prices rose last week when the House Speaker, Nancy Pelosi, spoke about the possibility of a stimulus package.
Oil supply feared to drop by 3%, as new cases of COVID-19 infections increase
Growing concern that oil supply could fall by 3% continues as a result of increasing cases of COVID-19 in the US and Europe.
There is a growing concern that oil supply will fall by 3%, escalating last week’s losses as a result of growing cases of COVID-19 in the United States and Europe.
This has raised worries about the market conditions – the demand and supply of crude oil. The United States reported its highest number of new coronavirus infections in two days – Saturday inclusive, while in France, new cases hit a record of more than 50,000 on Sunday, underlining the severity of the outbreak.
On the supply side, Libya’s National Oil Corp on Friday ended its force majeure on exports from two key ports and said production would reach 1 million barrels per day (bpd) in four weeks, a quicker ramp-up than many analysts had predicted.
OPEC+, a grouping of producers including the Organization of the Petroleum Exporting Countries (OPEC) and Russia, is also set to increase output by 2 million bpd in January 2021, after cutting production by a record amount earlier this year.
What you should know
Recently, Nairametrics reported that the oil prices had continued to decline as a result of worsening COVID-19 pandemic cases which are threatening to bring more restrictions on movement and consumption and ultimately hit demand for crude products.
What they are saying
According to Avtar Sandu, Senior Manager of Commodities at Phillip Futures in Singapore, “New barrels of Libyan oil come at a time when the crude oil market had just faced the disappointment from the recently concluded OPEC+ ministerial panel, when the organization made no new policy proposals.”
Last week, Russian President, Vladimir Putin, indicated he may have to agree to extend OPEC+ oil production reductions if that could be beneficial in stabilizing the market.