In an interview given to David Whitehouse from The Africa report, Folake Shakirah Lawal, Principal Energy Analyst at Pan Allen Energy in Abuja, discussed the impacts of the OPEC+ production cuts on Nigeria and how Nigeria could take full advantage.
Citing the fact that Nigeria is both a major crude oil exporter and a petroleum products importer, she explained that the OPEC cuts could affect the country both ways with potentially higher oil prices leading to higher oil revenues and foreign exchange earnings as crude oil exports accounted for 77.9% of foreign trade in Nigeria in Q4 2022.
On the other hand, as a major petroleum products importer, higher oil prices would inevitably lead to higher product prices, and this could be a problem for Nigeria.
If the fuel subsidy is removed as promised by the President-elect, higher product prices would only serve to fuel the inflation in Nigeria which is already at a record high, 21.91% as at February 2023. At the same time, If the subsidies are not removed, this would prove problematic as well, as it would put huge strain on government revenues which could be better spent. To put this in perspective, between January to August 2022, the government paid ₦ 2.568 trillion equivalent to $6.2 billion dollars on fuel subsidies. This could have easily accounted for the 2022 health, education, and power budget of ₦1.917 put together.
Highlights
- 2022 was every oil producers dream with soaring brent oil prices above $100/bbl and rising global demand. Saudi Aramco reported a record profit of $161.1bn, a rise of 46.5% year-on-year and the largest profit ever recorded by an oil and gas company. Nigeria however failed to take advantage of the situation and lost massively with crude oil production declining to a 25-year low of about 900,000 bpd primarily due to oil theft.
- Nigeria has since put measures in place to curb oil theft and been able to increase production to 1.306 million bpd in February 2023 with a slight decline in March according to NUPRC. NNPCL plans to increase production to 2.2 million bpd in 2023. This does not go against Nigeria’s OPEC quota of 1.8 million bpd, as OPEC quota does not include condensates.
- These success in combating oil theft were due to a holistic approach adopted by the government using a combination of technology by setting up a real-time monitoring command and control center, whistle-blowing initiatives with huge incentives, engaging indigenous security contractors that understand the terrain, local and cross-border collaboration as well as some creative means by oil companies such as using barges to transport crude oil to terminals instead of pipelines, although of course this comes with increased costs.
- To sustain these wins and maximize the upsides of the OPEC cuts, Nigeria needs to put effective strategies in place.
– Ramp up production as planned by NNPCL and ensure that OPEC quotas are consistently met. Nigeria is still producing about 500, 000 bpd below OPEC quota of 1.8 million bpd. Relevant parties should work on reactivating shut-in wells which could enhance national oil production by over 900,000 bpd as suggested by NUPRC. Also, the incoming government should create an enabling environment to facilitate investments by resolving insecurity issues and ensuring continuity of policies to increase investor confidence.
– Completely resolve oil theft: The government has done a good job so far in tackling oil theft; however the battle is far from over. The government should address the root cause of the problem by collaborating and engaging the Niger Delta communities to identify their needs and chart a strategy to solve these issues. Also, they should take advantage of the host community development fund as provided in the PIA where 3% of oil companies’ operational costs are dedicated to developing the host community where they operate.
The interesting factor here is the clause which stipulates that “In any year where an act of vandalism, sabotage or other civil unrest occurs which causes damage to petroleum and designated facilities or disrupts production activities within the host communities, the community will forfeit its entitlement to the extent of the cost of repairs. This has the potential to increase dedication of the host communities to monitor and report crude oil theft. NURPC should ensure that they closely follow up with the over 60 Host Community Development Trust that have been approved by the Commission.
– Take advantage of the windfall provisions in the Petroleum Industry Act, PIA 2021. Royalty rates in the PIA are based on production and price, with the royalty by production ranging from 7.5% to 15% depending on terrain and an additional royalty by price for crude oil and condensates at 0% when oil prices are below 50 USD/bbl, 5% at 100 USD/bbl, 10% at 150 USD/bbl, and linear interpolation applied for prices in- between. However, this provision applies to new acreages granted under the PIA or existing oil blocks and fields that have either been renewed or converted and so the government will not gain on several unconverted oil blocks.
– Develop local refining capacity and stop importation of petroleum products. This will reduce exposure to risk of higher oil prices which drive product prices up, reduce pressure on foreign spending and enable revenue from crude to be spent more productively. The government should ensure that they negotiate favorable terms for Nigeria with the Dangote refinery and resolve the issue of the fuel subsidy as soon as possible as this will disincentivize private investors in the refining sector. Despite the many arguments for and against the subsidy, data suggests that for refiners, it makes sense to sell petroleum products outside of Nigeria as all our neighboring countries have higher gasoline prices. As of 2nd January 2022, GlobalPetrolPrices.com estimates PMS price in Nigeria as ₦202.62, although it is much higher in the country, and ₦ 458.67 in Cameroon and ₦473.27 in Benin. Even with cost of export, it still makes more economic sense to sell to these countries than to sell in country.