Higher oil prices pose bigger under-recovery burden to Nigeria

Oil prices have been rising but Nigeria, Africa’s largest crude producer faces mixed fortunes as higher oil prices will also mean increasing under recovery burden and less revenue accruing to the federation account.

Under-recovery is a term used in the petroleum sector to denote the notional losses that oil companies incur due to the difference between the subsidised price at which the oil marketing companies sell certain products like diesel, fuel and kerosene and the price which they should have received for meeting their cost of production.

Oil price hit a four-year-high of $85 on Tuesday but this will not represent a windfall for Nigeria. BusinessDay analysis of the latest financial records of Nigerian National Petroleum Corporation (NNPC) showed that from January 2018 to April 2018, the government has paid N215 billion for under recovery alone as at the month of April alone stood at N77 billion.

In January when oil prices averaged at $69 the NNPC incurred N45 billion in under-recovery; in February when oil prices increased to $65 there was a corresponding increase in under recovery to N59 billion.

In March when oil prices was $70, the amount incurred in under recovery decreased to N34 billion, however in the month of April it sky rocked to N77 billion as oil prices averaged at $75.

The amount was the highest under-recovery since January 2017, and represented a 126 per cent appreciation compared to N34 billion recorded in March 2017.

The huge burden of under-recovery in April was also higher than transfer to federation account for the first time since the issues of under recovery came to lime light.

Africa largest oil producing oil country has been on a perpetual voyage with its Petroleum Industry Bill (PIB) which is one of its most important bills ever to be contemplated in Nigeria’s history in a journey that began sixteen years ago with a lot of anticipation and promises.

The bill is still stuttering through legislation after passing through four presidents, five presidential terms and five legislative tenures however the governance aspect of the bill which is Petroleum Industry Governance Bill (PIGB) was discarded by President Buhari (who is also the Minister of Petroleum).

As Nigeria continues to display inefficiencies in its petroleum industry, other oil producing countries are driving investment to its oil sector in order to attract investment to its oilfields both onshore and offshore.

Kuwait’s oil fields were only discovered 80 years ago, and we have, on the whole, utilized the same means of production today as we did then as crude capability figures stand at 4.25 million barrels while current production figures stand in the range of 3.1 million.

For KOC, its oil offshore is a new frontier that has not been tackled yet as the company announced plan to conduct initial work by the end of this year. KOC wants to maintain and boost production from its existing fields which the company admitted can only be done through direct partnerships with its business partners who are specialists in their respective fields.

“This means that we will definitely have to increase our capacity between now and 2040, whether through new exploration projects or going back into new frontiers,” Jamal Aziz Jaafar CEO of Kuwait Oil Company (KOC).

“We have also been blessed with the lowest production cost per barrel in the world. Together, our massive reserves and low production costs have been the primary driver of Kuwait’s oil production,” Jamal Aziz Jaafar CEO of Kuwait Oil Company (KOC).

Norway’s Equinor plans to drill as many as 3,000 exploration or development wells off the coast of Norway in the hope of finding new oil and gas fields and extend the lifetimes of existing ones.

These are around the same number as the company has drilled in the near 50 years since it was founded in 1972.

“We need to start now,” Arne Sigve Nylund, Executive Vice President for Development and Production Norway, said in a statement released on Tuesday, the second day of the Offshore North Sea (ONS) conference in Stavanger.  “After 2022, there are currently few big projects remaining.”

The company, which is two-thirds owned by the Norwegian government, confirmed its giant Johan Sverdrup oil field would start producing in November next year.

At the same time, it increased its estimate of the field’s size from 2.2bn-3.2bn barrels of oil equivalent (Bboe) to 2.1-3.1 Bboe.

The field, discovered in 2010, is the largest new discovery in the North Sea in more than 30 years. But the company said that it now planned to drill between 20 and 30 exploration wells a year on the Norwegian Continental Shelf in the hope of finding other significant new fields.

“While investments picked up slightly in 2017 compared to the previous two years, and the expectations are for higher levels again in 2018, it is vital that as an industry we ensure there is timely and adequate investment so as not to lead to a supply shortage in the future,” OPEC secretary general Mohammad Barkindo said in OPEC’s World Oil Outlook 2018.

Also, Saudi Arabia  have announced plans to boost government spending by 7 percent next year to $295 billion, a preliminary 2019 budget quoted by S&P Global Platts has shown. The amount breaks the previous record in spending, set this year with a budget of $261 billion, the highest in Saudi history.