Nigeria’s options thins as crude oil leaves sellers’ market

Oil markets are currently defying every prescription towards rebalancing as prices traded near a 10-month low on June 26, spooking fears the bearish markets may linger longer than predicted.

Analysts say crude oil markets are headed for its biggest decline in almost two decades as production recovers in Nigeria and Libya. Oil traded around $43per barrel, a slight gain over the 10-month of sub $40 barrel oil.

This is dealing a blow to OPEC–led initiative for its members and non-members to cut production by 1.8million till March 2018. Perhaps the biggest challenge is the prolific rise of shale volumes. With speed to market advantages and improving breakeven costs, volumes are expected to peak at 13 million barrels per day by 2030.

Nigeria secured exemption from OPEC cuts agreed in May this year, but crude oil production looks to surpass budget benchmarks of 2.2million barrels. This may imperil Nigeria’s chances to enjoy further exemptions.

Ibe Kachikwu, minister of state for petroleum resources in a recent interview with the BBC, said that Nigeria is not averse to joining cuts when its production recovers up to regular volume of above 2m bpd. It seems the possibility does not look so remote.

Analysis of loading schedule of crude traders analysed by Reuters revealed that Nigeria’s oil export is expected to exceed 2 million barrels per day (bpd) in August. Exports of 2.02 million bpd on 67 cargoes are scheduled in August, with an additional 97,000 bpd of Akpo condensate.

Nigeria’s production is spurred by the resumption of loadings through the Forcados terminal which was closed for over 10 months in 2016.

Figures for crude and condensate, output from OPEC’s biggest African producer plummeted to near 30-year lows of around 1.2 million b/d in 2016, from 2.2 million b/d previously, as attacks on oil facilities in the Niger Delta took a disturbing turn.

Nigerian crude oil production in May jumped to 1.73 million barrels per day, up 80,000 b/d from April, its highest level since March 2016.

With output of crude and condensate now near its full capacity of 2.2 million b/d, Nigeria, could be asked to join the deal if the recovery continues.

Options

Analysts at Goldman Sachs, a leading global investment firm in a recent report called on Nigeria, and other African producers to lower oil production taxes to remain competitive in a bearish oil market.

The belief is that low-cost countries may become ever more important for International Oil Companies in the medium term due two factors. Shale costs will continue to rise as cost for deepwater production on account of project simplification, cost reduction and cost deflation would see a decline.

“A number of countries such as Angola and Nigeria have lower costs than US Shale, but show higher breakevens. This is predominantly down to higher rates of tax.

“Consequently, we think these countries have a lot to gain by lowering taxes to make them cost competitive with shale. We have seen early signs of this, but think there is much further to go should prices remain in the $50-60 range,” said the report.

Another option available for Nigeria is to ramp crude oil refining to experience the benefits across the value chain. Global professional service firm PricewaterhouseCoopers, in a recent study on refining said that Nigeria could become a net exporter of refined products and become the refining hub of West Africa by the start of the next decade.

Nigeria’s position as Africa’s largest crude oil producer with proven crude oil reserve estimated at 37 billion barrels, annual consumption of 22 billion litres of PMS, 11 billion litres of AGO and 1 billion litres of Aviation fuel puts it at an advantage to be the refining hub of the West African sub-continent.

Experts say actions like recent passage of the Petroleum Industry Governance Bill (PIGB) and consideration of the fiscal and host community components are good steps, all that is required is to treat them with the urgency the situation requires.

ISAAC ANYAOGU