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Rising crude oil price: $75bpd threshold and its many worries for Nigeria

Recently, when the price of crude oil was within the $60-$70 range, the Group Managing Director (GMD), Nigerian National Petroleum Corporation (NNPC) said the rising price may be inimical to the economic health of the country. Now that crude oil is hovering around $75bpd, should Nigeria be worried? It would seem so, especially in other areas not captured in the GMD’s fears.

Chris Paul reports.

At the International market, crude oil prices is rising above $75 per barrel  and there are indications that Nigeria crude oil production may have recorded a decline by 7,000 bpd;  down from the 1.55 million bpd in May to 1.48 million bpd in June.

Not even the positive rise in the combined June oil output from the Organisation of the Petroleum Exporting Countries (OPEC) could provide stock comfort for Nigeria’s ailing supply quota.

Up 480,000 bpd from May, mostly due to Saudi Arabia’s continued unwinding of its voluntary extra production cut, OPEC’s 13 members pumped 26.19 million bpd in June.

According to S&P Global Platts latest survey, OPEC+ added 540,000 barrels per day of crude in June to a market hungry for oil as summer kicked off.

The survey discovered that Nigeria produced its lowest level since January, at 1.48 million bpd in June, compared to 1.55 million bpd in May.

The shortfalls, which saw some of the country’s large oil fields, especially those in the Niger Delta like Bonny, Escravos, Brass River and Qua Iboe, pumping well below their full capacity, could be linked to either technical problems or maintenance.

Led by Russia, the group’s nine non-OPEC partners produced 13.27 million bpd, a rise of 60,000 bpd from May; in spite of the production gains, higher quotas for the month meant OPEC+ compliance was at 110.16 per cent compared to 111.45 per cent in May.   

As parts of its plans to relax output quotas to meet the growing demand for its oil, the alliance has added 970,000 bpd in the past two months.

According to S&P Global Platts, the deal to raise output by two million bpd between August and December could be jeopardized by the bitter feud between emerging rivals Saudi Arabia and the UAE and could put an end to the initiative.

Despite a week of negotiations, the dispute persists; while the seeming irreconcilable disagreement could cause the OPEC+ alliance to leave quotas flat after July, with the possible consequence that may put more pressure on an already contracting market through the rest of the summer.

Sunday, July 18, 2021, the coalition increased the output of countries involved in the Declaration of Cooperation, DoC, including Nigeria.

Held via videoconference, as a strategy to achieving stability in the global market, the resolution that empowered Nigeria to produce 1.829 million barrels per day, mb/d from 2022, was arrived at, at the just-concluded 19th OPEC and non-OPEC Ministerial Meeting (ONOMM).

In order to remove huge stocks from the volatile market, a reality it was confronted with, following the outbreak of the Coronavirus pandemic which was characterized by lockdown, low demand and low oil prices, OPEC+ had to cut output by 10 million barrels per day( mb/d); in 2020.

Continued economic recovery, in most parts of the world with the help of accelerating vaccination programmes, coupled with clear signs of improvement in oil demand and falling Organisation for Economic Co-operation and Development (OECD) stocks, prompted OPEC+ to acknowledge the ongoing strengthening of market fundamentals; sequel to some months of an output cut.

 Noting the positive performance of Participating Countries in the Declaration of Cooperation (DoC), the Meeting also hailed the overall conformity to the production adjustments which was 113 per cent in June (including Mexico), reinforcing the trend of high conformity by participating countries.

“In view of current oil market fundamentals and the consensus on its outlook, the Meeting resolved to reaffirm the Framework of the Declaration of Cooperation, signed on 10 December 2016 and further endorsed in subsequent meetings, including on 12 April 2020.

“Extend the decision of the 10th OPEC and non-OPEC Ministerial Meeting (April 2020) until the 31st of December 2022.

“Adjust upward their overall production by 0.4 mb/d on a monthly basis starting August 2021 until phasing out the 5.8 mb/d production adjustment, and in December 2021 assess market developments and Participating Countries’ performance.

“Continue to adhere to the mechanism to hold monthly OPEC and non-OPEC Ministerial Meetings for the entire duration of the Declaration of Cooperation, to assess market conditions and decide on production level adjustments for the following month, endeavouring to end production adjustments by the end of September 2022, subject to market conditions.

 “Adjust, effective 1st of May 2022, the baseline for the calculations of the production adjustments.

“Reiterate the critical importance of adhering to full conformity and taking advantage of the extension of the compensation period until the end of September 2021,” the group stated.

By last Sunday decision, Nigeria is expected to produce 1.829 mb/d, excluding condensate, signifying a 30.6 per cent rise as against its current 1.4 mb/d output.

In other words, during the period, Nigeria and other countries, including OPEC and non-OPEC, would also witness a significant increase in output.

Meanwhile, the price of Bonny Light, Nigeria’s premium oil grade, which had previously risen to over $75, hovered at $74.16 per barrel on July 19, 2021.

With over $34 in excess of the $40 per barrel benchmark of the country’s 2021 budget, which was also benchmarked on 1.8 mb/d, including condensate, Nigeria can be said to be in some comfort zone.

Counterbalanced by better-than-expected data from OECD Americas in 2Q21, which is now projected to last through the 3Q21, OPEC stated that the 1Q21 was revised lower, amid slower than anticipated demand in the OECD, consuming countries; with solid expectations for global economic growth in 2022.

These include improved containment of COVID-19, particularly in emerging and developing countries, which are forecast to spur oil demand to reach pre-pandemic levels in 2022.

Despite the increasing vaccination-compliance levels in Nigeria, the Delta strain of the Covid pandemic is stoking up fears as the deadly variant has started claiming casualties and killing Nigerians.

However, the pandemic may not be the only concern of the government as other issues plaguing the nation’s oil industry coupled with the overwhelming insecurity in the country constitute the source of stress for the managers of the industry. 

On the downstream side, the picture is not looking good; last month, Mele Kyari, group managing director of the Nigerian National Petroleum Corporation (NNPC), had said that the cost of petrol should be N256 per litre at filling stations without subsidy.

Going by the Department of Petroleum Resources (DPR) recent speculation that the pump price of petrol in Nigeria may rise to N1,000 per litre when the petrol subsidy regime ends without an alternative energy source, the social consequence may not be pleasant should such a price, even that of the NNPC GMD’s, be foisted on Nigerians.

Currently, the price of premium motor spirit (PMS), better known as petrol, lingers around N162/N163 per litre.

While answering questions after delivering a paper titled, ‘A Discussion on the Future of the Nigerian Petroleum Industry,’ in Lagos, recently, DPR director, Sarki Auwalu, acknowledged that petrol subsidy was sucking so much from Nigeria.

Eliminating it, according to him, would require making alternative fuel available to Nigerians and that failure to do that will plunge Nigerians into paying higher petrol prices when subsidy is removed; adding that Nigerians may be paying as high as N1,000/litre on petrol when subsidy is removed and when alternative energy or autogas gas policy becomes fully operational.

The country, he said, may end up spending an initial $400 to convert one vehicle from running on petrol or diesel to running on either liquefied natural gas (LNG) or compressed natural gas (CNG); as alternative fuel regime.

Converting eight million public vehicles currently present in Nigeria to gas-powered, he explained will cumulatively cost $3.2 billion to realize.

“So, to eliminate subsidy, they don’t call it subsidy anymore now, it’s under-recovery of purchase. So, to eliminate under-recovery, what you need is alternative fuel. Without an alternative, you will subject people to higher prices, and that is why we go for price freedom,” DPR Director said.

With over 22 million cars plying Nigerian roads, eight million of which are for public use; Anwalu said, “Imagine if you want to convert every car into gas, the average cost of conversion is $400. Converting eight million cars requires $3.2 billion. To do that, there are a lot of environmental investors which can invest and recover from the sale of gas and we are encouraging that.

“Once that is achieved, you will see that PMS can be sold at N1000. After all, the average distance covered by one-gallon equivalent when you compare it with LNG or CNG with respect to energy for mobility, is 2.7 against one. One for PMS, 2.7 for LNG or CNG.

 “So, with that advantage, you will see that it creates an opportunity for this industry again. The issue of subsidy, volume will all vanish, and that is what we are working towards.”

Auwalu also warned that the rise in Nigeria’s local refining capacity as seen in the coming on stream of many refineries in the country without a corresponding increase in the country’s oil production volume may threaten the country’s membership of the Organisation of Petroleum Exporting Countries (OPEC).

Lamenting the state of certain strategic aspects of the Upstream, Anwalu said out of Nigeria’s over 7100 reservoirs and its mature basins, the country was recovering just as low as about 1000.

The DPR director said the situation needs the collaboration of all industry players to find a solution before Nigeria gets evicted from OPEC due to low contribution.

It gets worse…

The threat to sabotage oil and gas infrastructure pales to insignificance existing pandemic fears and possible fuel price hike worries; as Niger Delta militants, recently threatened to resume attacks on Nigeria’s oil installations.

Remembered as the group of rebels responsible for the greater part of the attacks on Nigeria’s oil infrastructure, the Niger Delta Avengers (NDA) have vowed to commence bombing of oil installations across the Niger Delta to protest the government’s neglect of the region.

In a statement published on its website on June 26, NDA said, “This operation shall be coded ‘Operation Humble’ aimed at bringing down targeted oil installations in the Niger Delta capable of humbling the economy into permanent recession.”

These militants attacked many oil fields and terminals in 2016 pushing the country’s production to as low as 1.4 million-1.5 million b/d.

Nigeria has seen its output fall sharply since early 2020 due to the oil price crash amid the coronavirus pandemic and has been adhering to OPEC+ output cuts.

Although she has the capacity to produce around 2.2 million-2.3 million b/d of crude and condensate, according to S&P Global Platts estimates, the country’s production has been averaged around 1.64 million b/d and lately less than 1.6mbpd so far in 2021.

Given the nature of the production setbacks upstream operations have been encountering, it would seem the Militants are in a rehearsal mode for their threatened assault on the country’s Oil infrastructure.

According to several industry sources, Nigeria’s oil production and capacity have faced technical and operational issues so far in 2021; with recent increase in pipeline leaks and sabotage adding to the issues.

In the last six months, many of its large oil fields especially those in the Niger Delta like Forcados, Bonny, Escravos, Brass River and Qua Iboe and some offshore fields such as Bonga, Usan, EA, have been pumping below normal levels due to either technical, or maintenance issues.

While some pipelines are down to fragile and aging infrastructure, needing urgent rehabilitation work, there has also been an increase in leaks at some of the country’s key pipeline networks. Some leaks have been caused by an increase in pipeline sabotage.

Fiscal stress and the lack of regulatory reforms have also been threatened production growth. The rise of kidnappings and other security threats in the oil-producing south are also expected to deter investment.

Reviewing southward its crude supply forecast for the second half of 2021 by around 130,000 b/d to 1.8 million b/d,  S&P Global Platts Analytics said in a recent note that Nigerian crude loadings have consistently been showing lower volumes on recent pipeline issues,” and with “violence rising in the southeast” in the country, downside risks are growing.

Oil exports remain the mainstay of the Nigerian economy. Tumbling output and sliding global prices saw the country slipped into economic recession first in 2016 and also in 2020.

Unpacking the many problems plaguing the Nigerian Oil and Gas industry and the options on the table for mitigating or minimizing the issues could create bigger problems not just for the industry, the economy but for the people and the nation at large.

Given the tense situation in the country amid the needless poverty, hunger, souring cost of living and insecurity, Nigerians are not likely to welcome the N1,000 per liter of fuel option with open arms. Converting fuel tanks will cost $400 per tank. It is not likely that the federal government can carry the burden of over 22 million cars on Nigerian roads.

Already, emerging private Refineries are having issues that the government is not responding to appropriately enough and with the sense of urgency required to get them to get the in-country refining on the road. So, the downstream dilly-dally may continue for some time more.

Worse still, some matters arising from the recently passed Petroleum Industry Bill (PIB) have increased the tension in the Niger Delta.

The Militants see the three percent allocated to Host Community as an assault on the Niger Delta people’s intelligence. They view the 30 percent given to Frontier Basin exploration, as another bonus for the North and the recent smuggling in of a Clause they alleged was skewed in favor of one major local refiner. All these have ticked off the Niger Delta Militants.

For the Niger Delta Agitators, at this stage, the issue has gone beyond the Amnesty program; which President Mohammadu Buhari retained to keep tempers down and the youths occupied in the Niger Delta region. The Agitators believe they have had enough of perceived injustice and impunity against their region.

With all these issues staring the country in the face amid other extraneous problems, uncertainty may continue to reign in the Nigerian oil and gas industry as crude oil price and fuel subsidy continue to leave a sweet-bitter taste in the mouth.


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