Nigeria’s economy is bracing for a dramatic slump as the fallout from the oil price crash and the coronavirus pandemic will be devastating on its oil and natural gas industry.
Africa’s largest oil producer has already had to cut back its oil production as it faced up to the double whammy of a lack of buyers and storage facilities even as oil prices briefly recovered over $30/b after they hit 21-year lows in April.
But the West African country has learned some lessons from the 2014/15 price rout, making it slightly better equipped to deal with the current crisis compared with previous occasions, according to industry figures and analysts.
The worry is also that economic instability in Nigeria could lead more to social unrest, especially in the oil-rich Niger Delta, which is home to many militants.
“Nigeria faced a fiscal crunch even before the oil market collapse, and concerns are rising that by June, the federal government will run out of money to disperse among states,” said Paul Sheldon, chief geopolitical advisor at S&P Global Platts Analytics. “This could also signal a diminishing ability to fund the amnesty program for former militants.”
The last time these payments ceased was in 2016, when Nigerian oil output slumped to around 30-year lows of 1.1 million b/d due to attacks on its key oil infrastructure and the specter of fresh attacks still haunts the sector.
Nigerian crudes are now being traded at values lower than how much it costs to produce them.
This is why production is poised to fall much faster and even lower than its OPEC quota as the country continues to struggle to sell its oil on the spot market.
“We cannot continue as usual anymore,” said Ainojie Alex Irune, chief operating officer of Oando Energy Resources, one of the country’s largest indigenous oil producers.
Irune acknowledged that in the past few years the government had been very aggressive with indigenous producers like Oando on driving down their production, which is coming in handy now.
“We have to do some serious cost cutting and have had to revise budgets, but there is more determination,” he added.
Nigeria’s premier export grade Bonny Light was priced as low as $14.47/b on April 27, the lowest level seen since March 1999, according to S&P Global Platts data. However, values had recovered slightly to around $23-25/b by this week, according to sources.
The cost to produce a barrel in Nigeria ranges between $15/b and $30/b, with the offshore fields being the most expensive, according to Platts estimates.
Five years ago, production costs in Nigeria were as high as almost $50/b, which shows that many oil companies did take aggressive measures to lower their costs.
This process will have to continue at a swifter pace, according to Irune.
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Earlier in 2020, Nigeria — like many other African oil producers — had lofty ambitions to push output much higher.
Nigeria also halted plans to hold a licensing round for its major oil blocks, but it may focus on the auction of small, marginal oil fields to bolster its oil reserves.
“The government is not able to conduct any major licensing round,” which is no longer feasible, Mele Kyari, state-owned Nigerian National Petroleum Corp. group managing director, said. “But we can do marginal fields, which by their very nature, require very small-scale investment.”
Some of Nigeria’s upcoming upstream projects have already been suspended or put on hold due to the current price crash.
French major Total suspended the development of the deepwater Preowei field, which has the potential to produce up to 70,000 b/d.
Similarly, ExxonMobil canceled its drilling program with the Trident XIV rig, which could impact the decline rates at some key fields.
Other indigenous producers like Seplat Petroleum and Eroton Exploration & Production have also severely cut their capital expenditure, especially for drilling and upstream work.
Nigeria’s economy is very exposed to the oil price rout as it depends on oil and gas for the bulk of its export revenues.
Minister for Finance, Budget and National Planning Zainab Ahmed said late Tuesday that Nigeria’s economy could contract by 3.4% this year after growing around 2% last year.
Ahmed also acknowledged the government is looking to make a further cut in its benchmark oil price assumption in its 2020 budget to $20/b.
The OPEC member had initially based its revenue calculations for the 2020 budget on an oil price of $57/b, based on a production figure of 2.18 million b/d.
In March, the government changed the benchmark price to $30/b, but with the crisis deepening, another downward revision looks inevitable.
Under the latest OPEC+ deal, Nigeria has committed to keeping its crude output at 1.412 million b/d in May and June, a decrease of 417,000 b/d from its baseline of 1.829 million b/d. From July through December it will pump 1.495 million b/d, while from January 2021 through April 2022, it will cap production at 1.579 million b/d under the agreement.
The quota, however, includes only crude and not condensate. Nigeria’s petroleum ministry recently said around 360,000 b/d to 400,000 b/d out of its recent production levels of around 2.2 million b/d to 2.3 million b/d was condensate.