The Emerald Energy Institute (for Petroleum & Energy Economics, Policy, and Strategy), EEI, University of Port Harcourt (Uniport) hosted a public lecture on September 04, 2015, which was presented by Paul Michael Wihbey; a Visiting Professor and Fellow of EEI & President, GWEST, LLC, Washington DC.
The lecture was well attended, and some of the Scholars present were the Chairman of the Institute and former Presidential Adviser on Petroleum & Energy (Dr Emmanuel Egbogah); a former Vice-Chancellor of Uniport (Prof Emeritus Nimi Briggs); Director of the Institute (Prof Omowumi Iledare); the Deputy Director of the Institute (Prof Chijioke Nwaozuzu); the Dean of College of Engineering and Technology / Shell Chair in Petroleum Engineering, Uniport (Prof Adewale Dosunmu); the Director of the Institute of Petroleum, Uniport (Prof Mike Onyekonwu); the Director of Claude Ake Centre for Governance, Uniport (Prof Eme Ekekwe); a former Director of the Institute (Prof Ben Naanen); the President of International Institute for Petroleum, Energy Law & Policy and Visiting Professor of Energy Law, EEI (Barrister Niyi Ayoola-Daniels); a Fellow of EEI & former GM, NNPC (Dr Timothy Okon), and another Fellow of EEI & former GGM, NNPC (Dr Joseph Ella), etc.
The highlights of the lecture were as follows:
Crude Oil Price Collapse 2014-2015:
At the height of the 2014 summer, a fundamental and historic decision was made by Saudi Arabia with the support of the other GCC (Gulf Cooperation Council) oil producers to lower the price of crude by increasing supply into the global market.
Many observers viewed this simply as an attempt to maintain market share in the face of increasing global competition, including US production arising from the development of that country’s shale deposits in North Dakota and Texas.
In fact, that is only part of the story.
Oil as a global commodity is but one component of the basket of global commodities such as copper, silver, coffee, wheat and so on, that has come to be known as the Commodity Supercycle for the relative high prices that these natural products have been identified with since 2000.
However, ever since mid-2010 the overall commodity index revealed a steady and consistent decline, with the notable exception of crude oil. This indicated that the primary driver of commodity buys, China, was slowing down as early as 2010. Nevertheless, Brent oil prices remained robust and seemed secure at the $100 mark.
In my assessment, the Saudis understood that under these conditions, the oil market was but a gigantic bubble that would inevitably burst with dramatic and unforeseen consequences. Rather than await the event to happen, they decided to force the issue on their terms, and attempt to manage the price decline into a soft landing, allowing them to maintain critical Asian market share, and secondarily, deal a hard blow to high cost competitors in unconventional oil, such as the Canadian oil sands and the US shale producers.
Other key geopolitical issues such as the return of Iran to the market and the emergence of a nascent economic zone of powerful overlapping Eurasian supra-regional economies as Moscow’s Eurasian Union and Beijing’s Shanghai Cooperation Organization, provided the Saudis with additional motivation to strategize the management of low prices. The critical goal being market moves that would ensure Saudi dominance in setting the oil price agenda for years to come, especially in all-important energy hungry Eastern Hemisphere.
Nigeria’s Economic Condition:
It is within this market and geopolitical context, that Nigeria now finds itself. Having completely lost its position as a major supplier to the lucrative US market, its reputation in tatters because of massive looting of oil funds and unabated bunkering, battered by Naira depreciation, a $123 oil price for fiscal break-even, and lack of international investment, the country has seen its revenue stream from crude oil sales diminish by over 50% as a consequence of the plunge of oil prices since July 2014.
The consensus of institutional experts such as the US Energy Information Administration and Goldman Sachs, is that this low price regime will continue until at least the end of 2015, and likely well into 2016.
Under such circumstances, it is not a surprise, that President Buhari said, at the September 1st ICAN Conference, ‘…with decreasing prices of oil exports, Nigeria must begin to properly manage its available resources or face developmental stagnation and decline.’
This forthright appraisal is a crucial and necessary acknowledgment that signals both the domestic market and the international community, that Nigeria is aware of the problems its economy is facing and is endeavoring to do what needs to be done, to avert debilitating consequences given projected continuation of low price regime.
What can be done? New Markets, New Revenue Streams:
As in all other aspects of life, in crisis there is opportunity. So it is with Nigeria.
As a result of the quality of its primary export, crude oil, its geographical location, and because of the Saudi strategy as outlined, Nigeria has an opportunity to secure significant ‘new’ market share with two of the world’s major consumers, the United States and India. In the process, and despite low prices, Nigeria could see an impressive source of revenue flowing back to the federal treasury over the next 3-6 months.
The United States:
Nigeria’s dramatic and unexpected decline as a powerful exporter of crude to the US correlates exactly to rise of US oil shale production, which in North Dakota alone stood at over a million barrels a day during 2015. Transported by rail, North Dakota’s light crude has become a primary feedstock to US East Coast refiners, displacing other similar crudes such as Bonny.
However, a convergence of factors over the last few months suggest that US shale production in North Dakota may be reduced by such an extent that US East Coast refiners will need replacement supplies of light crude at competitive pricing, thereby opening the American market to volumes of Nigeria crude.
The principle reasons for a sudden reversal of fortune impacting shale production and supply are:
-Low oil prices that have seriously exacerbated an already cumbersome and unwieldy debt burden for most of the shale producing companies who have taken advantage of access to easy money lends from US hedge funds and institutional players benefiting from the low interest rate policy of the US Federal Reserve;
– New US federal safety and environmental regulations on rail shipments of crude, including speed reductions, mandatory rail tank retrofits, and re-routing. All of which increase the shipments costs;
– Proposed federal regulations to slash methane emissions from shale fracking techniques by 50% in the future which if enacted would further increase costs.
For these and other reasons, both the necessary investment flow into shale production and the higher pricing needed to maintain output levels are currently plagued with a new risk calculus. Production levels, permitting, and active rig counts have been in decline since the beginning of the year.
An opportunity to re-enter the US market may be close at hand. Nigeria needs to monitor and evaluate the situation on a regular, even daily basis to assess the WTI-Bonny differential that would trigger exports of Nigeria crude. My institute, the Emerald Energy Institute for Petroleum Economics, Policy and Strategic Studies, University of Port Harcourt, is at the very epicenter of the country’s oil and gas sector. It is capable and ready, in collaboration with the Federal Government, to assess the opportunity, as an apolitical and expert facility, with required international outreach.
India Challenges Nigeria:
On August 23rd, India’s High Commissioner to Nigeria, delivered an unprecedented and extraordinary message to Nigeria’s oil economy when he declared;
“We buy $15 billion worth of crude oil per year and we have the potential of importing $50 billion worth of crude oil from Nigeria. We can buy more because our requirement is going up… it means you don’t trust us, and if you don’t trust us, we have to look for those who trust us more. We are making concessions to Nigeria by buying your crude oil because you’re our old friends and we’ve been friends for a long time, and your crude oil is better quality. But you must take our interest into account.”
The High Commissioner made it clear that major Persian Gulf producers such as Iran and Saudi Arabia have been aggressively courting the Indians, so as to secure long-term market share into what is probably the most compelling energy-consuming market in the world, given India’s demographics with the ratio of young to old, and forthcoming urbanization trendlines.
India seeks not only reliable and substantial supplies, but also security of supply. Rather than relying heavily on the high risk environment of the uncertain Persian Gulf oil-producing region, India places a premium on unfettered sea-borne access to a major source of crude, such as Nigeria.
This geopolitical consideration is immensely important to India which does not want to be, in any way, beholden to rival Pakistan which can easily monitor and interdict shipping or pipeline deliveries from the Gulf to Indian markets.
However, it cannot be assumed that India will wait indefinitely for an authoritative response from Abuja. As President Buhari rightly takes the time to select people of integrity and capability to his Cabinet, and as national institutions of the oil and gas sector undergo a process of rehabilitation, the opportunity to enter the growing Indian market ought not to be delayed and possibly lost.
In addition, it is imperative to determine whether any other Asian buyer suffered the same treatment as the High Commissioner has claimed. Recent data has shown that most Asian countries have flat-lined their domestic oil production or are in a decline. The gap between production and consumption in the Asia-Pacific region in 2014 was over 22 million barrels a day and trending towards even stronger demand despite the Chinese slowdown.
Reconfiguration of Nigeria’s Export Strategy:
Nigeria’s export posture to India and other Asian markets needs an immediate overhaul and reconfiguration in order to secure access and to develop new revenue streams, even as the competitive environment heightens with the arrival of greater Iranian and Iraqi supplies over the next few years.
Time is of the essence. Nothing can be taken for granted.
Even Europe, which has become the primary regional market for Nigeria exports, may not be that secure. Powerful political forces in Washington are gathering momentum to lift the prohibition against the export of US crude to international markets. A recent US Department of Energy report indicating that domestic gasoline prices would not be impacted by such exports, could well be the trigger that leads to the lifting of the ban and subsequent tanker shipments to Europe, displacing or reducing Nigeria supplies.
Oil Theft and Repatriation:
Finally, oil theft (the systemic looting of oil-related funds and placement in overseas assets) and bunkering (pipeline vandalism and organized thievery), both represent potential and vast amounts of repatriated funds that have been lost to the government.
With the political, diplomatic, and technical assistance of the United States, Abuja stands to regain up to $150 billion in looted monies, a figure that President Buhari referred to during his July visit to Washington DC. Although, we are at the very beginning of these processes, it is not too early to properly and professionally plan for the logistical options as to where such ‘lost’ oil monies ought to placed, whether in a Sovereign Wealth Fund, the ECA, the CBN or other mechanisms, keeping in mind, not only domestic sectoral planning priorities, but international investment calculations towards Nigeria.
With the implementation of ‘state of the art’ marking technology and advanced surveillance techniques, bunkering can be severely curtailed and even terminated. The resultant savings of at least 100,000-200,000 barrels per day and the huge dollar value that represents to the Nigerian economy cannot be underestimated.
How this repatriated revenue will be prioritized in budgetary spending needs to be discussed and addressed within the operational context of an ‘oil windfall’ opportunity, which is the very antithesis of pending demise scenarios for Nigeria.
The global oil market is in a flux, with abundant supplies, growing domestic consumption from Asia to the Middle East to Africa, with a premium on quality crude, geopolitical calculations, and strategic multi-sector engagements between major buyers and sellers pivoting on sophisticated win-win oil negotiations at the highest levels.
The days of colonial constructed bureaucratic regimes in Nigeria’s oil sector that denied the country of its full potential in overseas markets, downstream assets, and multiple in-flows of significant revenue sources are at an end. The time has come to identify the opportunities, and seize them, before they are gone, or before others do.
Highlights presented by Prof Chijioke Nwaozuzu, the Deputy Director, Emerald Energy Institute, University of Port Harcourt.