The future of Nigeria’s oil wealth starting from next year appears bleak as the USA and other major buyers of the nation’s crude in the global market have found better alternatives. In this report, Ibrahim Apekhade Yusuf examines all the issues
Forlorn hope. This best describes the outlook for the New Year which is less than two months away as the managers of the country’s oil wealth look forward to the coming year not with optimism and blessed assurance but with great fear and pessimism.
The reason for this is not far to seek: crude oil, which accounts for over 80 percent of our revenue, is not only fast depleting, but Nigeria’s reputation as a reliable exporter is being jeopardised, no thanks to the impressive run of new energy alternatives from across the world, including the US shale gas.
This development, analysts have argued, may put the nation’s domestic economic stability and revenue under severe pressure in the years ahead.
Early signs of the shape of things to come manifested in the first quarter of this year when the nation’s crude projections were not met leading to huge revenue shortfalls for government even as a projected $15billion revenue shortfall is most likely early next year if the permutations of those in the corridors of power is anything to go by.
Besides, the discovery of shale oil in the United States (U.S.) and China as well as discovery of oil in commercial quantities in countries such as Ghana, South Sudan and Mozambique, among other countries, may further exacerbate Nigeria’s already precarious situation.
Perturbed by these obviously ominous signs, President Goodluck Jonathan reportedly jetted out to China with his economic team recently, in search of more benevolent development partners to help him cushion the likely impact of the low oil revenue to government.
As would be expected, the President aptly highlighted his administration’s concern over the development in the international oil market during his state visit to Beijing, admitting that; “Nigeria must urgently diversify its economy to survive in a world less dependent on fossil fuel.
“Nigeria and other OPEC states which depend on crude oil sales to the US and other nations to run her affairs are concerned about increasing utilisation of alternative sources of energy such as shale gas,” Jonathan exclaimed.
Clear and present danger
Inevitably, the United States shale oil revolution is set to take a huge toll on Nigeria’s economy as the Organization of Petroleum Exporting Countries (OPEC), predicted that the world would need less of its crude in 2014 owing to competing supply sources.
When this eventually crystallizes, analysts warn that Nigeria which depends on crude petroleum sales to finance her activities may not be able to funds development projects and run her recurrent budget in the absence of a viable non-oil revenue stream.
Deconstructing shale oil
Shale gas is natural gas found trapped within shale formations and has become an increasingly important source of natural gas to the United States and the rest of the world.
Presently it provides over 20 percent of U.S. natural gas need and that figure is set to rise to 46 percent by 2035, according to the U.S. government’s Energy Information Administration.
So far, this worrisome trend has led to Nigeria’s crude oil production dropping in volume sold to around1.3 million barrels per day, as against the budget benchmark of 2.48 million barrels per day with price heading below $100 per barrel after hitting over $114 or more thus resulting in huge loss of revenue, a figure far lower than that seen during the height of the protracted militancy in the Niger Delta.
It would be recalled that the Nigeria National Petroleum Corporation (NNPC), had in April 18 reported a drop in crude oil production in the first quarter of 2013, January to March, resulting in a loss of crude oil revenue of $1.23 billion (N190 billion).
Group General Manager Public Affairs Division of NNPC, Tumini Green, reported that daily crude oil production during the first quarter oscillated between 2.1 and 2.3 million barrels per day (mbpd) compared with the projected estimate of 2.48mbpd.
“Expectedly, this fall between actual production and forecast in first quarter 2013 has resulted in a drop in crude oil revenue of about $1.23 billion (N$191 billion) that should have accrued to the Federation Account,” she explained at the time.
Echoing similar sentiments, Mr. Emeka Okwuosa, Energy and Maritime Consultant and Managing Partner, The Chancery Associates, said the recent evolution of shale oil in the United States has led to steady decline in the country’s crude oil exports to the US.
In a report by his chamber on the sector, Okwuosa was quoted as saying that the evolution of shale had caused Nigerian oil export to the US to diminish from about one million barrels per day in December 2009 to less than 352,000 barrels per day as at February 2013.
“This amounts to about 70 per cent loss of the US market from a region that was the largest importer of Nigeria’s crude oil,” he explained.
He said shale oil development will lead to a net fall in Nigeria’s crude oil exports to the US with the attendant reduction in government revenue which will have a negative multiplier-effect on the economy.
The Minister for Petroleum Resources Mrs. Diezani Allison-Madueke, in her presentation at the recently concluded Nigerian Oil and Gas Conference 2013, had said, “I must say that the world is now becoming more competitive, the U.S shale oil is already affecting our oil export to the US bearing in mind that the US is one of our major trade partners in this sector.”
The Nation learnt that the country’s oil production is gradually falling below the two million mark where the country was shortly before the introduction of the amnesty programme.
Just in February this year, the U.S. imports from Nigeria dropped to 194,000 barrels per day, an 18-year low, forcing Nigeria to find new buyers.
Possible threat to Nigeria’s revenue
Angola poses a challenge to the nation’s continued dominance as the continent’s leading oil producer, though Nigeria’s 37.2 billion barrels of provable oil reserves are more than thrice that of Angola.
However, the dream of propelling Nigeria’s oil production to hit the four million mark has not been marched with action as government has done very little in making the dream become a reality.
This is manifested in the divesting of some International Oil Companies (IOCs) like Shell and Chevron, which have sold their assets to indigenous oil firms to concentrate more on deepwater blocks.
Razia Khan, head of Africa research at Standard Chartered Bank, was quoted by Financial Standard of London as saying that the falling oil revenues should be a worry for the Nigerian government, especially with a presidential election scheduled for early 2015.
Khan added: “Nigeria still has a comfortable current account surplus, but it is declining, as is the Excess Crude Account. Unless we see a turnaround in oil revenues, investors are going to start to get concerned.”
“Shale oil and the increase in their gas production is already affecting our exports to the United States,” Minister of Petroleum Resources, Diezani Alison Madueke said.
Exports of Nigerian oil to the U.S. almost halved between 2011 and 2012, according to EIA data. In the late 2000s, Nigeria regularly shipped around one million barrels a day of crude to the U.S., but last year that number was just 405,000 barrels a day.
Other members of OPEC have also been affected. Exports from both Angola and Algeria fell more than 30 per cent last year, with the impact being most severe in Nigeria, which has historically sent the bulk of its oil exports to the U.S., and the country has been forced to react.
“Nigeria is repositioning its exports in the light of this emergent threat,” and has so far been able to find alternative markets for its crude, said Andrew Yakubu, Group Managing Director of Nigerian National Petroleum Corporation.
Weak demand forced Nigeria to sell some cargoes of its oil below the official selling price in January, said a report from analysts at Ecobank. For instance, cargoes of Qua Iboe crude, one of Nigeria’s benchmark grades, sold for almost 40 cents a barrel below the official price, the bank said.
This is just a fraction of the total selling price, but would still see the country lose $380,000 on a typical cargo, according to calculations by The Wall Street Journal.
Many Nigerian oil cargoes are being redirected to the Mediterranean or the North Sea, said one trader active in the West African crude market, who didn’t wish to be named for reasons of commercial confidentiality. But it was not clear whether Europe, where oil demand is falling, could be a long-term market for Nigerian crude, the trader said.
But the effects, analysts warn, could spread further, because a rising production in the U.S. “is a major challenge for Nigeria and the rest of OPEC,” said Bright Okogwu, Director-General, Budget Office.
OPEC’s own projections now show that demand for the nation’s oil will be fairly stagnant over the next four years, even as global consumption rises. “We can’t stand still and think the world will wait for us,” Okogwu added.
Concern over diminishing oil revenue
A landmark report by the International Energy Agency published in October forecast that the U.S. could produce more oil than Saudi Arabia by 2020, a development that would force OPEC members to adapt to rapidly changing trade patterns and even result in them competing with U.S. exports for market share.
OPEC has largely dismissed the threat that shale oil poses to its historic dominance, highlighting the stumbling blocks that could still hamper the growth of this kind of production.
“A high level of risk is associated with non-OPEC supply forecasts on political, price, economic, weather, environmental and geological factors,” the group of major oil producers said in its most recent monthly oil market report.
In addition, rivals on the continent – both East and West – are fast catching up, and hungry for returns to boost their smaller economies they are tempting foreign oil and gas companies with better terms and fewer bottlenecks than Nigeria.
“Nigeria has multiple problems in its oil game – it has failed to meet reserve growth and production targets for many years while competition grows worldwide,” said Duncan Clarke, Head of African oil experts Global Pacific & Partners.
“High crude prices have shielded Nigeria of late – but this may not last forever, and its reputation as the proverbial Land-of-No-Tomorrow continues.”
“A big issue is that the growing East African oil and gas industry will prove to be a serious competitor, especially given its proximity to key Asian markets compared to Nigeria.”
Other threats to Nigeria’s oil revenue
The discovery of around 70 oil wells in sub-Saharan Africa in the last five years with the majority coming from East African countries like Tanzania, Uganda and Mozambique, poses a major challenge Nigeria’s oil economy.
Around 250 trillion cubic feet of natural gas may lie off those three countries alone, the US Geological Survey estimates.
Shell has sold onshore oil blocks in Nigeria but is seeking to expand elsewhere in Africa including Kenya, Cameroun, Chad and some others have also found oil.
“There is a finite amount of money to be invested by oil and gas majors in the short to medium term, and Nigeria needs a slice of that cake,” said Mutiu Sunmonu, Managing Director, Shell Nigeria, at an investor conference recently.
However, Energy consultants Wood Mackenzie forecast Nigeria’s oil production could drop by 20 percent by 2020 because years of delay to a PIB have blocked tens of billions of dollars in exploration investment.
Fear that Nigeria may increasingly find it difficult to finance key capital projects including the machinery of state bureaucracy heightened further as her crude took a worst hit in the global oil market against the impressive run of new energy alternatives from across the world, including the US Shale gas may put the nation’s economy under severe pressure over the next two years.
Most states across the federation have not been able to meet their financial obligations in terms of paying wages and salaries in recent times even as many serving and retired civil servants are yet to be paid their dues.
“I survive on my meagre pension. But this has not come in the last three months. Tell me, how does one survive in this kind of situation,” lamented Waheed Oduwole, a retired military officer.
More stolen oil being taken away
It is estimated that more than 150,000 barrels of oil are reportedly stolen every day, with some feeding illegal refineries in the Niger Delta and the bulk shipped to destinations as far away as Asia.
Apart from oil theft, the proliferation of illegal refineries in the Niger Delta has also been identified as a portent tool that is sending negative signals to the multinationals on why they cannot risk future investment in the oil and gas sector in Nigeria.
Holistic approach to stem crude oil theft
Apparently worried by the rising level of oil revenue loss, Mrs. Diezani Alison-Madueke has described the process of oil theft and the perceived support globally as a form of terrorism, hence the need for global concern to tackle the menace.
Allison-Madueke told a packed audience in London recently while delivering her keynote address at the power list 2014, where she was also listed as one of the 25 Africans who were transforming the continent, said oil theft was not just a threat not only on Nigeria’s oil and gas sector but also the security of the Gulf of Guinea in particular and the global economic order in general,
“Theft of this magnitude is not only highly technical, but it is also an international crime. It is aided and abetted by syndicates outside of Africa who are the patrons and merchant-partners of the oil thieves.
“This crime against Nigeria must be resisted as we simultaneously deploy in-country resources to fight this menace. It perpetuates criminality, defrauds economies and discourages investment,” she said.
Some stakeholders in the oil and gas industry have lamented the high rate of crude oil theft and pipeline vandalism, advising Nigerians to stand up to fight the scourge because of its damaging effect on the nation’s economy.
This is even as the National Economic Council (NEC), constituted ad hoc committee of NEC on Crude Oil Prevention and Control with all governors from Niger Delta region as members, approved the disbursement of N15 billion to security agencies to protect oil installations in the region.
The Deputy Governor of Bayelsa, Mr John Jonah, disclosed that the fund would be sourced through a tripartite arrangement involving, federal and state governments and international oil companies.
Jonah said: “What we are trying to do is to ensure that we buy the necessary equipment for them to perform their duty in the areas that we have identified gaps. We also want to make sure that more personnel are available. The terrain is a very difficult one, swampy terrain is a very difficult one.”
Meanwhile, the Federal Government, which expressed the need for all hands to be on deck to curtail sharp practices in the sector, admitted that the country was faced with the current challenge of leakage within the production process that included oil theft.
The Chairman of the House Committee on Petroleum Resources Upstream, Mr. Muraina Ajibola, who led members of the committee on statutory oversight visit to the Nigerian National Petroleum Corporation (NNPC) recently informed that before now, the leadership of the House of Representatives had set up a committee to look into the issue of crude theft, stating that the committee came up with recommendations which the NNPC had expressed willingness to incorporate in the fight against crude theft.
In a related development, the Secretary to the Government of the Federation, Senator Anyim Pius Anyim – have said the country is headed for doom if it fails to diversity its economy from relying largely on oil.
Anyim spoke at the opening session of the Ninth All Nigerian Editors Conference in Asaba, Delta State, warning that if concrete steps are not taken in the next five years to steer the country’s economy away from dependence on oil, the country may not survive.
Nigeria, according to him, also loses about $7 billion to vandalisation annually.
The country lost about $11bn between 2009 and 2011 to oil theft.
He said with the discovery of oil in several African countries and parts of Europe and the United States, it has become obvious that the law of demand and supply will take its course and ultimately lead to a fall in the price of oil.
He said the pronouncement by President Barack Obama of the United States of America that his country would no longer look in the direction of Africa for its energy needs has further driven home the point that Nigeria must quickly diversify its economy to survive.
“And much more contentious is the fact that America, our largest customer, has discovered shale oil and so may not need to patronise us again.
“I tell you doomsday is by the corner, except we become proactive and stave off the evil.”
A word of caution
The dwindling oil fortunes of the nation, analysts believe, doesn’t bode well for the economy.
“In a situation where we can’t sell as much as we used to sell of our crude oil, there would be job cuts, loss of revenue, and the social service sector, especially infrastructure, schools, healthcare would bear the consequence more,” lamented Dr. John Isemede, Director-General, Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA).
Pressed further, he said: “We almost 11months into the New Year and oil has performed very well, at about $105/ 110 per barrel throughout 2013, which means that if we have budgetary provision of $79, we ought to have a surplus of about 30 per cent, which should be in the crude oil account but rather than having this surplus, we are witnessing a situation where Federal allocations no longer come as at when due, states can’t pay salaries. The prospect looks doom for us.
“Any country that has allowed itself to thrive on the strength of the US economy, of course, would collapse much more dangerously than the US itself. Nobody impressed on the US to shutdown their economy. As a country, you got to.”
In his view, Mr. Effiong Bassey, an economic analyst, while attempting a prognosis of the nation’s peculiar oil mess, said: “Very soon, developed countries are thinking far away from oil as a base for their own internal supply and demand. So, it is not a surprise to some of us. So, for a country to be credible, it is to harness resources, you have to identify credible resources that will keep the country.”
Also speaking on the issue, Dr. Chris Onalo, Registrar/Chief Executive, Institute of Credit Administration (ICA), said rather than sulk over the loss of revenue, the country’s managers should gird up its loins and act fast.
He said: “It is true that President has warned about the loss of oil revenue, but then we need to diversify our economy for development to take place by simplifying our processes, by encouraging people with innovative ideas, by recognizing them… The same Mr. President that has said such a beautiful thing should put up a bold step to encourage people and dish out incentives for people that would go into agriculture.”
Nigeria leaders, he stressed, “Must be inward looking. We must look at the terrain with clear mind and feeling. You don’t expect that developed countries will year in year out will depend on you. You see, if you have one single thing you depend solely on, you’re at a very high risk, if you consider what the developed countries are doing, particularly our major crude oil buyers, the US. The next critical sector that needs to be developed to compete favourably with oil is agriculture and then solar energy development because one day the oil will go away. Even if it doesn’t go away, one day, we will be looking at our oil and our oil will be looking at us because a lot of people will be cynical about buying from Nigeria because they have a lot of alternatives. So, we should read the handwriting on the wall.”