Low Oil Price and Way Out for Nigeria

As we approach that day in May the montage of policies of the incoming administration of President-Elect Muhammadu Buhari on all sectors of Nigerian life will become less fuzzy. It is easy to deduce that due to the ideological polarity of the incoming and outgoing governments, the changes afoot will be sweeping. One of the sectors that is bracing itself in anticipation of these changes is of course the nation’s prime industry, the oil and gas industry.

There is so much hope riding on the expected changes to the industry; the PIB and eventual reorganisation and reform of the sector, environmental remediation in the Niger delta, job creation, to mention just a few.

An important but unasked question on the immediate future plan of the industry is that of increased production in light of depressed revenues. Pertinent to this is a re-strategising of the sector to give added weight to local consumption against exports. Of importance is a consideration of how much value the nation can derive from its oil if it is refined locally into fuel and petrochemicals products for local consumption and export. Weighing local value addition against export is a toss up between industrialisation, innovation and job creation on one hand and liquid cash on the other. The former improves  the national economy and standard of living of the populace and the latter oftentimes promotes indolence, profligacy and corruption.

To focus the national attention to producing more oil and not more export revenue from oil is not going to be an easy task after four to five decades of singular focus to easy petrodollars. But seeing that those petrodollars have not taken us very far in terms of national development a change of focus should be an easy sell. Especially if the gains of the change can be well articulated and sold to the citizens by a trusted political leadership at a time when the nation’s balance of accounts is unfavourable and austerity and prudence is forced on it.

In a lecture titled "The Strategic Importance of Nigeria's Oil and Gas to Global Security and the World Economy" delivered at her alma mater, Howard University, in the United States on a balmy April day three years ago, out-going oil minister, Mrs. Diezani Allison-Madueke, outlined the country’s oil production ambition by the end of the decade. According to her, the ambition is to raise Nigeria’s reserve base to 40 billion barrels of oil equivalent (BOE)  and the daily production to 4m BOE by the year 2020.

As is usual with such speeches given in such gatherings, there was no supporting data to inform the audience if the current exploration and production (E & P) infrastructure and assets in the country can support that ambition, what strategic plans are afoot to achieve that or if there is enough investment going into the sector to realise that.

Or more pertinently, why 4 million barrels per day? Why not 6, 8 or 5? Is there a reason behind the 4m BOE/D target? Does that figure reflect a knowledge of what is possible under the circumstances at that time or was it merely a reflection of the extent of our collective ambition for the sector? Can we aspire for more? Is the plan to process the excess production into products locally, request an upward review of export quota from OPEC  or of shutting it in? I am sure there are more questions that can be asked from the minister’s Statement of Intent.

Almost coincidentally, in February of that year, two months earlier than the Minister’s homecoming speech at Howard, Ian Craig, an executive vice-president of Royal Dutch Shell stated at the 12th Annual Nigeria Oil & Gas Exhibition that his company, Shell, alone, can produce 4m barrels of oil in Nigeria if the funding issues and oil theft can be sorted by the Nigerian authorities.

The word ‘almost’ is used at the beginning of the above paragraph because it is hard to fathom that Mrs. Allison-Madueke was unaware of the above position from her former employers before her speech at Howard University. But that is a discussion for another day.

The minister herself mentioned in that same speech that with some deepwater projects coming on stream, Nigeria can add another one million BOE/D from its current production ‘in the next few years’ (her words exactly). Since the country currently boasts of 37 billion barrels in reserves and produces 2.37m BOE/D then, going by this plan, ‘in the next few years’ the nation would be only about 600,000 BOE/D short of the 4m daily production target.

Yes, ‘in the next few years’ is both ambiguous and noncommittal but considering that the context in which the statement was made is as an additional rider to a stated target, then one can interpret here that the ‘few years’ were meant to come earlier than the projected eight years (2012 - 2020).

Suffice it today that Mr. Craig’s offer of hitting the 4m BOE production refers to the capacity of his company, Shell, only and not that of the entire nation and considering that his company is the nations number one producer we can infer here that if Shell alone, through its two companies, Shell Production and Development Company (SPDC) and Shell Nigeria Exploration & Production Company (SNEPCO) can take us to that promised land, then producing far more than 4m per day is achievable if production from other operators such as ExxonMobil, ChevronTexaco, Total and Agip, to mention only the major IOCs, is factored in. Add to that the contribution of indigenous producers such as Sapetro, Oando and Seplat.

So with some effort the a level greater than the 4m BOE/D target is achievable. But before we roll out the drums from a celebratory ‘owambe’ let us consider a few points.

Oil revenue dependent economies normally adapt two strategies in times lower oil price. One is to pump out more oil to compensate for the revenue loss and the other is to process the produced crude into higher value products for internal consumption or export which should also make up for loss of revenue due to falling prices. Considering that the 4m BOE/D target was mooted at a period of high oil price it is safe to assume the intention was simply to increase capacity. Which makes it more apt to consider pursuing that line of thinking now that oil price has fallen and it becomes a bit more necessary to pump out more oil.

In addition, increasing production is dependent on Nigeria’s OPEC export quota at one end and processing capacity for fuel and petrochemicals at the other. OPEC usually considers a request for quota increase based on a country’s reserve base but, unfortunately, Nigeria’s oil reserves have not increased substantially in the last few years. Our refineries are also still working far below capacity.

So despite the good intent of increased oil production, the country will find it difficult under the current circumstances to push for an increase in production unless, of course, ‘in the next few years’ an aggressive campaign for the rehabilitation of the existing refineries, or building new ones, is commenced and an expanded E & P offensive is launched to increase the nation’s reserve base. Of course, the preferred destination for any additional barrel produced should be a Nigerian refinery and not an ocean-going crude carrier.

But even if a justification is found for that push there is currently a dearth of investment into the upstream sector because investors are simply staying away due to the uncertainties surrounding both the content and the future of the Petroleum Industry Bill, PIB.

The restiveness in the Niger Delta which has now greatly abated did not help matters also as it forced many operators divest their onshore producing assets. Few of such assets are now optimally producing.

So while the current low oil prices present us with an excellent opportunity to expand our hydrocarbon output and improve our local processing capacity we are, unfortunately, more likely to be held back by our unpreparedness to take advantage of such an opportunity and all the benefits it brings.

Expanding Nigeria’s capacity to process its hydrocarbons internally may be the best thing to happen to the country’s march economic greatness. Whoever said lower oil export earnings are all about doom and gloom?