What does High Oil Price Mean to Nigeria?

Since 2021, oil price has been increasing due to OPEC’s decision to maintain a 400,000 additional output to the market every month.  Amid the price war between Russia and Saudi Arabia as well as the impact of Covid-19 pandemic in the first quarter of 2020, OPEC+, agreed to cut oil production by 9.7 million barrels per day, as part of measures to rebalance the then dying oil market.

This strategy as well as relaxing of lockdowns and movement of people in various countries, have aided the market to recover. The return of economic activities as countries eased up lockdowns and work to recover from the economic impacts of Covid-19, have led to rapid demand for oil as well as gas.

In December, gas price soared in Europe and Asia, selling above $35 per Million British Thermal Unit (MMBTU) in Europe and sold for about $25 in Asia. However, the recovery efforts being made in various countries to make up for Covid-19 losses are being threatened by the ongoing Russian invasion in Ukraine, which has disrupted supply of oil and other commodities. The Brent crude, which is the global oil
benchmark, was in March on a pendulum, swinging between $111 and $129 per barrel while the price of West Texas Intermediate (WTI) hovered around $108 and $126 per barrel.

The rising oil price took a new dimension in the same March following  the ban by the United States on  the importation of Russian oil, liquefied natural gas, and coal to its country.

While oil producing countries  are raking in staggering revenue from the current high price of oil, Nigeria is struggling to stay afloat as high oil price is hitting hard on the income of the country. Nigeria, though, the largest oil producer in Africa, is also a net importer of petroleum products. There are four state owned refineries in Nigeria, but none is functioning due to years of neglect. Despite spending billions of naira in turnaround maintenance of these refineries, they have remained moribund, forcing the government to import petroleum products and sell at subsidized rate.

Importation of Petroleum products In February 2018, the Nigerian National Petroleum Corporation (NNPC)  said  it had spent $5.8 billion on fuel imports since late 2017, as it combated a fuel shortage that had left people queuing for hours at filling stations. In a statement, the corporation said: “The corporation’s intervention became necessary following the inability of the major and independent marketers to import the product because of the high landing cost which made cost recovery and profitability difficult.”

The National Bureau of Statistics (NBS) in March 2020, in  its Foreign Trade Statistics for the Fourth Quarter of 2019, said the country spent N1.713 trillion on the importation of  petrol, in 2019. The NBS revealed that the amount the country spent on fuel import in 2019 declined by 41.9 per cent from N2.95 trillion spent on the import of the commodity in 2018. According to the NBS data, fuel import accounted
for 10.1 per cent of Nigeria’s total import in 2019, compared to 22.4 per cent recorded in 2018.

Government laments

In trying to answer the question: What does High Oil Price Mean to Nigeria?, The Minister of State for Petroleum Resources, Chief Timipre Sylva, late February lamented that the high oil price in international market is affecting the country.  This is because, according to him, Nigeria is a net importer of petroleum products. “Once oil prices go up to a certain point, you’re encouraging a lot of products that will otherwise not be in the market. So we are not happy when prices go to a certain level. We believe that prices should be at a certain point, which will be optimal for us to make sub-optimal for the shale producers, Sylva said.

“That’s why we like to have that balance right here in Nigeria as well. You know that we are right now a net importer of petroleum products. And when the price of crude is up it also affects the price of petroleum products. “So for us as a net importer, it’s not very good for us. But of course, in a way what we are saying is if we are going to produce more and you get more dollars from your
production they give you more money for your inputs.

The Minister noted that the oil price would have been advantageous to the country if it was producing more, adding that low production, supply to the international market and meeting domestic demands have been very challenging. He said that Nigeria will like to raise its daily production, so as to take advantage of the current high price of oil in the international market.

“But if you are now producing less and then you still have to make sure that the Nigerian market is supplied fully then you see there is a shortfall. That’s why we would rather like to have production now to the point where we’ll at least get in enough to be able to do the imports better production at this point is not very optimal”, he explained.

“So at the end of the day, we are not necessarily making a lot of gains because we are taking from the high prices. We’re also importing higher priced products. And on the other side, we’re also encouraging producers who should not be producing to produce which of course neutralizes the market for us.”

Although Nigerian Government made a provision of N443 billion for a subsidy for January to June in the 2022 budget as appropriated, the government succumbed to pressure to keep up with fuel subsidy taken into consideration the current economic
realities in the country. Some economic analysts are of the view that the removal of petroleum subsidy without some palliatives may balloon the country’s inflation rate, which is currently above 15 percent.

In January, the NNPC presented to the Ministry of Finance a request for N3 trillion as fuel subsidy for 2022, which implies that the country has to make an incremental provision of N2.557 trillion to be able to meet the subsidy requirement. As of January, fuel subsidy payment was averaging about N270 billion per month,  according to the Minister of Finance, Budget, and National Planning, Zainab Ahmed.

Nigeria oil production rose to 1.398 million barrels per day in January, according to OPEC'S Monthly Oil Market Report for February. This shows an increase of about 81,000 barrels per day  when compared to the 1.317 million barrels per day recorded in December 2021. Early this month, OPEC+ raised the country’s production quota  to 1.735 million barrels per day for April 2022. The quota adjustment was made by OPEC+ following the conclusion of the 26th OPEC and non-OPEC Ministerial Meeting, held via video conference on March 2, 2022.

The new quota is  higher than the 1.72 million for March bpd and 1.70 million bpd for February. But Nigeria has been struggling to meet up with its quota due to years of underinvestment in the upstream end of the oil sector.

In the last three years, International Oil Companies (IOCs) operating in Nigeria have not shown willingness to do more investments in the upstream sector. This may not be unconnected with the delays in the passage of the  Petroleum Industry Bill (PIB).

The Final Investment Decision (FID) on five offshore oil and gas projects have been put on hold, due to issues around fiscal terms, which the IOCs wanted the country to address in the bill, to encourage investments in deepwater projects. The five projects that their FID are being delayed include the 225,000bpd Bonga Southwest-Aparo project; 120,000bpd Zabazaba-Etan project; 140,000bpd Bosi project; 110,000bpd Uge project and 100,000bpd Nsiko deepwater project. These projects are estimated at over $23.5 billion as of 2018.

However, President Muhammadu Buhari, in August 2021, signed the bill into law. The new law, which is known as Petroleum Industry Act (PIA),  provides legal, governance, regulatory and fiscal framework for the Nigerian petroleum industry, the development of host communities, and related matters. It aims  to open up the Nigeria oil and gas industry to investment, strengthen industry governance and regulation to expand, grow and maximize value capture for Nigeria and its citizens.

IOCs divesting

Most of the IOCs in Nigeria have been divesting their onshore and shallow-water assets. The Managing Director of the NNPC, Mele Kyari, while speaking at the 2022 Nigeria International Energy Summit (NIES), said that IOCs are not leaving because there are no opportunities in Nigeria, but because they want to divest and meet their net-zero commitment.

“Companies are divesting. They are leaving our country. Literally, that is the best way to put it,” he said. “They are not leaving because opportunities are not here but because companies are shifting their portfolios where they can add value and not just that — but where they
can also add to the journey towards carbon net-zero commitment.”

However, speaking on a panel session at the 2021 Practical Nigerian Content (PNC), the Group Executive Director, Upstream, Nigerian National Petroleum Corporation (NNPC), Adokiye Tombomieye, said that Final Investment Decision (FID) can be taken on big ticket  projects in 2022 with the assent of PIA by the President, current efforts being made to improve security situation, and the utilization of dispute resolution mechanism as contained in the Nigerian Upstream Cost Optimisation Programme (NUCOP) initiative of the Federal Government.

Represented by the Group General Manager, National Petroleum Investment Management Services (NAPIMS), Bala Wunti, he identified energy transition, energy investment, and energy crisis as key impediments confronting the oil and gas industry. “Whether we go ahead with the energy transition or not we have already created a
monster and that monster is that we now have finance activists, investment activists that have come into the space to create problems for energy investment.

“Energy investment is being attacked and will continue to be attacked in the fossil fuels industry. Investment capital is now very discriminatory against fossil fuels, but not only that, it has become more and more impatient. “Everybody wants to invest today and recoup the money tomorrow. Nobody wants to invest that money for 10 years, but I need to let you know that the upstream space is not a day’s job. You will invest today and wait for 10 years. These issues have created an impediment to investment,” Tombomieye explained.

With the current situation in Nigeria, high oil price is causing the country more harm than good. And considering the long term nature of investment in the upstream subsector and issues around underinvestment, the country may not be able to take advantage of the oil windfall.

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