COVID-19: Is Nigeria ready for long term low crude price regime?

The world is waging two major wars that will define the global economy for a long time. The first being the war against coronavirus (COVID-19) and the second being the crude oil price war between Saudi Arabia and Russia. Both wars have direct impact on the fragile Nigerian economy which is widely regarded as a mono-economy because crude oil exports account for over 85 per cent of its foreign exchange earnings. In this report, OLATUNDE DODONDAWA examines how ready Nigeria is for the consequences of both wars on its economy. Excerpts

On March 11, 2020, Mele Kyari, Group Managing Director (GMD) of the Nigerian National Petroleum Corporation (NNPC), painted a gloomy picture of tougher times ahead for the Nigerian economy amidst COVID-19 pandemic and falling crude oil prices. He said liquid crude is also badly hit, noting that Nigeria had some 50 cargoes of crude that had not found landing. “This means that the traders do not know where to take these projects to,” he said.

Coronavirus pandemic has affected over 300,000 people (confirmed cases) across the world, with over 13,000 deaths recorded. Almost all countries have shut their borders to trade, tourism but essential services. Demand for crude oil will definitely continue because it is regarded as essential service to those industries that may need crude oil to produce drugs and other health related products.

Nigeria is gradually going into lockdown which is impacting domestic economic activities. Most companies are looking for ways to make workers work from home, but due to Nigeria’s lack of adequate power supply, this may be ineffective and inefficient.

As demand for Nigerian crude falls, revenue from sale of crude oil drops, as revenue drops. In a matter of weeks, governments may begin to find it difficult to pay salaries, disposable income will drop, and recession may likely set in again and the whole country will be in trouble because people will look for alternatives to survive.

On the other hand, if Nigeria is able to get buyers for its crude oil, Brent Crude hovers around $29 per barrel, Bonny Light hovers around $26 per barrel while the Organization of Petroleum Exporting Countries (OPEC) basket hovers around $27 per barrel, industry sources said Nigeria should be ready for long term oil price of below $30 per barrel.

Impacts of oil price war on global economy

When Saudi Arabia, OPEC’s de facto leader and most influential member, decided at its latest meeting in Vienna to break its recent strategic oil partnership with Russia and adopt a new policy to maximise production levels, oil prices crashed posting their biggest slide since the Gulf war in 1991.

But even more importantly, this new policy recalibrated global oil markets, giving Saudi Arabia the long-term advantage. This move marks a big change for the world’s largest oil exporter, which has in recent years attempted to manage the global oil markets by altering production levels, while garnering the difficult cooperation of Russia. Crown Prince Mohammed bin Salman has finally decided to pursue a long-term policy that not only preserves and ultimately increases the kingdom’s market share, but also may signal the end of OPEC as a united functioning organisation.

This decision is very unpopular with most oil exporting countries, international energy companies and American shale producers because collapsing prices will drastically decrease their revenues and, in some cases, force them into bankruptcy. There are several reasons why the kingdom is finally taking this aggressive approach. First, the successive Saudi monarchs have all recognised the strategic importance of spare production capacity to manage the global markets because it provides the vital indicator of the world’s oil market’s ability to respond to sudden crises that jeopardise the free flow of oil supplies.

Saudi Aramco, the state’s gargantuan oil and gas company, spent over $35 billion since 2012 to maintain a 12 million barrels-per-day sustained production capacity with a 1.5 to two million barrels-per-day spare capacity cushion that can be called upon at short notice. And that’s exactly what the Saudis will be doing over the next several weeks. Saudi Aramco is expected to be pumping a staggering 12 million barrels per day by April 1, 2020, with exports reaching between 9.5 to 10 million barrels per day.

NIGERIAN TRIBUNE

On April 1 or shortly thereafter, Saudi Arabia will most likely surpass Russia to become the world’s second largest producer. But this oil price war won’t end until Saudi Arabia takes back the global production crown from the United States, which should happen within the next two years. No country other than Saudi Arabia, including Russia, has had the political and financial will to invest so heavily in upstream production capacity.

This provides the Saudis with the means to go it alone and inflict insurmountable chaos on the vast majority of their conventional and shale oil producing competitors around the world. To emphasize this point, a new directive was issued last week by the kingdom’s energy minister, Prince Abdulaziz bin Salman, to increase Saudi Aramco’s sustained production capacity to 13 million barrels per day in about 24 months.

From an internal Saudi perspective, lower oil prices are manageable for the next decade. According to Aramco CEO Amin Nasser, “In a nutshell, Saudi Aramco can sustain the very low price and can sustain it for a long time.” Saudi oil is the cheapest to produce (gross taxes, capital spending, production and transportation costs) in the world at $8.98 per barrel, according to the Aramco IPO prospectus of last year.

In comparison, US shale oil costs $23.35 per barrel (and $20.99 for non-shale), Russian production costs average $19.21 per barrel, while Nigerian production costs average $26 per barrel, according to the Energy Information Administration.

In fact, with new drilling technologies, Saudi production costs have decreased even further at some fields, such as at the world’s largest offshore oil field, Shaybah.

Second, the Saudis have over $500 billion in net foreign assets, so their public finances are shielded to a sudden drop in revenues from petroleum sales. While Nigeria’s external reserve is $37 billion.

The new Saudi policy suggests that sustained lower prices will help them maintain, and with time, increase their market share in the face of the shale oil production boom in the US. Moreso, Saudi Arabia is closer to China (5763km) than Nigeria to China (9920km). if China will choose Nigerian crude over Saudi Arabian crude many factors will be considered including crude properties, transportation costs, pricing and existing bilateral agreements between the parties.

Saudi Arabia holds about 25 per cent of the world’s oil reserves, about 70 per cent of global spare production capacity, and it is the world’s largest crude exporter by a large margin.

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Conclusion

Nigeria missed the opportunities when it failed to pass the Petroleum Industry Bill (PIB) for the past 12 years now. If passed, there would have been a clearer fiscal terms needed to attract the much needed foreign investment in the upstream, mid-stream and downstream sectors of the oil and gas industry.

Nigeria would have had enough savings to compete favorably even when crude oil prices fall below $20 per barrel.

According to an oil and gas consultant, Mr Emmanuel Chikezie, “Nigeria should be ready for a scenario like this because it has no influence on the global oil policy and except being a member of OPEC.

“It is time for Nigeria to liberalize the downstream sector, provide a legislation that will address the fiscal challenges in the upstream and address the infrastructural challenges in the midstream sectors. Nigeria must also improve domestic refining capacity and be less dependent on importation of refined products.”