How crude price volatility may affect 2019 budget funding

THE news of Nigeria seeking fresh $2.5 billion loan from the World Bank despite securing $2.4 billion in 2018 did not come to many as a surprise.

This is because funding constraints have been rocking Nigeria’s N8.916 trillion 2019 budget and this may take a worse turn in the months ahead following the Federal Government’s inability to meet its oil production benchmark set at 2.3 million barrels per day (bpd) in the budget.

The concern is, however, being aggravated by recent developments in the global oil market including declining oil prices, a sustained cut in Nigeria’s oil production quota by the Organisation of Oil Exporting Countries (OPEC), low exploration and production activities, hostilities in the Niger Delta and high cost of operations in the country relative to competitors.

Last December’s OPEC announcement that Nigeria was expected to cut its crude oil production by 3.04 per cent to 1.685 million bpd in the first half of 2019, as part of efforts by the cartel to reduce oversupply, did not help matters.

OPEC and 10 non-OPEC countries had agreed earlier in December to cut oil production by 1.2 million bpd effective, January for an initial period of six months to shore up what many expected would weaken market fundamentals ahead in order to hedge for likely price drops.

Nigeria, which was exempted from previous cuts since January 2017, was however urged to join the deal during the cartel’s meeting on December 7 in Vienna.

With a reference level of 1.738 million bpd, Nigeria’s oil production was to be cut by 53,000 barrels to arrive at the new quota of 1.685 million bpd, according to a breakdown of member quotas under new OPEC’s supply accord.

This gained much traction when Saudi Arabia, pledged to lower its crude oil output to 10.311 million bpd -a 322,000 bpd cut from its October level, as evidenced by documents prepared by OPEC’s secretariat.

The document showed that OPEC would shoulder 812,000 bpd of those cuts, while the non-OPEC members would cut 383,000 bpd.

But looking at the possible impact of that policy on the country, former Minister of State for Petroleum Resources, Dr Ibe Kachikwu, said on December 7, that it was very difficult for Nigeria to reduce its crude oil production.

Kachikwu, who spoke on ‘Bloomberg Daybreak: Europe’ ahead of the OPEC meeting in Vienna, however, admitted there was a need for an extension of production cuts to stabilise the global oil market.

Asked if Nigeria would be able to reduce production, he said, “It is very difficult to do that but where we are now, everybody must be seen to contribute. Obviously, the smaller it is, the more amenable we are to participate; the larger it is, the more we will struggle to participate. We have got exemption three times understandably. This time round, I think there is a decision that everybody should be seen to chip in.

According to the Chairman, Petroleum Technology Association of Nigeria (PETAN), Mr Bank-Anthony Okoroafor, had said, “Production of 2.3 million bpd projection for 2019 may not be realistic owing to OPEC’s plan to cut production in order to shore up prices. The benchmark price of $60 per barrel used for the budget is not smart, based on all the uncertainties and volatility surrounding the price of oil.”

With the 2019 crude oil production benchmark of 2.3million bpd, Nigeria may struggle to finance the 2019 budget based on a realistic quota-based production of 1.685 million bpd imposed by OPEC.