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Crude oil business challenges assail Nigeria’s economy

By Roseline Okere
21 July 2015   |   11:55 pm
Nigeria’s economy may face tougher times this year due to a cocktail of challenges assailing the country’s crude oil business. The country has been contending with the plummeting crude oil prices and the United State’s shale boom, which resulted to total halt in import to U.S.
USAN FPSO

USAN FPSO

Nigeria’s economy may face tougher times this year due to a cocktail of challenges assailing the country’s crude oil business. The country has been contending with the plummeting crude oil prices and the United State’s shale boom, which resulted to total halt in import to U.S.

Besides seeing its oil revenue drastically reduced in the wake of global oil price slump and domestic production shortfalls due to oil theft and pipeline vandalism, Nigeria has been struggling to find buyers for its premium quality Bonny Light crude in recently times. Nigeria is Africa’s largest oil producer and ranks 13th in the world, pumping about 1.9 million barrels of oil a day.

That is less than the Middle East’s biggest producers, including Saudi Arabia, Iran and Iraq, and about the same as Norway. The drop in crude oil prices has made it difficult for Nigeria’s government to balance its budget. Oil accounts for close to 90 per cent of Nigeria’s exports and roughly 75 per cent of its consolidated budgetary revenue, the World Bank said in a recent report.

The International Monetary Fund predicts Nigeria’s oil exports will be valued at $52 billion this year, down from $88 billion in 2014. In the last few months, Nigeria crude oil cargoes that normally sell a month ahead of delivery have languished without buyers lately.

The West African nation has lost business in its main market in the U.S. and struggled to gain footholds elsewhere, raising a question for OPEC on whether its decision to fight for market share may have left behind more-vulnerable members. According to OPEC, 15 cargoes of Nigerian crude oil for July delivery is desperately seeking for buyers.

Nigerian National Petroleum Corporation (NNPC) has resorted to price cutting mechanism in order to attract buyers. This has greatly reduced Nigeria’s government revenue from crude oil sales. For example, revenue collected by the Federal Government from crude oil and gas export dropped by 39.8 per cent to N359.73 billion in the month of February, according to the latest data from the Central Bank of Nigeria (CBN).

This has however, affected the Federally-collected revenue estimated at N560.84 billion, showing a decline of 38.1 percent. The CBN Economic Report attributed the decline to drop in revenue from crude oil and gas exports, occasion by the drop in the price of crude oil in the international market.

Experts are of the opinion that the country’s crude oil may suffer total neglect by the time Iran flood the market with product. The return of oil from Iran following the landmark nuclear energy deal with world powers has become a source of concern for all OPEC countries, including Nigeria.

Tehran and major powers — Britain, China, France, Germany, Russia and the United States — clinched a historic agreement in Vienna last week aimed at ensuring Iran does not obtain a nuclear bomb, and which paves the way for the removal of sanctions and the gradual return of Iranian oil to the global market next year.

The accord puts strict limits on Iran’s nuclear activities for at least a decade. In return, sanctions that have slashed the oil exports of OPEC’s fifth-largest producer will be lifted and billions of dollars in frozen assets unblocked.

The Islamic republic’s exports could reach a potential 2.4 million barrels per day (bpd) in 2016, from 1.6 million bpd in 2014, according to data from economist Charles Robertson at investment bank Renaissance Capital.

That jump in supply could see Nigeria’s revenues dwindle as the price of crude drops, says the CEO of Lagos-based Financial Derivatives Company Limited, Bismarck Rewane.

“It is, to a large extent, depending on how low the price goes, it is a game-changer,” he said. But with money tight and expected to get tighter, Rewane says the administration will have to borrow and spend wisely. “So there will be two approaches,” he said.

“One is being more prudent in what you have. And second, borrowing to spend on impactful investments in the infrastructure space.” The IEA thinks Iran can get back to producing 4 million barrels of oil per day — the level it was at in 2008 — by the end of this decade.

Oil Minister Bijan Namdar Zangeneh wants Iran to resume its spot as the world’s number two oil exporter behind Saudi Arabia (a spot currently occupied by Russia).