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Revenue crisis may worsen

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As OPEC meets amid COVID-19 vaccine uncertainties
• Cartel sees mixed outlook as inventory remains high
• Stakeholders ask FG to hedge cuts by leveraging high prices, uninterrupted production

Nigeria and other oil producers’ hope of increased production will have to be managed with cautious optimism as the slow pace of vaccine administration, the emerging new COVID-19 virus strains, and high inventory levels are expected to affect demand and production as OPEC and OPEC+ meet today.

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Having agreed to raise quotas by 500,000 barrels a day for January— a compromise between members, despite uncertainty about pandemic recovery, the cartels will decide February’s output by maintaining the conservative quotas or ease the cuts.

The 13 members of the OPEC cartel, led by Saudi Arabia, and their six allies led by Russia, had agreed to meet at the beginning of each month to decide on any adjustments to production volumes for the following month.

Mohammad Sanusi Barkindo, OPEC Secretary-General during the 47th Meeting of the Joint Technical Committee Videoconferencing yesterday, stated that inventory levels remain stubbornly high as the current levels are more than 205 million barrels higher than the same period one year ago and about 163 million barrels above the latest five-year average.

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Amid the hopeful signs, Barkindo said the outlook for the first half of 2021 is very mixed and there are still many downside risks to juggle.

According to him, the cartel can only speculate based on how social and working habits developed last year will ultimately affect projections for 2021.

He added that the new strain of the virus is a harsh reminder of how delicate the situation remains after a year of human loss, economic shock, and historic oil market destruction.

Having recorded a decline in revenue of 42.3 per cent to N842.09 billion in the third quarter of 2020, compared with a benchmark of N1.459 trillion, Nigeria’s revenue problem may worsen, forcing it to rely even more on debts for its 2021 budget.

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With more borrowings, Nigeria’s public debt might hit N35 trillion, having risen to N31tr on June 30, 2020, according to the Debt Management Office (DMO).

While prices had continued to hover around $50 for Brent Crude, the Organisation of the Petroleum Exporting Countries (OPEC) had last month, lowered its oil demand forecast for 2021 to 95.89mbpd from 96.26mbpd, according to the latest version of the Monthly Oil Market Report.

Similarly, the International Energy Agency (IEA) modestly cuts its estimates for 2021 despite a recent rally in crude futures, saying it “will be several months before we reach a critical mass of vaccinated, economically active people and thus see an impact on oil demand.”

Indeed, some of the concerns spur from the fact that the country’s deficit might rise beyond N5.196 trillion, if the revenue targets are not met, especially in the light of the second wave of the coronavirus.

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Nigeria’s quota, which is adjusted monthly, has oscillated between 1.3mbpd and 1.5mbpd in the past months. On many occasions, Nigeria and a few other countries have been queried for exceeding the rations.

Also, the 2021 production benchmark is about 400,000 above its current quota, which experts said might not improve remarkably due to the pandemic.

President Muhammadu Buhari had on Thursday, signed the 2021 N13.588 trillion appropriation bill into law. Key parameters of oil production and price benchmarks at 1.86 million barrels per day and $40 per barrel were retained for the 2021 fiscal year.

Experts had questioned the feasibility of other revenue targets as contained in the budget proposal, saying a number of them were not achievable. The inability to meet either the crude production or price benchmark will expand the deficit, already put at 40 per cent, and make the budget largely unimplementable.

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Similarly, the latest data from the National Bureau of Statistics showed that crude oil remains Nigeria’s dominant revenue earner, as N2.78 trillion of the almost N3 trillion export earnings in the third quarter of 2020, came from oil export.

To finance its budget, Nigeria needs to produce more as the country heavily depends on oil proceeds.

One striking similarity between the current forex situation and that of 2016 is the fact that both are linked to oil price crises, showing that the diversification policy action of the government has not yielded sufficient results to insulate the economy against oil price shock.

In its comments, the Lagos Chamber of Commerce and Industry (LCCI) lowered expectations about oil sector outlook, noting that the sector’s growth would be subdued on the continued implementation of OPEC+ Declaration of Cooperation and weak oil price outlook.

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“Considering the dim outlook for revenue in the light of weak economic fundamentals, we think government would most likely underperform its revenue projections, with attendant impact on fiscal deficit and debt portfolio. Budget deficit for year 2021 is expected to remain elevated above the projected N5.2 trillion and this poses a risk to Nigeria’s fiscal sustainability.

“Looking forward, a resurgence of covid-19 pandemic in year 2021 may propel the Federal Government to take on more (concessionary) borrowings to fulfil fiscal obligations. Additionally, a potential FX adjustment in a bid to ease pressure on the local currency (naira) might possibly expand Nigeria’s external debt portfolio and total debt stock in year 2021”, says LCCI Director-General, Dr. Muda Yusuf.

GOING into the OPEC meeting, PricewaterhouseCoopers’s Associate Director, Energy, Utilities and Resources, Habeeb Jaiyeola said the Federal Government must consider budget benchmark for price and crude production.

To him, the OPEC cut remained a concern if Nigeria must meet its budget benchmark, insisting that anything below current production quantity could frustrate implementation of the 2021 budget.

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According to him, there was a need for representatives of Nigeria at OPEC to consider the prevailing economic situation in the country, adding that the need to increase revenue and the excess crude account is important for Nigeria.

Jaiyeola noted that continuous increase in vaccines production and number of people being vaccinated would douse tension in the oil sector and help price to stabilise.

Despite the second wave of Covid-19, Jaiyola said economies are opening. With more openings, he noted that demand would continue to increase and prices may continue to rally.

“Nigeria must leverage its place in OPEC and ensure the stability of crude oil price. The push for gas revenue is good for Nigeria. But there must be strong strategies. That should also guide Nigeria’s membership of OPEC,” Jaiyeola said.

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According to him, Nigeria needs to look at its long term plan of being a member of OPEC and consider the best approach towards gas development.

He also advised the Federal Government to ensure the stability of the downstream sector, adding that the sector has higher GDP compared to the upstream sector.

Jaiyeola said: “There must be a focus on the stability of the sector to encourage private investors. Government cannot continue to dominate the sector. Demand and supply must drive the sector.

“The Petroleum Industry Bill is also critical legislation that would help Nigeria to drive the oil and gas sector this year. Diversification agenda has to be a top agenda in the face of the shift from fossil fuel. Backward integration is also very necessary to ensure that we don’t continue to depend on other countries,” he stated.

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An Energy Expert, Michael Faniran, noted that Nigeria may not have its production quota reduced as demand for crude would continue to increase.

Faniran predicted that the price of crude oil may continue to increase with the current breakthrough on vaccine and the increased rate of approval, which would continue to allow more economic activities to pick up.

Given the hostility that often clouds oil production in the Niger Delta region and growing insecurity across the country, the expert advised the government to ensure sustainable peace in the region.

Faniran also insisted that unless the economy is diversified and value is added to crude oil and gas, Nigeria would always struggle to generate needed revenue from the sector.

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Former Chairman, Society of Petroleum Engineers, Joe Nwakwue did not expect surprises from OPEC, stating that the cartel may rollover the previous cut agreement.

According to him, prices of oil, as well as demand, would continue, stressing that Nigeria would stay a little above the current benchmark.

He projected the price of oil to hover around $50 per barrel but insisted that Nigeria’s ability to maintain production remained critical.

Nwakwue said: “Demand recovery would continue, confidence would be restored. We would be above benchmark but that depends on what happens to the volume of production.”

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Nwakwue noted that without passing the PIB, an investment that would enable the country maintain production volume may remain challenging.

He was also worried over the country’s harsh operating environment, stressing that persistent insecurity and bottlenecks in ease of doing business bottlenecks could scuttle projected goals.

To feed the expected economic recovery but continue to squeeze top-heavy global stocks next year, OPEC+ looks poised for a gradual easing of its output curbs as it keeps a watchful eye on the impact from the rollout of COVID-19 vaccines on demand.

Global liquids supplies are expected to climb by 3.5 million b/d on average in 2021, according to S&P Global Platts Analytics, with almost all of the total coming from crudes pumped by the OPEC+ group led by Saudi Arabia and Russia.

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Although dependent on hard-to-predict OPEC+ output policy, around 70% of crude supply growth could come from the Middle East next year as Saudi Arabia and other core OPEC producers add a combined 800,000 b/d to the market, Platts Analytics believes. By contrast, outside OPEC, US production is expected to shrink by a further 1 million b/d on average over 2021, as pandemic drilling cutbacks feed through to higher decline rates.

In addition to greater potential supply volatility due to disruptions in the Middle East, a growing dependence on Middle East crudes has implications for average global crude quality.

The supply rebound from OPEC means the tables will be turned on years of surging light sweet crude growth from US shale towards the medium sour crudes that predominate in the Middle East. After shrinking by a cumulative 5.4 million b/d from 2017 to 2020, the global supply of medium sour crudes is seen rebounding by more than 1.4 million b/d next year, according to Platts Analytics.

“Overall the liquids growth next year is going to be dominated by OPEC crude,” Shin Kim, head of supply and production at Platts Analytics, said. “Light, sweet crude is barely growing at all in 2021… but watch for that medium, sour, which will take a dominant role in growth for 2021.”

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