Stakeholders split over OPEC reduction of oil output
• Nigeria will make extra N1 trillion, says Sylva
• ‘Why FG may not benefit much from decision’
Mixed reactions yesterday trailed the reduction of daily oil production to 10 million barrels by the Organisation of Petroleum Exporting Countries (OPEC) and the extent to which the action could impact the nation’s economy.
OPEC and its allies in the OPEC+ group, in conjunction with the G20 and International Energy Agency (IEA), had finalised the deal which is expected to boost the oil price and provide some much-needed stability for an industry in crisis.
The Minister of State for Petroleum Resources, Timipre Sylva said Nigeria would comply with the deal and make additional N1 trillion ($2.8 billion) as the development would increase oil price by about $15.
With the new agreement by OPEC, Nigeria will now produce about 1.4 million barrel daily, reducing output by about 300,000 barrel against the 1.7 million projected in the adjusted 2020 budget.
Sylva said: “It is expected that this historic intervention, when concluded, will see crude oil prices rebound by at least $15 per barrel in the short term, thereby enhancing the prospect of exceeding Nigeria’s adjusted budget estimate that is currently rebased at $30 per barrel and crude oil production of 1.7 million barrels per day. The price rebound may translate to additional revenues of not less than $2.8 billion for the federation.”
In the new pact, Sylva said Nigeria joined OPEC+ to cut supply by up to 10 million barrels per day between May and June 2020, eight million barrels per day between July and December 2020 and six million barrels per day from January 2021 to April 2022.
According to him, based on Nigeria’s referenced production in October 2018 of 1.829 million barrels per day of dry crude oil, the nation will now be producing 1.412 million barrels per day for the month of April, 1.495 million barrels per day in May and 1.579 million barrels per day in June.
The Vice president of a consulting firm, Macro Oils at Wood Mackenzie, Ann-Louise Hittle, said a 10 million b/d cut would be very supportive of price over the second quarter of the year.
“Even a 5 million b/d reduction would see oil prices in the low $30s. It would ease pressure on storage and stem the steep price collapse we saw in March.
“A 10 million b/d reduction may seem small compared with some very high demand loss estimates, but if the curbs are implemented, it would slow the build-up in storage and avoid the surplus of supply.”
A professor of Economics and former Chairman of Council of Chartered Institute of Bankers of Nigeria (CIBN), Segun Ajibola, said the cut in oil supply would at least stabilise price and arrest further decline in price worsened by Covid-19 scourge.
“However, this will depend on the extent the non-OPEC members are ready to cooperate with others and also reduce supply by 5m bpd.
“For Nigeria, it will yield positive result if the loss in supply will be relatively compensated by the price-induced increase in revenue. Otherwise, it may not have any salutary impact on Nigeria’s economy.”
“With a demand shock estimated at between 15 million and 30 million barrels of oil a day, depending on who you talk to, it is clear that the OPEC+ agreement contains more hope than reality,” said OANDA’s senior market analyst Jeffrey Halley Monday.
But other analysts are not optimistic that the cut in oil production will have significant impact on the economy of the nation that had adjusted its 2020 budget, cutting oil production to 1.7 million barrel and reducing the appropriation by N320 billion.
A former president, Nigerian Association for Energy Economics (NAEE), Prof. Wunmi Iledare, who said the cut would badly affect the budget,stressedthe urgent need for the prioritisation of spending to minimise the effect of economic downturn.
There are also indications that most of oil and gas projects which are awaiting sanctions in the country could be delayed till after the OPEC deal expires since there won’t be room for additional output in the market.
Besides, with the current lockdown across the world, stakeholders, including the Director, Centre for Petroleum and Energy Economics, University of Ibadan, Prof. Adeola Adenikinju and PricewaterhouseCoopers’s Associate Director, Energy, Utilities and Resources, Habeeb Jaiyeola, doubted increase in demand that would bring about the needed increase in the price of oil, considering the fact that Nigeria is currently struggling to sell its crude at the international market.
Last month, the Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Mele Kyari, had painted a gloomy picture of the Nigerian economy, disclosing that over 50 cargoes of crude and 12 cargoes of liquified natural gas were unsold.
Oil prices have been drastically affected by the outbreak of Covid-19 and the price war between Saudi Arabia and Russia, creating a record shortfall which saw the price falling from about $60 a barrel to below $20, but Bonny Light stood at $26.40 per barrel yesterday following the new deal.
Iledare, who stressed that the cut must be across the board if global market would be stabilised, raised concern that Nigeria’s sweet crude was particularly being affected by the development.
“Further, as government both at the federal and state, being highest employers of labour, paying salaries on time is, therefore, critical. There may also be the need to realign incentives with productivity required for the economy.
“For now, however, the health sector is critical and spending on this sector can protect the vulnerable among us with health infrastructure investments,” Iledare said.
Adenikinju said the cut would reduce significantly current excess supply in the market, but that global demand needed to increase for the market to start reaping the benefits of the reduction.
“Currently, air transportation is down, China economy is far below its optimum capacity, global production chain is down. Oil is a derived demand. Until demand for energy services pick up around the world again, oil prices may not rise significantly.
“The current revision of the Nigeria’s budget is in order. Even if oil prices were to rise above the $30 per barrel benchmark price, Nigeria needs some fiscal buffers to deal with current huge budget deficits,” Adenikinju stated.
While crude oil is produced in some countries for less than $8 per barrel, the cost of production in Nigeria is hovering around $28.99, meaning that the nation is currently running at a huge loss by selling at about $26 a barrel.
According to Jaiyeola, Nigeria’s high cost of oil production may erode the country’s gains from the development.
He said the country must reduce the cost of oil production, otherwise budget deficit would continue to widen.
Jaiyeola was pessimistic about the impact of the cut in the global market, urgingNigeria to secure contact that would enable it to sell its crude. He said there was the need to look at the effects of the cut and readjust the budget to align with the existing realities.
The Director and Chief Executive Officer of the Department of Petroleum Resources (DPR), SarkiAuwalu, in an interview with The Guardian, said that with the lockdown across several countries, limiting movement of people and goods, energy balance had been disrupted.
He said the imbalance would remain until global lockdowns were lifted.
The Lagos Chamber of Commerce and Industry (LCCI), stated that the cut would have marginal effect on the economy as demand for oil remained low and lockdown across many countries persisted.
Its Director-General, Dr. Muda Yusuf, said though oil prices would retain some gain, the effect would not be huge until the lockdown was lifted globally.
“Across market, the bigger issue remains demand as COVID-19 shocks continue to linger while the cut also takes place from a markedly higher production level prior to the price war,” said market strategist Pan Jingyi Monday.
“With the likes of the IEA looking to a 20mbpd drop in global oil demand and that sitting towards the lower end of various forecasts, it may be a slow crawl for prices,” Jingyi added.
A Development Economist, Dr. ChiwuikeUba ex-rayed the oil production cut agreement and submitted that the decision would not in any way benefit Nigeria.
Uba insisted that the drop in demand for oil in international market following the covid-19 pandemic had brought the need for Nigeria to urgently begin to think about running an economy without oil and deploying resources appropriated for the fight of the scourge into massive productive infrastructure than palliatives.
He told The Guardian in Enugu that the OPEC’s agreement was a welcome development, but stressed that whereas it might lead to a marginal increase in the global oil price, the market would experience almost a glut immediately, due to the continuing decline in oil demand.
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