The dangerous outlook of Nigeria’s crashing oil output

BY MARCEL OKEKE.

For a very long while, even with spiking oil prices in the international market, Nigeria’s oil output and export have been far short of targets and below levels allocated to the country by the Organization of Petroleum Exporting Countries (OPEC) of which it is a key member. The Nigerian Upstream Petroleum Regulatory Commission (NUPRC) says oil output dropped to an average of 1.24 million barrels per day (mbpd) in March from 1.25 mbpd in February 2022. Similarly, Nigeria’s oil output dropped to 1.3 mbpd in June 2022 from its 1.7 mbpd in May 2022. As a result of a series of OPEC+ meetings and negotiations, especially since the onset of the Russia-Ukraine war, Nigeria’s oil quota has been increased to about 1.8 mbpd. Unfortunately, rather than climbing up, the nation’s oil production and export figures have been on the decline, owing to a multiplicity of factors — ranging from the sublime to the ridiculous.

The chief executive officer of the Nigerian National Petroleum Corporation (NNPC) Mele Kyari said recently, “there is massive disruption to our operations as a result of the activities of vandals and criminals along our pipelines in the Niger Delta area. This has brought down our production to levels as low as we have never seen before.” Further lamenting the situation, Kyari said, “today, we are doing less than 1.15 million barrels per day simply because some criminals decided that they should have some infractions on our pipelines…and that is clearly the biggest form of business disruption that we are facing.” In a similar vein, NUPRC also released figures showing that about $3.28 billion worth of oil has been lost to vandalism in the past 14 months (April 2021—June 2022). NUPRC chief executive officer, Gbenga Komolafe, further elaborating on this state of anomie, said Nigeria had been able to achieve only “72 percent of its assigned OPEC quota.” He said, “the challenges that arise from this state of affairs include threat to national and energy security; erosion of global competitiveness and ease of doing business; rise in unemployment across the industry; increase in conflicts due to proliferation of arms, as well as widespread health, safety and environment (HSE) and community concerns, etc.”

Even the leading oil firm in the country – Shell Petroleum Development Company (SPDC) – has been contending with the headwinds and threats to oil production in Nigeria. In a recent briefing, the nation’s highest oil producer blamed the decline in its 2021 output on “heightened insecurity issues, such as crude oil theft and illegal oil refining.” So, clearly, all these mean that Africa’s largest oil producer, Nigeria, has been contending with several security, operational, and technical problems for well over a year now. It means virtually every major oil field, terminal, and facility in the country has encountered motley problems, with the recent sustained attacks on oil facilities aggravating the situation.

It also goes without saying that the Petroleum Industry Act (PIA), which took a very long time to come, now looks like the government, doing so little so late. This is because the very long ‘gestation’ period of the PIA practically put all operators in the nation’s oil and gas sector in perpetual suspense. And while the PIA was undergoing the endless ‘incubation’, existing and potential investors in Nigeria’s hydrocarbons either looked elsewhere or fled the country. Recent trends in energy conversion have shown an outright desertion of Nigeria by major oil companies – the International Oil companies (IOCs). In point of fact, in desperation, the government even appears pushed to the point of taking legal action to stop some of the IOCs from disposing of some or all of their (onshore) assets.

The NNPC, which sought to block ExxonMobil Corporation from selling its assets in Nigeria to Seplat Energy Plc, went and got a court ruling in its favour. An Abuja court granted the NNPC an “order of interim injunction” on July 6, 2022, barring ExxonMobil “from completing any divestment” in a unit that ultimately operates four licences in Nigeria. According to a Bloomberg’s report, Seplat had agreed to acquire ExxonMobil’s businesses in Nigeria for at least $1.28 billion in February 2022. But the NNPC “wished to block the transaction and take over the permits itself.” The Exxon–Seplat deal, however, is just one out of many such asset sales by the IOCs in recent times.

Shun of all jargons and euphemisms, the fate of Nigeria’s oil industry (manifesting in continued drop in volume of oil output and exports) translates to diminishing financial resources for the country. Crude oil export remains the mainstay of Nigeria’s economy; and so, its current challenges put further strains on the nation’s fiscal condition. Already, the country is at the precipice of (external) debt trap; with debt servicing obligations appropriating close to ninety percent of government revenue. The nation’s economy remains fundamentally undiversified, despite claims to the contrary; Nigeria remains largely import-dependent – underpinned by a scotching business environment.

Ill-informed and ill-timed policies, such as fuel subsidy that is now gulping trillions of Nigeria’s shrinking revenue, further keep the economy on tenterhooks. From a modest sum of N433 billion that was to be applied to fuel subsidy early in the year, the ‘monster’ is now guzzling close to N5 trillion – and still counting! The ‘manager of the fuel subsidy fund’ – the NNPC – has already got to its wits end and is no longer able to perform one of its core statutory functions – namely, its monthly remittance of money to the Federation Account Allocation Committee (FAAC). The trickle down effect of this is that the monthly distributable revenue by FAAC to the various tiers of government has significantly dropped in the past six months or so.

The ripple effects of this shrinking revenue to the subnational governments are fast manifesting in different forms and shapes. Irregular salary payment is now the norm rather than the exception in most states of the federation owing to dwindling FAAC allocations; pensions and sundry allowances are no longer being paid by many of the state governments. The federal government, on its part, as disclosed by its former acting Accountant-General, is borrowing from various sources to augment funds for salaries of civil/public servants. The crashing oil output/export has also translated to fast dropping stock of external reserves and spiking budget deficit. The thinning external reserves and the huge outstanding debt stock are also already negatively impacting Nigeria’s credit rating on the global scene.

This dire situation literally forced Nigeria, in March this year, to offer a premium to raise $1.25 billion Eurobond. It thus priced its Eurobond issue at 8.375 percent, a premium, compared to existing tenors, “as the country sought to raise cash to fund a costly petrol subsidy scheme, in the face of limited oil revenue,” according to Reuters. The latest debt issue, Reuters says, “marks Nigeria’s eighth outing on Eurobond market after it sold a US$4 billion debt in September 2021…” And the ineluctable borrowing spree goes on as exportable oil and revenue keep crashing!

Marcel Okeke, a practising economist and consultant in Business Strategy & Sustainability based in Lagos, is a former Chief Economist at Zenith Bank Plc. He can be reached at: obioraokeke2000@yahoo.com; +2348033075697 (text only)

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