Should Nigeria outsource its oil production to China?
Another dismal monthly oil production tally, another shortfall behind the production quota granted by OPEC+ and another missed opportunity to take advantage of the high oil prices that dominate the international oil market. On Wednesday, oil prices hit $88 a barrel, a price level not seen since 2014.
In December 2021, crude oil production in Nigeria fell below 1.2 million barrels per day – another production underperformance that is starting to look like a normal event.
Nigeria’s OPEC+ quota, which only covers crude oil and not condensates, is around 1.614 million barrels per day +/-, and Nigeria’s production capacity is closer to 2.2 million barrels per day. day according to Timipre Sylva, Nigerian Minister of Petroleum.
For readers unfamiliar with oil matters, a quota is a trade restriction imposed by OPEC that limits the number of barrels a country can produce in a given period. The purpose of quotas is to ensure that oil markets are not oversupplied.
If we do the math, removing recent month’s production figures (1.2m b/d) from Nigeria’s OPEC+ quota allocation (1.614m b/d), that comes out to 400,000 bpd. per day. That’s leaving money on the table.
At today’s prices, that’s a loss of $35,200,000 a day. That’s about the same amount, the National Economic Council revealed, that remained in Nigeria’s surplus crude account ($35,868,086.40) as of January 17, 2022.
In one month, this represents a loss of US$1.09 billion – a few million dollars less than the gross monthly distribution by the Federation Accounts Allocation Committee (FAAC) distributed to the three levels of government in December. 2021 – NGN 676 billion (US$1.65 billion).
But let’s look at the excess crude account.
The ECA is a savings account held by the federal government and is funded by the difference between the market price of crude oil and the budgeted price of crude oil as listed in the appropriation bill.
Here’s a look at the declining ECA balance.
Since oil is the lifeblood of the Nigerian economy, Nigeria should bleed the life of oil by maximizing its full production capacity. Oil revenues have fallen due to low production and there is a growing need to address this.
Forcados, Nigeria’s leading quality, was disrupted last year until Shell lifted force majeure on shipments in September last year. Industry sources said the suspension of exports was due to an oil spill near the Forcados terminal.
Other Nigerian crudes such as Bonny Light, Escravos and Qua Iboe have also faced production issues in recent months due to operational and technical reasons.
Growing threats from militants of renewed attacks on oil infrastructure in the restive Niger Delta remain a concern.
Oil has been in the region of over $50 for over a year and yet the external reserves, surplus crude account, Nigeria Sovereign Investment Authority (NSIA) fund have not increased significantly as they should have. Any increase seen in reserves is largely due to inflows from Eurobond proceeds and the allocation of Special Drawing Rights (SDRs) to Nigeria by the International Monetary Fund (IMF).
So when crude oil production in Nigeria fell below 1.2 million barrels per day in December 2021 from 1.28 million barrels per day in November 2021, further introspection of the data obtained from the Nigerian Upstream Petroleum Resources, the Commission showed the highest volume of crude oil produced last year was around 1.43 million barrels per day (in March), compared to the forecast production level of 1.86 million barrels per day in the 2021 budget.
In September 2021, Nigeria requested a higher production quota under the OPEC+ deal, saying the technical issues that have hampered its production “will soon be resolved”. But the numbers don’t lie – Nigeria has failed to hit 1.614 million barrels per day since then.
Now, the idea of conceding to China is inconceivable and admittedly bait, but if you look at the idea through the prism of Nigeria’s inefficiencies – it’s a rational take because the only new functional infrastructure that the Nigeria was built and financed by the Chinese. Moreover, the majority of our loans come from the Chinese. Perhaps a local private sector concession would make more sense to sovereignty and national interest alarmists. But the rate at which the Dangote refinery has stalled is concerning. The country needs more players.
The Nigerian Petroleum Industry Act has brought new life and much needed boost to the Nigerian petroleum sector which the country desperately needs. On top of that, the industry needs a total holistic overhaul with new players who would give revenue, royalties, and commissions to the Federation account. New players who would be accountable to the public with a mandatory declaration in the same way as listed companies.
Most theorists would argue that under competitive market conditions and in the absence of other market failures, private firms tend to be more efficient and profitable than their public counterparts.
If the country is so oil-focused, then the country should seek comprehensive and sustainable improvements in performance and efficiency, which is usually associated with privatization. A first step would start with the privatization of NNPC.
Privatizations often require several years of preparation (legal framework, parliamentary and public debate, etc.), and therefore finding the “right timing” is quite difficult anyway. But there is an option called share issue privatizations. Privatizations of large state-owned enterprises are usually carried out through the capital markets through public share offerings or privatizations through share issuance (SIP). This gives governments a chance to tilt their share allocation schemes to favor domestic investors, impose control restrictions on privatized companies and generally use fixed-price offers rather than reservations or calls. competitive offers, all to achieve political and economic objectives.
Some studies have shown that privatization offers by national oil companies have yielded positive results. For example, a 2008 study of 28 national oil companies in different countries ranging from China, Argentina, France, Canada to the UK led to the following:
- Increase in profitability – Profitability was measured by return on sales, return on assets and return on equity.
- Increased work efficiency and productivity – Operational efficiency was measured by sales per employee, net profit per employee, physical output per employee (physical output defined as the sum of oil and gas produced or refined in a year), costs of research and development per barrel of oil equivalent.
- Increase in capital investments – measured by CAPEX itself plus the two ratios CAPEX on turnover and CAPEX on assets.
- Production increase – measured by both physical production and monetary sales.
- Decrease in financial leverage – three variables used to measure leverage were debt to equity, debt to sum of debt plus equity, and debt to EBITDA.
- Increase in dividend payments – measured by the ratios of dividends to net profit (“payout rate”) and dividends to sales.
The Nigerian oil sector would benefit from these positives and it is recommended that the government make this a priority before handing over to the next administration.
With the oil market tightening and the need for supply as global investment and capital expenditure (CAPEX) has declined in fossil fuel production, an opportunity for Nigeria to supply more oil has arisen. There are strong indications that this is the year the world will welcome COVID-19, so we would expect demand for oil to increase as travel and jet movements increase.
Iran (sanctions), Venezuela (sanctions), United States of America (climate change policies) and Mexico’s impending exit from the international oil market will see global supply pegged and Nigerian oil expected obtain more demand quota to reach its “full oil capacity” of 2.2 million barrels.
Substantial theories show that the Nigerian economy is beginning to disconnect from rising oil prices (blame the subsidies), and restless Nigerians even want oil prices to stay low so that policymakers can exert all their efforts to diversify sources of income. The resource curse, also known as the paradox of plenty, refers to the inability of many resource-rich countries to fully benefit from their natural resource wealth and the inability of the governments of these countries to respond effectively meet public welfare needs. Nigeria is one such country and must effectively maximize all its resources.