Six decades after the discovery of oil, can Nigeria continue to depend on the black gold as its mainstay?
As the economies of oil-dependent countries stifle, Nigeria’s dependence on oil has been brought into cross-examination for the umpteenth time. With a growing population of over 200million people, a struggling economy, and fall in oil price, can we continue to depend on this black gold?
Nigeria first discovered oil at Oloibiri, Bayelsa in 1956 – four years before independence, and began production of crude oil the following year. By 1960, about 847,000 tonnes of crude oil was exported. The country became a member of Organization of the Petroleum Exporting Countries (OPEC) in 1971. Notably, Crude Oil accounts for about 10% of Nigeria’s GDP, and 90% of total exports revenue; which begs the question, for how long?
Experts and economists have clamored for the diversification of an economy that has been subjected to volatile oil price fluctuations. In April 2020, when oil was sold at negative prices, supply crippled, and cargoes of oil were stuck on water; eyebrows were raised as to how long our economy will survive on this dependency. Forex inflows diminished, as the CBN was forced to devalue the naira in line with global realities, after several months of playing hardball. To exacerbate issues, OPEC+ could not agree on reducing market supply and in some weeks of recklessness, member countries created a supply glut that could bury the oil markets. But for the intervention of the US President, Donald Trump, Nigeria would have been in the middle of an oil crisis, even though the OPEC Secretary, Mohammed Barkindo, is a Nigerian national.
During the recent oil crisis, Russia and Saudi Arabia said they could afford low oil prices. Both economies had other sources of revenue, and deep cash reserves they can use to support their economy. Which begs the question? Can Nigeria boast like these other nations?
Nairametrics had earlier questioned if agriculture can replace oil, and a breakdown of agricultural exports showed it would take a lot of investments for it to generate the revenues that oil currently commands.
Nigeria is faced with revenue decline, as we have been compelled to reduce output to stabilize the oil market. Although the country was accused (albeit true) of cheating quotas and output cuts with other countries, as OPEC and its allies decided to reduce global oil supply. The recent deal required OPEC member countries, including Nigeria to cut their output from 9.6 million bpd to about 7.7 million bpd in a bid to stabilize the oil market. Consequently, the FG adjusted the budget benchmark to about $25 per barrel.
How efficient are the country’s refineries?
Nigeria has four major oil refineries. Namely, the Warri Refinery and Petrochemical Plant, which has the capacity to process close to 125,000 barrels of crude per day. The new Port Harcourt Refinery, with a capacity to produce 150,000 barrels per day. There is also the ‘old’ Port Harcourt Refinery, with subpar production and lastly, the Kaduna Refinery.
Early this year, the Nigerian National Petroleum Corporation (NNPC) published audited financial statements. In a report by Bloomberg, the corporation has been censured for years for not publishing audited reports.
In 2018, the first three refineries reported a combined loss of N154 billion, while the Kaduna refinery recorded zero revenue.
The country still cannot refine petroleum products to supply her internal demand, and that is why the imminent Dangote Refinery, expected to open in the next few years, is targeting a daily capacity of 650,000 barrels.
NNPC led by Malam Mele Kyari, the Group Managing Director, published online the 2018 audited accounts for its 20 subsidiaries and business divisions for the first time. According to the statement, National Petroleum Investment Management Services (NAPIMS), is the group’s most profitable division.
It reported revenue of N5.04 trillion ($13 billion) in 2018 and profit of N1.01 trillion. That compared with a loss of N1.65 trillion in 2017.
The report shows total assets managed by NAPIMS at N18.6 trillion, with the oil and gas components valued at N14.2 trillion.
Its oil production subsidiary, the Nigerian Petroleum Development Company (NPDC), reported a post-tax profit of N179 billion in 2018.
Outlook for the short-term
Nigeria has sought to diversify the economy, however there is still huge focus on its main export – Oil. The coronavirus (COVID-19) has changed how the oil economy will operate forever. In 2020, global oil demand contracted for the first time since 2009 global recession. With restrictions imposed in some cities, demand might not reach pre-pandemic levels, as global air travel still grapples with the effect of lockdown.
Although recovery improved in the second half of 2020, prices have failed to reach the $50 mark. Ultimately, the outlook for the oil market will depend on how coronavirus can be contained, because economic activity depends on the global health crisis. On the supply side, Libya seems to be back in the foray, as tensions are easing in the area. Even before the pandemic, markets had been over-supplied, leading to OPEC+ producers cutting output with competition from American Shale oil. There are indications that the oil market looks supplied through 2025.
Given the cycle of the industry and the demand contraction in 2020, a rebound in 2021 is expected. Forecasts shows that between the periods 2019 and 2025, global oil demand will grow at an average annual rate of just below 1 mb/d.