Budget: Nigeria records 600,000bpd oil output deficit

Output stunted amid aging infrastructure

 

 

N

igeria, at the weekend, recorded 600,000 barrels daily oil output deficit. The production, a document of the Ministry of Petroleum Resources sighted by this newspaper at the weekend revealed, stood at 1.7 million barrels, 600,000 barrel below the 2.3 million barrels daily production benchmark in its budget.

 

 

The country was given the production ceiling of 1.7 million by the Organisation of Petroleum Exporting Countries (OPEC). Minister of State for Petroleum Resources, Timipre Sylva, said that the country would keep adhering to the quota.

S&P Platts, however, said that the country’s output growth was stunted amid aging infrastructure.

 

 

The international oil companies (IOCs), whose productions are central to the country’s output increase target, are still waiting for a break in Petroleum Industry Governance Bill (PIGB) deadlock.

Based on this, Nigeria’s oil sector, the group said, might not get a much-needed revamp in 2020 as President Muhammadu Buhari’s state-led economic model would likely throttle reform and blunt efforts to increase oil production in the near term and further out.

 

 

 

President Buhari’s radical move in November to hike taxes on companies operating in its lucrative deep water blocks may have raised government’s share of the revenue from oil, but analysts at S&P Global Platts said that this could backfire by deterring international oil companies from Africa’s largest producer and hindering output growth.

 

 

“The prospect of more IOC divestment from Nigeria is looming, especially as the 20-year deep water production sharing contract agreed in the mid-1990s begins to expire,” Ed Hobey-Hamsher, senior Africa analyst at Verisk Maplecroft, told S&P Global Platts.

“No one will want to be last major holding a PSC and a race to divest will depress prices.

“Buhari shows no willingness to further projects that might rekindle oil and gas development. He believes retaining his control of existing projects is crucial to maintaining his grip on power,” Hobey-Hamsher added.

Buhari’s shift comes as other producers in the region, like Angola and Gabon, sweeten fiscal terms to attract foreign investment into their beleaguered oil sectors.

 

 

“A 10 per cent royalty hike marginally reduces Nigeria’s competitive advantage, in a country where investors must also weigh persistent security risks,” Paul Sheldon, geopolitical advisor at Platts Analytics, said in a recent note.

Nigeria, OPEC’s biggest African producer, saw its oil production grow sharply in 2019, thanks to the start-up of the 200,000 b/d deep water Egina field, with output averaging a five-year high of 1.91 million b/d in 2019, according to Platts estimates.

 

Militancy in the Niger Delta remained largely dormant in 2019, which helped keep production at elevated levels. But the security situation in the Niger Delta remains fraught as history has shown the region is just a few sparks away from a conflict.

 

Buhari has been managing militancy in the restive Niger Delta by continuing amnesty payments, and this will continue into 2020, according to the country’s budget.

 

“The real threat is aging infrastructure,” Hobey-Hamsher said, “dilapidated pipelines would exacerbate the production disruption caused by even a minor increase in theft or sabotage by up to 300,000-400,000 b/d.”

Key export flows on the Trans Forcados pipeline and Nembe Creek trunk line were frequently targeted by thieves resulting in shutdown on several occasions in 2019.

 

The country’s oil production prospects, however, remained stunted by government’s budget deficits.

 

 

Platts Analytics said Nigeria’s persistent fiscal deficits, projected by the IMF at five per cent of GDP and nearly 40 per cent of the budget in 2019 and 2020, raise short- and medium-term risks to oil supply growth.

“Fiscal stress puts a spotlight on amnesty payments to Niger Delta militants, which risk being gradually whittled away as 2016 recedes further from memory,” Sheldon said.

“However, a cut to amnesty payments could quickly change regional security dynamics.”

 

 

Nigeria saw its production plummet to a 30-year low of around 1.4 million b/d in mid-2016 due to devastating attacks on oil installations by Niger Delta militants.

Nigeria’s singular piece of legislation aimed at introducing radical reform in its oil sector, the Petroleum Industry Governance Bill (PIGB), is still gathering dust in the parliament as it continues to bounce between legislative and executive arms of government.

 

 

The PIGB, which will change the organisational structure and fiscal terms governing the Nigerian oil industry, has been in the works since 2008. Foreign oil companies have said billions of dollars in investments in the Nigerian oil industry have been held up due to the non-passage of the bill.

 

 

Nigeria aims to increase oil production from to three million b/d by 2023, according to a government document. But industry analysts say the target may elude the country due to climate of uncertainty the non-passage of PIB has created.

 

 

Most analysts do not expect the bill to be passed this year, which means international oil firms are unlikely to increase their investment in the country unless more attractive terms are offered.

 

 

“Buhari could provide a positive signal to investors and temper tumbling investor confidence through a speedy passing of the PIGB in 2020, a prospect, however, that remains remote,” Hobey-Hamsher said.

The country’s petroleum minister, however, said he would be striving to get the PIGB passed by mid-2020.

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