Crude oil: Nigeria’s production quota challenge

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Going by the current bullish trend in the international crude oil market, propelled by the increasing demand for the commodity, it is safe to say that oil producing countries like Nigeria should be smiling to the bank now. Again, since the last quarter of 2021, oil price has remained on the rising side and now further buoyed by the ongoing Russia/Ukraine war.

The Organisation of Petroleum Exporting Countries (OPEC), acting as regulator in the international oil domain and aware of the likely situation that may arise from the unfolding development, has tried to steady the production quota, not only to avoid a glut in the market but also to prevent a shortfall even as sanction against the world’s second largest producer and supplier of the commodity, Russia, gets tougher.

For instance, amidst fears of a possible seven million barrels loss of oil from the Russian pipes, OPEC may have moved decisively by increasing production quota allocation to member countries.

At its last meeting earlier in the week, the organisation approved a production quota of 1.753 million barrels per day (mb/d) for Nigeria for the month of May. Angola got mandate to produce 1.465mb/d; Saudi Arabia and Russia are to produce the highest volume of 10.549mb/d each; Iraq and Kuwait got 4.461mb/d and 2.695mb/d respectively.  In a similar vein, the body approved that OPEC 10 are to produce 25.589mb/d; Non OPEC member countries are to produce 16.537mb/d and OPEC+ are to produce 4.2126mb/d all in the month of May.

For Nigeria, this is not the first time OPEC will be granting an enhanced production output for the country. Earlier in the year, allocated output to Nigeria stood at 1.7mb/d; 1.8mb/d; 1.718mb/d and 1.735 for January, February, March and April respectively.

This year, notwithstanding the enhanced production output granted the country, it has remained impossible to meet up with the allocation. For instance, available reports from OPEC showed that the country has fallen short of all its production allocations for this year. In its report, OPEC captured the country’s output at 1.399mb/d in January; 1.25mb/d in February and 1.354mb/d in March. The report added that Nigeria maintained an average daily oil production of 1.424mb in 2021, while so far this year, it is producing below 1.4 mb/d failing to meet its OPEC quota.

But failing to meet production output capacity is not strange to Nigeria. Last August, the country managed a paltry 1.23mbpd, which was a major drop from the 1.32mbpd it produced a month earlier, while it  produced 1.246mbpd in September and 1.227mb/d in October. This was at a time when the country had 1.6mbpd as its production output target.

A report by Cordros Capital indicated that Nigeria’s oil sector contracted for the seventh consecutive quarter with a negative growth print of 8.1 per cent in fourth quarter 2021, bringing 2021 full year oil sector negative growth to 8.3 per cent. However, providing some comfort was the trend of slowing contraction in the oil sector as the negative growth of 8.1 per cent in fourth quarter 2021 was 4.6 percentage points and 2.7 percentage points slower than the 12.7 per cent and 10.7 per cent contraction in second quarter 2021 and third quarter 2021.

Causes

The Nigerian Upstream Petroleum Regulatory Commission (NUPRC) has also confirmed the various shortfalls this year. NUPRC noted Nigeria lost more than 115,000 barrels per day (bpd), valued at $3.27 billion worth of crude oil to oil theft and vandalism between January 2021 and February 2022.

According to analysts, the steady decline in oil production is directly associated with operational and maintenance issues, supported by incessant pipeline vandalism, which has prevented Nigeria from meeting its OPEC+ production quota, despite upward adjustment that has seen Nigeria’s production quota rise to 1.72mb/d (excluding condensates). In addition, capital expenditure investment in the oil and gas sector continues to lag below pre-pandemic levels, despite the passage of the Petroleum Industry Act (PIA).

For the Minister of State for Petroleum Resources, Timipre Sylva, poor investment and the exit of oil majors are major issues affecting the country’s inability to meet the oil production quota. The minister added that the drive towards renewable energy by climate enthusiasts had discouraged funding for the sector.

Speaking at a ministerial plenary session at the Ceraweek, in Houston, Texas, United States of America, Sylva, according to a statement by his Senior Adviser (Media and Communications) Horatius Egua, he noted that the speed with which international oil companies and other investors were withdrawing investments in hydrocarbon exploitation had contributed significantly to Nigeria’s inability to meet OPEC targets.

“Lack of investment in the oil and gas sector contributed to Nigeria’s inability to meet OPEC quota. We are not able to get the needed investments to develop the sector and that affected us. The rate at which investments were taken away was too fast,” he added. He also cited security challenges as another major factor that contributed to the lack of significant growth of the sector.

The Group Managing Director, Nigerian National Petroleum Company (NNPC) Limited, Mele Kyari, blames the country’s inability to meet its OPEC quota on lack of funding. He said financing was badly needed to improve the country’s production capacity.

According to him, following the decision to allow more oil in the market, Nigeria and other members of OPEC would face challenges to quickly pump more oil. “Even if OPEC members decide to pump more oil, it may not be very, very realisable as the financing needed for more development is lacking,” Kyari said in an interview with Bloomberg.

Far from the position of Sylva and Kyari, several other factors are said to be mitigating against the ability to meet the production target. One of such is the huge cost of restarting fields and pipeline vandalism in the country. An economist and oil market analyst, Mayowa Sodipo, noted that the level of vandalism is very high such that oil firms like Agip, Shell and some other companies have suffered serious damages to their facilities, thereby limiting their ability to contribute to production as a result of the shutdowns that usually followed such attacks.

“Unfortunately, when you experience a shutdown in your operation, restarting them is not straight forward, as restarting a facility cost money,” he explained.

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Last year, for instance, a combined shortage of 1.62 million barrels was recorded at Qua Iboe terminal, with 200,000 barrels due to production shut-in arising from flare management and low well head pressure. Another  530,000 barrels were lost to shut-ins following tank top concerns, 650,000 barrels as a result of production cut-back as directed by the then Department of Petroleum Resources (DPR) as well as a loss of 240,000 barrels due to a gas leak on one of the assets.

This was followed by losses from the Forcados facility, which shed 200,000 barrels, 84,000 barrels, 30, 000 barrels and 80,000 barrels respectively on different days, with reasons ranging from leak repairs, tank top issues, a fire incident and declaration of a force majeure.

Still, Forcados continued its shut-ins, shedding an additional 405,000 barrels of crude oil at the Uzere/Afisere/Kokori axis following a shutdown as a result of protests by community workers as well as a loss of 80, 000 barrels due to a fire incident.

In the same vein, Anyala Madu shed 105,000 barrels, Bonny suffered total shut-ins of 335,000 barrels, Ugo Ocha lost 30,000, Okono’s shutdown led to loss of 96,000 barrels, while Sea Eagle lost 750,000 barrels.

 Implication

The decline in oil output also depleted revenue accrued to the Federation Account amid zero remittances from the Nigerian National Petroleum Company (NNPC) Limited despite soaring oil prices.

Besides, with the inability to meet these allocated quotas, an increasingly huge gap between production increase on paper and actual growth in output now exist, which has made the market tighter than stakeholders had anticipated a few months ago.

Challenge

This is why stakeholders are worried that for a country that has failed to meet its production quota in more than one year, the new allocation may also be a squandered opportunity to make the critical revenue needed to finance this year’s budget and other critical infrastructural needs in the country.

Yet, stakeholders like Kayode Oyedele, a public analyst, warned that if the trend of declaration of force majure by some of the International Oil Companies (IoCs) persists this year as experienced previously, then the 1.753mbpd allocation by OPEC+ to the country for the month of May will remain a charade. The issue of divestment by the IOCs remains a sore point against the march to meeting production capacity, with some of the multinational oil companies discreetly withdrawing their investment in the industry.

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