Oil Revenue To Remain Subdued As Output Plunges By 15%
Despite the recent rise in oil prices, there are strong indications that Nigeria is not likely to be out of the woods in its petroleum revenue performance and budget funding, due, mainly to the significant drop in its oil output.
The Economic Confidential Finance Report has indicated that the sector recorded a 15 percent output decline in the first 11 months of this year.
A breakdown showed that the nation produced an average of 1.5 million barrels per day, mb/d, (excluding Condensate) between January and November 2020, indicating a drop of 0.30 mb/d when compared to 1.8mb/d recorded in the corresponding period of 2019.
The implication of the decline is more telling against the 2021 budget benchmark output of 1.86 mb/d.
The dip in output has been worsened by the prolonged lull in the global market, characterised by low prices of crudes, including Nigeria’s Bonny Light, which demand has been affected because of the resurgence of Coronavirus pandemic in many nations.
In its December 2020 Market Report, obtained by our correspondent, the Organisation of Petroleum Exporting Countries, OPEC, said this data were based on information obtained from official or direct sources.
Also some industry analysts believe that even the rise in oil price, with the price of Bonny Light, Nigeria’s premium oil grade, hovering at $50 per barrel in the international market last week, significantly in excess of the 2021 budget benchmark price of $40, the benefits may be muted by outrageous cost of production put at $30 per barrel. Nigeria has the highest output cost per barrel amongst OPEC member states.
Demand
Prospects of improvements in the market condition seem deem going by the calculations of OPEC.
The global oil cartel, which noted that the global market was still haunted by weak demand, stated: “World oil demand for 2020 is expected to decline by 9.77 mb/d, marginally lower than in last month’s assessment. Weaker-than-expected data in the Organisation for Economic Co-operation and Development, OECD in 3Q20, mainly due to lower transportation fuel demand in the US and OECD Europe, led to a downward revision of around 0.18 mb/d for the OECD group.
“However, this is mostly offset by an upward revision to the non-OECD, by 0.16 mb/d. Better-than-expected oil demand in China, amid a steady recovery across various economic sectors, and improving oil demand from India support this upward revision. Total oil demand is estimated to reach 89.99 mb/d in 2020. For 2021, world oil demand growth is revised lower by 0.35 mb/d, to the growth of 5.90 mb/d.
“This is due to the uncertainty surrounding the impact of COVID-19 and the labour market on the OECD transportation fuel outlook for 1H21. Petrochemical feedstock and industrial fuels are forecast to gain momentum on the back of improving economic activities, with total oil demand projected to reach 96.89 mb/d in 2021.”
Supply
On supply, it stated: “Non-OPEC liquids production in 2020 is revised down by 0.08 mb/d, m-o-m, contracting by 2.50 mb/d, to average 62.67 mb/d. This is mainly due to downward revisions in Brazil, the US, the UK, and Norway, following lower-than-expected output in 4Q20, although partially offset by upward revisions to production in Russia and Canada.
“For the year, oil supply shows declines mainly in Russia, the US, and Canada, while production in Norway, Brazil, China, and Guyana is estimated to have grown. Non-OPEC supply for 2021 is adjusted down by 0.1 mb/d and is now forecast to grow by 0.85 mb/d to average 63.52 mb/d, mainly due to downward revisions in Russia’s output. The US liquids supply forecast remains unchanged at 0.3 mb/d, while uncertainties persist. The main drivers for supply growth are expected to be the US, Canada, Brazil, and Norway. Non-Gas Liquids, GLs in 2020 are estimated to decline by 0.1 mb/d y-o-y, and forecast to grow by 0.1 mb/d, year-on-year, y-o-y in 2021, to average 5.2 mb/d.”
DPR Report
Also supporting the position of OPEC, the Department of Petroleum Resources, DPR, disclosed in its November 2020 report that Nigeria consistently produced about 1.7 mb/d, including Condensate monthly between July and November 2020.
This showed a shortfall of 0.16 mb/d when juxtaposed against the government’s 1.86 mb/d 2021 budget projection.
Although DPR did not provide reasons for the downward trend, investigation by The Economic Confidential confirmed that it was fueled by some factors, especially compliance with OPEC directive, oil theft, and pipeline vandalism in the Niger Delta.
Experts
However, in an interview the Lead Promoter, EnergyHub Nigeria, Dr. Amieyeofori Felix, said: “Nigerian economy is still strongly dependent on oil and gas revenues. So, the low oil price and output cut have negatively impacted the economy. Since oil and gas are the major foreign exchange earners, definitely, these have also affected our foreign exchange inflow, and by extension the value of the Naira. The prices of goods and services, especially those that are imported are hitting the sky with inflation reaching an all-time high at 14.1%.
“The 2021 budget is already sitting on the deficit to be funded through additional borrowing, and given our high debt service to revenue, the low crude price and lower output will definitely affect the revenue we retain after debt servicing, and because we cannot afford to remain in the black hole, the government will resort to additional borrowing to fund it’s budget and development activities.”
He added: “The government must focus on expanding the revenue base so as to bring in more money outside of oil and gas. They must work on electricity to power the economy. They must also focus on how to curb the security challenges in the northern part of the nation in order to enhance economic activities, including petroleum exploration and agriculture. They have to also increase their tax net to bring many tax evaders as Nigeria has one of the lowest tax to gap ratio in Subsahara Africa.”
The President, Oil and Gas Service Providers Association of Nigeria, OGSPAN, Mazi Colman Obasi, said: “Despite the pronouncements of different governments, Nigeria has not been able to shift from oil to other important foreign exchange generating sources, including natural gas. The present administration can do better, especially in encouraging investors, particularly the Nigeria LNG Limited, to complete additional LNG Trains, thus boosting the nation’s foreign exchange generation.”
Prof. Omowumi Iledare, the Ghana National Petroleum Corporation (GNPC) Professorial Chair in Oil and Gas Economics and Management, Institute for Oil and Gas Studies, University of Cape Coast. Ghana, had said: “It is not unexpected because of drastic shift downward in demand due to lower economic growth projections in Asia subsequent to the coronavirus-19 in China. Cast your mind back to 2008. Something has to be done with supply to reverse the trend in the short run! OPEC is mindful of the unfolding price trend, and in conjunction with non-OPEC producers, OPEC is working at reducing marketed production (global supply).
“Certainly because of the excessive dependence on oil for revenue, fulfilling budget estimates will be straining. And because the government drives the economy, the inability of the government to fund its budget has implications on the economy.”
Budget 2021
In his 2021 budget address to the National Assembly, President Muhammadu Buhari, had said: “The 2021 Appropriation Bill, which is designed to further deliver on the goals of our Economic Sustainability Plan. This Plan provides a clear road map for our post- Coronavirus economic recovery as a transitional plan to take us from the Economic Recovery and Growth Plan (2017 – 2020) to the successor Medium-Term National Development Plan (2021 – 2025).
“In view of the many challenges confronting us, we must accelerate our economic recovery process, promote social inclusion, and strengthen the resilience of the economy. The 2021 Appropriation has, therefore, been themed the ‘Budget of Economic Recovery and Resilience’. It is expected to accelerate the pace of our economic recovery, promote economic diversification, enhance competitiveness, and ensure social inclusion.
“The 2021 – 2023 Medium Term Expenditure Framework and Fiscal Strategy Paper set out the parameters for the 2021 Budget, which include a benchmark oil price of 40 US Dollars per barrel; daily oil production estimate of 1.86 million barrels (inclusive of Condensates of 300,000 to 400,000 barrels per day) and an exchange rate of N379 per US Dollar.”
