THE reduction of oil output by Organisation of Petroleum Exporting Countries (OPEC) members in response to the fall in oil price occasioned by the COVID-19 pandemic is understandable. The exercise was carried out by OPEC and its allies, including Russia, in conjunction with the G20 and the International Energy Agency (IEA). The cut of about 10 million barrels per day from members’ oil production is to boost the oil price and provide some much-needed stability in the global oil market. This cut, which is reportedly the largest by OPEC in recent times, is also aimed at halting the current spiraling decline in crude oil prices.
The Nigerian crude oil, benchmarked against the Brent crude is now trading at less than $18 per barrel, while the OPEC basket sold between $13 and $15 per barrel, much less than the Federal Government’s revised budget oil benchmark of $30 per barrel, which was later reduced to $20 per barrel. Sadly, traditional European buyers have stopped purchasing because of the demand that has virtually collapsed. With the new agreement, Nigeria will now produce about 1.4 million barrels daily, reducing output by about 300,000 barrel against the 1.7 million projected in the adjusted 2020 budget.
However, the government is optimistic that the deal will help the economy rebound. Only recently, the Group Managing Director of the Nigerian National Petroleum (NNPC), Mele Kolo Kyari, painted a gloomy outlook for the economy, disclosing that over 50 cargoes of crude and 12 cargoes of Liquefied Natural gas were unsold. But the Minister of State for Petroleum Resources, Timipre Sylva, is upbeat that Nigeria will gain from the finalised deal, and could make additional N1 trillion ($2.8 billion) as the agreement will increase oil price by about $15 in the short term, thereby enhancing the prospect of exceeding Nigeria’s adjusted budget estimate that is currently rebased at $30 per barrel and crude oil production of 1.7 million barrels per day.
But that has not happened yet. Instead, oil price is flattening in the international market, a development, which may put the country in a big hole, if it continues. Already, fiscal deficit in the revised 2020 budget is about N5 trillion. Nigeria’s huge fiscal deficit would have been managed if it had enough fiscal buffers to deal with the current economic realities. This has not been helped by the fact that while crude oil is produced in some countries for less than $8 per barrel, the cost of production in Nigeria hovers around $28.99, meaning that the nation is currently running at a huge loss by selling at about $22 a barrel.
Based on Nigeria’s referenced production in October 2018 of 1.829 million barrels per day, the nation will now be producing 1.495 million barrels daily for the month of April, 1.495 million barrels per day in May and 1.579 million barrels per day in June. There is no doubt that the 10 million b/d cut will be very supportive of price over the second quarter (Q2) of the year. It will ease pressure on storage and stem the steep price collapse of recent weeks and help stabilise price as the COVID-19 scourge worsens. However, we believe this optimism will depend on the extent the non-OPEC members are ready to cooperate with others and also reduce supply. The recent oil production spat between Saudi Arabia and Russia that led to oil glut in the market before it was resolved should not be allowed to happen again. Developments in the oil market have brought about a deflationary moment that surpasses anything the market has ever seen in decades. And it holds a lot of lessons for Nigeria, going forward. Clearly, it has badly affected the budget. Therefore, it presents urgent need for the prioritisation of spending to minimise adverse effects of economic downturn. Unfortunately, most oil and gas projects that are awaiting execution in the country will be delayed till after the OPEC deal expires since there would be no room for additional output in the market.
All the same, the most significant lesson of the current pandemic is the need to diversify the economy. For long, successive administrations in the country have paid lip service to diversification. The advent of the pandemic has brought to the fore the reality of looking beyond oil. Now is the right time for government to look for other sources of revenue to cushion the impact of falling oil prices.
Good enough, Nigeria has several sources of revenue it should tap from to create employment for the teeming population. These include agriculture and agro-processing industries, tourism and the creative industry, among others. This is the time to restructure the economy, diversify our sources of revenue and create the enabling environment for businesses to thrive.