Faced with an oil industry that is failing to grow, and plunging oil revenues, a rude awakening awaits Nigeria, unless it can somehow overcome the inertia that has hobbled its energy industry and attract new technologies and capital to revive stagnating production.
Nigeria’s oil revenues are collapsing not so much from falling crude oil prices but a significant plunge in oil production, as a result of failures in Government strategies or lack of same, according to analysts.
With Nigerian GDP having grown steadily at about 7 percent per annum over the past 10 years and with a population of 160mn, analysts say the country’s domestic energy thirst will increasingly eclipse export capacity in the future, as it rises from the currently extremely low 300kb/d level.
“If production remains at current levels due to under-investment, the net amount of barrels available for export will shrink quickly, putting further pressure on the budget and future economic growth,” said Renaissance Capital energy analysts, led by Ildar Davletshin, in a note released last week.
The oil and gas industry which makes up 15 percent of Nigeria’s Gross Domestic Product (GDP), has an outsized impact on the economy, as it accounts for 70 percent of the FG budget and 90 percent of the nation’s dollar earnings.
Oil production for first quarter of 2013 has averaged 1.9 million barrels a day, 22 percent below the 2.562 million barrel per day crude oil production assumption for the 2013 budget.
It may have dropped to as low as 1.7 million barrels a day last month, industry sources speaking to BusinessDay, said.
“The negative quarterly revenue impact of that was $1.23 bn or 30 percent of oil receipts in the first quarter,” said Bismarck Rewane, an economist and CEO of Financial Derivatives Company Ltd., in Lagos.
The drop in oil production is affecting Government revenue.
A sum of N519 billion was shared between the three tiers of govern
ment in April, 41.48 percent, lower than N888.4bn shared in March.
The excess crude account (ECA), in which the country saves revenue above the benchmark oil price set in the budget, is now down to about $5 billion, Finance Minister, Ngozi Okonjo-Iweala said last month. The account held $9.2 billion in January.
Nigeria’s benchmark bonny light crude, is down 7.64 percent since February; it reached a low of $100.31 on April 17.
The naira has dropped 1.4 percent against the dollar since the beginning of the year. Then there is shale.
Oil production in Texas’s Eagle Ford shale formation reached an all-time high in February 2013 as it climbed 74 percent, compared with a year earlier.
The US state produced 2.26 million barrels a day in December, the highest monthly level since May 1986, according to the Energy Information Administration, the statistical arm of the Energy Department.
IEA expects the US to add another 2.8mb/d of production by 2018 at a break-even price of less than $70/barrel, which is more than the whole of the Nigerian oil output in 2012.
Such developments put traditional producers like Nigeria at risk, say analysts.
“For Nigeria the challenge is even bigger as it is competing with other emerging countries, some of which have an advantage due to recent discoveries and often more favourable regulatory and security environments, such as East Africa or Brazil,” said Davletshin.
The 2013 budget which already has a deficit projection of N887 billion ($5.69 billion), could widen, putting the naira under pressure , if budget shortfalls persist for the rest of the year.
In recent times, there has been sluggish growth of 0.05 percent in external reserves to $48.85 billion at the end of April, from March levels a reflection of lower oil production.
The loss of almost a quarter of Nigeria’s oil output due to theft and sabotage, has the potential to stall foreign investment and is increasingly a fiscal drag on spending by state and local governments, rating agency Moody’s Investors Service said last Month.
The momentum for addressing challenging structural reforms has slowed,” Moody’s said.
“Most critically, legislation to revise the fiscal regime in the petroleum industry and to deregulate the downstream oil and gas sector has stalled, holding up significant foreign investment while the sector’s productivity declines.”
This is affecting prospects of a credit upgrade to Nigeria’s current Ba3 rating, according to Moody’s
