The fourteen-member Organisation of Petroleum Exporting Countries (OPEC) along with non-OPEC members including Russia have agreed to include Nigeria into a production supply cap deal agreed to rebalance an oversupplied oil market till the end of 2018.
Rising from a meeting in Vienna, Austria yesterday, the group agreed to extend cuts by nine months until the end of 2018 as largely anticipated by the market but raised hopes that it could exit the deal earlier if the market rebalances. While it capped Nigeria’s production, it could not agree on a cap for Libya. Both countries have previously been exempted from cuts.
Experts say this decision has implications for Nigeria’s 2018 budget. Adeola Adenikinju, gas policy analyst for the World Bank and professor of Economics at the University of Ibadan told BusinessDay by phone that capping Nigeria’s production at 1.8million BPD means that the 2018 budget assumptions would need to be reviewed.
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“Definitely, we have to revise our budget projections, because it is fundamental to our budget. Since we cannot be seen to working against OPEC, so this means we need diversify our economy away from oil and do more about getting gas and linking up gas with the rest of the economy so that we can fully industrialise it by having petrochemicals, fertilizers, gas to power projects, LNG. We need to work on this because gas does not come under OPEC restrictions,” Adenikinju said.
The Nigerian upper legislative body this week deferred consideration of the revised version of the 2018 to 2020 Medium Term Expenditure Framework (MTEF) and Fiscal Strategy Paper (FSP), which provides the parameters upon which the national budget is prepared, waiting on the decision of the OPEC.
Nigeria’s 2018 budget of N8.6trillion is based on a projected oil revenue of N2.442 trillion and non-oil projection of N4.165 trillion. This was reached based on an oil benchmark price of $45 per barrel, daily oil production level of 2.3 million barrels per day and exchange rate of N305/$1. It was also assumed that gross domestic product will grow by 3.5 per cent and an inflation rate of 12.42 per cent.
In retrospect, it looks like it was a wise move.
In light of this development, Tajudeen Ibrahim, the head of research at Chapel Hill Denham told BusinessDay by phone the decision by OPEC portends a threat to Nigeria’s capital expenditure plan next year unless something else fills this revenue gap.
“The only way out for Nigeria is if oil prices rally substantially to offset the impact of this cap, but that is not 100 per cent certain and that is why I don’t think we can lean towards this as a solution. What I think Nigeria should do is to look sale of assets or lease of assets instead of an outright sale, to generate income over a period of time, within the period you are looking to restructure your economy, just to buy time,” said Ibrahim.
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Recall last year, Atedo Peterside, banker and entrepreneur urged the government to form separate IJVs with the International Oil Companies to sell down its stake from the 55-60 per cent that it presently holds to no more than 49 per cent in each of the IJVs. Peterside said he favoured a sell down to 40 per cent by releasing a further 9 per cent to the investing public.
Sources say the government is now disposed to selling down these stakes.
“The Federal Government should also consider selling its stake in the Transmission Company of Nigeria and also selling its shares in the DisCos to raise financing,” said Olawale Oluwo, Lagos state commissioner for energy during the 8th edition of the PwC’s Annual Power and Utilities Roundtable held in Lagos yesterday.
Ibe Kachikwu, Nigeria’s minister of state for petroleum resources had previously said that Nigeria’s production could not be capped until it stabilises at previous production figures of 1.8million BPD before militants began a vicious bombing campaign last year.
Analysts say it would seem premature to conclude that Nigeria’s production has stabilised at 1.8million BPD. Three weeks ago, the Niger Delta Avengers, a militant group in the region warned that it was calling off a ceasefire agreement agreed with the Federal Government.
Meanwhile, OPEC and its allies are counting on this current extension to help rebalance oil markets that have been stuck in a glut for over a year. Russia who had been hesitant came around after demanding clarity on how the agreement will run its course because of its complex economic policy which includes a floating exchange rate that fluctuates with the oil price.
Speaking after the meeting, Khalid Al-Falih Saudi’s Oil Minister said, “It’s premature to talk about an exit strategy because OPEC and its allies are relying on oil demand in the third quarter of 2018 to finally eliminate the inventory surplus, but the kingdom is open to discussions about how the group could wind down the cuts “very gradually” once its goals are achieved,” he added.
The major concern for OPEC however is the U.S oil shale production which rose to 9.68bpd and could surpass the 9.9 million targets for December, U.S Energy Information Administration (EIA) reported.
ISAAC ANYAOGU & DIPO OLADEHINDE
