- Preparing Nigeria for Possible Crude Oil Production Cut
A capping or reduction in Nigeria’s crude oil output is likely going to happen soon and this will impact the economy adversely considering the economic significance of the commodity, stakeholders have said.
Earlier this week, it was reported that the Organisation of Petroleum Exporting Countries may ask Nigeria and Libya to cap their crude oil output soon in an effort to help re-balance the global crude oil market.
This is because the two countries had boosted oil production since they were exempted from the global cuts led by the OPEC and other producers.
OPEC and non-OPEC producers have invited the two African nations to their committee meeting in St. Petersburg, Russia, on July 24, 2017, to discuss the stability of their production, according to the Kuwait Oil Minister, Issam Almarzooq.
Almarzooq is also the chairman of the committee monitoring the compliance of OPEC and non-OPEC suppliers with output cuts that started in January to the extended date of March 2018.
To cushion the effect of an imminent cut in Nigeria’s crude production on the economy, stakeholders and operators in the oil sector urged the Federal Government to start implementing measures that would boost economic activities outside oil export.
They noted that the exemption of Nigeria by OPEC with respect to capping its crude production might end anytime soon, judging by the recent comments of the oil cartel’s official.
Almarzooq had earlier said, “We (OPEC) invited them (Nigeria and Libya) to discuss the situation of their production. If they are able to stabilise their production at current levels, we will ask them to cap as soon as possible. We don’t need to wait until the November meeting to do that.”
Crude price sank into bear territory last month amid concerns the cutbacks by OPEC, Russia and other allies were being partially offset by a rebound in supply by Libya, Nigeria and United States’ shale output. Libya and Nigeria were exempted from the cuts due to their internal strife.
“Any cut in Nigeria’s crude output will, of course, impact negatively on our economic activities because oil is the mainstay of this economy,” a former President, Association of National Accountants of Nigeria, Dr. Samuel Nzekwe, said.
He added, “This is why the government must now begin to look inwards to get money and we can see that they are trying to do so through taxation using the Federal Inland Revenue Service. Also, we’ve been hearing about yam export from Nigeria recently, which is geared towards earning more foreign exchange.
“So it is no gainsaying to state that Nigeria must make all necessary preparations to mitigate the severe impact of a possible cut in crude output. For if there is any cut or if Nigeria is asked to put a cap to its crude oil production, it is going to hit the country seriously.”
Nzekwe noted that this was another reason why some government officials often talked about borrowing, but was quick to state that the notion had been criticised in some quarters, as the cost of servicing such loans was high.
“It is therefore glaring that presently we are having financial problems as a country and if you now cut our crude production output, then there is going to be more economic chaos for us in Nigeria,” he said.
On the way forward should the global oil cartel ask Nigeria to cap its crude production, Nzekwe said, “I think what we should do now is to further ascertain how to generate more funds internally and also export more of our products, both raw and manufactured goods. If we don’t do this, at the end of the day we will find ourselves in a very big mess.
“There is need for an enabling environment that will allow businesses to thrive. The manufacturing sector of the economy must be allowed to thrive. We must look at what to do in order to start importing less and produce more of what we consume in Nigeria.”
He added, “If we do that, even if there is a cap or reduction in our supply of oil, we will not feel the impact as being that severe. But because virtually all we use in Nigeria today are imported, we spend the limited foreign exchange we have on these imported items and deplete our reserves.
“If we have food security, if manufacturers are producing more than 70 per cent of what we need in Nigeria and we export more than we import, then there will be less cause for worry. So Nigeria should see the possibility of cutting its crude production as a warning and must be prepared to adjust aright.”
The Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, had earlier hinted that OPEC might ask the country to cut its production output.
He stated that the country was open to such request, adding that it was the responsibility of member countries to do all that was necessary to ensure stability in crude oil prices.
The minister said, “Serious members of OPEC will support the cuts when we are sure that we can have a stable and predictable production. Yes, we’ve got 1.7 million barrels production daily, but it is still below the 1.8 million barrels that was used as benchmark for us at OPEC.
“But the reality is that this is a very difficult terrain and we’ve got to watch it for a couple of months to be sure that what you see is quite sustained. We will ultimately find stability in this market. Nigeria will do whatever it takes to help that stability.”
Kachikwu, however, expressed hope that oil prices might stabilise later this month or in August, adding that conversations with other OPEC members would determine to what extent Nigeria would have to support in stabilising crude prices globally.
“I’m sure that by the time I have conversations with my colleagues, we will determine at what time frame we will see Nigeria coming in, with a lot more predictive analysis of what our market is looking like and what we need to do to further help. Hopefully by then, we would have been out of the price uncertainties that we are seeing today,” he added
The oil minister explained that Nigeria and Libya came into focus after they seemed to resolve some of the political challenges that had slashed their production.
Libya’s oil output climbed to more than one million barrels per day for the first time in four years, while Nigeria’s production rose by 50,000 barrels per day in June, according to a Bloomberg survey.
Giving that Libya and Nigeria’s exemptions to production cuts was a collective decision, and any proposal to include them in OPEC’s plans would also require a joint decision, the Secretary-General, OPEC, Mohammed Barkindo, told reporters at a recent event in Istanbul.
Barkindo, however, noted that it was still too early to discuss steeper cuts by the group and its allies.
On whether the crash in crude oil price and the likely call by OPEC for a reduction in Nigeria’s oil production would impact the implementation of the country’s 2017 budget, Kachikwu replied, “In terms of the budget impact, definitely.”
He added, “The Ministry of Finance is looking for ways to cover some of this shortfall and part of that is efficiency, like how to cut down our expenditures. So the budget will be impacted.
“We are working hard at the Federal Executive Council to see how we can forecast or predict that sort of impact in order to see how we can cover them.”
Another petroleum analyst, Mr. Bala Zakka, told our correspondent that the Federal Government must look at ways to mitigate the harsh economic realities that would follow any likely cut in crude output by Nigeria.
to him, most Nigerians were already suffering the negative effect of an economy that is in recession. He noted that it would be too much to bear if no concrete step was taken to cushion the effect of a reduction in Nigeria’s crude oil production.