With crude oil trading around $30 per barrel in the international market from a peak of $114 in June 2014, production from Nigeria now faces a decline as some fields face an imminent shutdown if the low oil price persists.
Industry players say operating some of the fields in the country is becoming uneconomic, with the selling price of oil being driven down close to the production cost level.
The price of the Nigerian crude oil, Bonny Light, has fallen to $29.47 per barrel, according to the latest data obtained from the Central Bank of Nigeria.
“When oil price drops, we are all in serious trouble, because if the oil price and your unit operating cost are almost the same, it means that when you sell the oil, there is little profit or you are at a loss. Many companies are not far from there,” the Project Director for the Uquo gas field development, a joint venture project by Frontier Oil Limited and Seven Energy, Alhaji Abdullahi Bukar, told our correspondent.
“The unit technical cost of many of our producers is not far from $30 per barrel. So many companies are in trouble,” he added.
According to Bukar, the average production cost for many of the fields in the country is $24 to $25 per barrel.
“For some fields, the production cost is well above $25, maybe $28. For some fields, it is well below $20 and $25. Many of the older fields, which are mostly with the International Oil Companies, have got high production costs,” he said.
Global financial services firm, Morgan Stanley, on Monday joined banks such as Goldman Sachs, City Group and Bank of America Merrill Lynch, in warning that prices could slide to $20 per barrel.
Bukar said, “The production in Nigeria is going to suffer. In the last five years, we have not invested as much as we should to develop additional reserves. Once, we keep going like that, whether there is price change or not, the amount of oil Nigeria is going to be producing will go down.
“When the price drops as low as $20-$30 range, people who have got those old fields or fields where oil production cost is above the selling price will shut them down. There is no point in producing oil to sell at a loss.”
Nigeria, Africa’s top oil producer, relies on crude oil for most of its export earnings and government revenue. Oil production in the country has continued to hover between 1.9 million barrels per day and 2.3 million bpd in recent years.
President Muhammadu Buhari had projected crude oil production of 2.2 million bpd for this year’s budget, down from 2.2782 million bpd in the 2015 budget, with oil-related revenues expected to contribute N820bn.
Industry experts also say the continued decline in global oil prices would stall a number of deep-water projects in the country.
The Chief Executive Officer, Petrosystem Nigeria Limited, Mr. Adeola Elliott, said, “Obviously, the plunging price will affect investment in new fields. I had a discussion with a top official in one of the IOCs operating in the country. What they have done now is to just keep maintaining the facility they have now and producing what they producing now. There is no more new investment.”
Prior to the drop in prices, several IOCs had in recent times shifted more of their focus to the offshore areas of the Nigerian oil industry as a result of onshore risks, with a number of planned deep-water projects expected to come on stream in the coming years.
Deep-water oil projects that have yet to achieve Final Investment Decision include Bonga Southwest and Aparo (Shell); Zabazaba-Etan (Eni); Bosi, Satellite Field Development Phase 2 and Uge (ExxonMobil); and Nsiko (Chevron).
An energy expert and Technical Director, Drilling Services, Template Design Limited, Mr. Bala Zakka, said with oil at $30 per barrel, the profits and projects, including Corporate Social Responsibility activities of many oil firms would be negatively affected.
“Major deep-water projects will be affected because they are very expensive. If oil continues to fall, a lot of exploration and drilling campaigns will reduce. A lot of marginal field operators will not be able to drill new wells. There is every possibility that companies will retrench to be able to stay afloat,” he said.
The Head, Energy Research, Ecobank Capital, Mr. Dolapo Oni, said, “Our production is really having issues, and I think it might be worse in 2016. Our production is likely to reduce this year.
“There are not as many fields likely to come on stream this year. Most companies just want to focus on their existing production. So, it is possible we won’t see as much new production come on stream to reverse the trend of decline in major fields we have. That might make production go down.”
Oil prices could reach as low as $10, Standard Chartered warned, stating, “Given that no fundamental relationship is currently driving the oil market towards any equilibrium, prices are being moved almost entirely by financial flows caused by fluctuations in other asset prices, including the dollar and equity markets.”
Wood Mackenzie, the energy consultancy firm, said in a report last week that since the oil price collapse in 2014, 68 major upstream projects containing 27 billion barrels of oil equivalent had been deferred.
This, it said, amounted to $380bn of capital expenditure deferred by total project spend in real terms.
It stated, “As oil prices continue to fall and capital allocation tightens, we expect the list will grow further. The level of production impacted by these deferrals is material in a global context.
“The FIDs on many of these projects have been pushed back to 2017 or beyond. Deep-water is hit the hardest. Over the next five years, $170bn of potential investment currently hangs in the balance across these 68 projects.”
Wood Mackenzie says, in all, some 27 billion barrels of oil equivalent in reserves, or 2.9 million barrels per day of liquids production, will not come on stream until early in the next decade, later than envisaged.
High cost deep-water fields, particularly those in Angola, Nigeria and the Gulf of Mexico, requiring heavy upfront investment, account for more than half of that deferred production.
Brent Crude Rises to $69 on IEA Report
Oil prices rose after the release of the International Energy Agency’s (IEA) closely-watched Oil Market Report, with WTI Crude trading at above $66 a barrel and Brent Crude surpassing the $69 per barrel mark.
Prices jumped even though the agency revised down its full-year 2021 oil demand growth forecast by 270,000 barrels per day (bpd) from last month’s assessment, expecting now demand to rise by 5.4 million bpd. The downward revision was due to weaker consumption in Europe and North America in the first quarter and expectations of 630,000 bpd lower demand in the second quarter due to India’s COVID crisis.
The excess oil inventories of the past year have been all but depleted, and a strong demand rebound in the second half this year could lead to even steeper stock draws, the IEA said yesterday, keeping an upbeat forecast of global oil demand despite the weaker-than-expected first half of 2021.
However, the upbeat outlook for the second half of the year remains unchanged, as vaccination campaigns expand and the pandemic largely comes under control, the IEA said.
Moreover, the global oil glut that was hanging over the market for more than a year is now gone, the agency said.
“After nearly a year of robust supply restraint from OPEC+, bloated world oil inventories that built up during last year’s COVID-19 demand shock have returned to more normal levels,” the IEA said in its report.
In March, industry stocks in the developed economies fell by 25 million barrels to 2.951 billion barrels, reducing the overhang versus the five-year average to only 1.7 million barrels, and stocks continued to fall in April.
“Draws had been almost inevitable as easing mobility restrictions in the United States and Europe, robust industrial activity and coronavirus vaccinations set the stage for a steady rebound in fuel demand while OPEC+ pumped far below the call on its crude,” the IEA said.
The market looks oversupplied in May, but stock draws are set to resume as early as June and accelerate later this year. Under the current OPEC+ policy, oil supply will not catch up fast enough, with a jump in demand expected in the second half, according to the IEA. As vaccination rates rise and mobility restrictions ease, global oil demand is set to soar from 93.1 million bpd in the first quarter of 2021 to 99.6 million bpd by the end of the year.
OPEC Expects Increase In Global Oil Demand Raises Members’ Forecast on Crude Supply
The Organisation of Petroleum Exporting Countries (OPEC) yesterday lifted its forecast on its members’ crude this year by over 200,000 bpd and now expects demand for its own crude to average 27.65mn bpd in 2021.
This is almost 5.2mn bpd higher than last year and around 2.7mn b/d higher than an earlier estimate of the group’s April production.
According to the highlights of the organisation’s latest Monthly Oil Market Report (MOMR), OPEC crude is projected to rise from 26.48 million bpd in the second quarter to 28.7 million bpd in the third and 29.54 million bpd in the fourth quarter of the year.
The report also indicated a fall in Nigeria’s crude production from 1.477 bpd in February to 1.473, a difference of just about 4,000 bpd before rising again in April to 1.548 million bpd, to add 75,000 bpd last month.
OPEC stated that its upward revision of members’ crude was underpinned by a downgrade in the group’s forecast for non-OPEC supply, which it now expects to grow by 700,000 bpd to 63.6mn b/d against last month’s report’s projection of a 930,000 bpd rise to 63.83mn bpd.
The oil cartel projected that US crude output would drop by 280,000 bpd this year, compared with its previous forecast for a 70,000 bpd decline.
On the demand side, OPEC kept its overall forecast unchanged from last month’s MOMR, stressing that it expects global oil demand to grow by 5.95 million bpd to 96.46 million bpd this year, partly reversing last year’s 9.48mn bpd drop.
Spot crude prices fell in April for the first time in six months, with North Sea Dated and WTI easing month-on-month by 1.7 percent and 1 percent, respectively.
On the global economic projections, the cartel said stimulus measures in the US and accelerating recovery in Asian economies might continue supporting the global economic growth forecast for 2021, now revised up by 0.1 percent to reach 5.5 percent year-on-year.
This comes after a 3.5 percent year-on-year contraction estimated for the global economy in 2020.
However, global economic growth for 2021 remains clouded by uncertainties including, but not limited to the spread of COVID-19 variants and the speed of the global vaccine rollout, OPEC stated.
“World oil demand is assumed to have dropped by 9.5 mb/d in 2020, unchanged from last month’s assessment, now estimated to have reached 90.5 mb/d for the year. For 2021, world oil demand is expected to increase by 6.0 mb/d, unchanged from last month’s estimate, to average 96.5 mb/d,” it said.
The report listed the main drivers for supply growth in 2021 to be Canada, Brazil, China, and Norway, while US liquid supply is expected to decline by 0.1 mb/d year-on-year.
Oil Rises Over Concerns of Fuel Shortages
Oil prices rose on Tuesday, as lingering fears of gasoline shortages due to the outage at the largest U.S. fuel pipeline system after a cyber attack brought futures back from an early drop of more than 1%.
Benchmark gasoline futures prices rose 1 cent to $2.14 a gallon.
On Monday, Colonial Pipeline, which transports more than 2.5 million barrels per day (bpd) of gasoline, diesel and jet fuel, said it was working to restore much of its operations by the end of the week.
“Right now there’s a generalized anxiety premium being built into prices because of Colonial and it’s keeping a floor under the market,” said John Kilduff, partner at Again Capital LLC in New York.
Fuel supply disruption has driven gasoline prices at the pump to multi-year highs and demand has spiked in some areas served by the pipeline as motorists fill their tanks.
Traders booked at least four tankers to store refined oil products off the U.S. Gulf Coast refining hub after a cyber attack that knocked out the pipeline, shipping data showed on Tuesday.
North Carolina, the U.S. Environmental Protection Agency and Department of Transportation issued waivers allowing fuel distributors and truck drivers to take steps to try to prevent gasoline shortages.
OPEC on Tuesday raised its forecast for demand for its crude by 200,000 bpd and stuck to its prediction of a strong recovery in global oil demand this year as growth in China and the United States counters the coronavirus crisis in India.
Meanwhile, the rapid spread of infections in India has increased calls to lock down the world’s second-most populous country and the third-largest oil importer and consumer.
India’s top state oil refiners have already started reducing runs and crude imports as the new coronavirus cuts fuel consumption, company officials told Reuters on Tuesday.
On the bullish side for crude, analysts are expecting data to show U.S. inventories fell by about 2.3 million barrels in the week to May 7 after a drop of 8 million barrels the previous week, a Reuters poll showed.
Gasoline stocks are expected to have fallen by about 400,000 barrels, analysts estimated ahead of reports from the American Petroleum Institute on Tuesday and the U.S. Energy Information Administration on Wednesday.
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