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Nigeria: Rising to Oil Price Slump Challenge

Nigeria should take advantage of the oil price slump to reposition its oil and gas sector. The recent slump in crude oil price as well as the spreading coronavirus (COVID-19) pandemic have sent shock waves to managers of economies that are largely tied to income from crude oil.

The United Nations Economic Commission for Africa (ECA) has predicted that the fall in the price of crude oil will terribly impact Nigeria and Africa’s economy, predicting that Nigeria’s total revenue from oil export in 2020 might drop to between $14 billion and $19 billion against $38.9 billion it had predicted previously.

Also, FXTM, a global financial and research institution, has warned that many companies will go bankrupt if the coronavirus persists for the next two months.

However, the situation has necessitated proposals on counter actions by the federal government, the national oil company as well as other concerned stakeholders to mitigate the effect on the country.

As part of efforts to help the country out of the current quagmire from the industry front, the Nigerian National Petroleum Corporation (NNPC) has stated that it would work to ensure that the cost of crude oil production was reduced.

Speaking in Abuja at a recent forum, the Group Managing Director of the NNPC, Mallam Mele Kyari, had said the national oil firm was ready to deploy strategic measures to reduce the cost of crude oil production in Nigeria to create market for Nigeria’s crude.

While noting that the oil price crash signified the importance of oil to the global economy, he added that oil price would continue to shape activities in the global economy.

According to him, “We used to say when the financial sector collapses, everything collapse. But certainly, it is the other way round. When the oil market collapses, everything collapses. So oil is the only commodity that the beneficiaries panic when the price goes up.”

The GMD, however, forecast that fossil fuel would remain significant contributor to the world’s energy need in the next 40 years.

Kyari said: “But what would not be there in the next 40 years would be inefficient producers because as we speak today, we are getting production from the least expected places. “Nearly every country now produces oil and that means that the best of people who would remain are the people who would produce oil at the cheapest cost.

“Much as these are high expectations, but you must produce them today even at low prices. And the assumption for this year was $60 per barrel. Now, we are facing sub $30 per barrel and potentially we haven’t seen the bottom. We haven’t!

“And this is a challenge to us as a country and it is difficult to manage. It simply implies huge deficit for all of us and it would radiate in all sectors, including the financial sector,” he said.

However, the Major Oil Marketers Association of Nigeria (MOMAN), an umbrella body of petroleum products marketers/distributors, have called on the federal government to use the opportunity offered by the oil price slump to reposition the nation’s petroleum industry.

Chairman of MOMAN and Managing Director of 11Plc, Mr. Tunji Oyebanji, said while the downward trend in oil price should be a source of concern to the world, it however, presents Nigeria with the opportunity to reform and restructure the downstream sector of its oil and gas industry.

Among strategic policy actions suggested to the government were the review of industry margins to enable them improve their earnings and invest in products distribution infrastructure, and the removal of wasteful subsidy on petrol.

According to Oyebanji, the drop in crude oil price will also open up the importation of petrol by bringing multiple players to participate in importation.

“Removing fuel subsidy at this period of drop in prices would eliminate waste, address the issue of low price margin for marketers as well as set the country on the path of determining appropriate pricing for the product through urgent robust reforms,” he said.

On his part, the Chief Executive Officer of Waltersmith Petroman Oil & Gas, an indigenous oil company, Mr. Chikezie Nwosu, said, “the issue of reduction in technical costs of production in Nigeria must continue, irrespective of these current challenges.”

He explained that the, “key reason why Saudi Arabia and Russia can play this game is their relatively low technical costs of production and the significant foreign reserves they have built up as a buffer to such situations. We need to ensure we are positioned similarly.”

Nwosu, however, opined that the oil price crash would not stay with us for a long time, saying, “it may be a quarter or two (if good sense trumps politics).”

According to him, the speed of recovery is tied to two key and obvious areas: How soon the coronavirus pandemic comes under control, either due to a breakthrough in the invention, approval, manufacturing and distribution of a vaccine and/or the effectiveness of control measures and (possibly) seasonal changes.

The second area, he explained, was the coincident effect of the ongoing OPEC+ tensions, which will be controlled once the key players (Saudi Arabia and Russia) arrive at the sensible conclusion that stable oil prices of $50 – $60/ barrel are best for everyone, and that the resilience of the US shale oil producers has to be counterbalanced by periodic production cuts by OPEC+, and not this approach of a ‘race to the pits of hell’.

“Finally, the USA sometimes take a different view of these low oil prices because as an energy consuming economy, the benefits of low oil and gas prices on the other ‘diversified’ aspects of their economy is immense.

“Again, we must learn this lesson of diversification by consuming more of these resources (refine our crude and condensate for internal consumption versus use as a traded commodity, utilise our gas to create an industrial revolution, whether through lower energy costs to manufacturing or consumption of gas by industry),” he added.

In his tacit comment, petroleum economist and Director, Society of Petroleum Engineers (SPE) African Region, Prof. Wumi Iledare, stated that the significant drop in oil price and its effect on the global economy particularly Nigeria was supposed to be a wake-up call in terms of our approach to the nation’s petroleum sector.

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“The Petroleum Industry Fiscal Bill was to be the reform in terms of taxation and royalty. The Petroleum Administration Bill was to be the reform in terms of the administration of the oil and gas industry; and the Petroleum Host Community Bill was to have been the ultimate reform in terms of the relationship with the community. So, we are not there yet,” he added.

In response to the challenge posed by the oil price crash, the Minister of State for Petroleum, Chief Timipre Sylva, had explained the federal government had directed the National Petroleum Corporation (NNPC) to reduce “Ex-coastal and ex-depot prices of PMS to reflect current market realities.”

Sylva, had said the reduction would rejuvenate the economy and bring relief to Nigerians, adding that the PPPRA would also provide a framework for a sustainable fuel supply. He added that the Petroleum Ministry would continue to encourage the use of natural gas as an alternative to fuel consumption.

The statement said: “The drop in crude oil prices has lowered the expected open market price of imported petrol below the official pump price of N145 per liter.

“Therefore, Mr. President has approved that Nigerians should benefit from the reduction in the price of PMS, which is a direct effect of the crash in global crude oil prices.

“In view of this situation, based on the price modulation template approved in 2015, the federal government is directing the Nigerian National Petroleum Corporation (NNPC), to reduce the ex-coastal and ex-depot prices of PMS to reflect current market realities.