The Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, recently gave an account of how a 2016 oil production cut exemption granted Nigeria by the Organisation of Petroleum Exporting Countries was beneficial to the country.
In this report, Chineme Okafor, reviews the deal
It is almost two years since Nigeria got what analysts considered a good deal from the oil production cut member-countries of the OPEC and non-OPEC associates led by the Russian Federation, agreed to raise prices of oil which had gone down and threatened a lot of economies including Nigeria.
From the December 2016, OPEC and its 11 non-OPEC associates decided to cut their crude oil production levels by almost 1.8 million barrels per day (mbd) to support a market rebalancing effort by taking out excess oil volumes, limiting supplies and shoring up oil prices.
At the meeting, it was agreed that the cut would kick off in January 2017, but with Nigeria and Libya exempted from taking part because of the production disruptions they had in their respective oil fields which severely impaired their output levels and uniquely affected their economies.
As reported then, oil production from both countries witnessed intense disruptions from separate violent uprisings and militant activities.
This affected their respective OPEC production quotas, hence the exemption to enable grow productions to their pre-agreement levels after which additional outputs would be capped.
For Nigeria who participated intensely in the negotiations as confirmed by Kachikwu recently, the exemption gave the country a breather considering that its production had plunged as a result of disruptions by armed militants in the Niger Delta.
With prices down to low levels and affecting investment in the sector as well as government revenue, disruption in production became an additional headache Nigeria could not deal with.
In fact, it was a double whammy for the country as the development contributed to the country’s slide into economic recession in 2016.
The OPEC Negotiations
But then, the country realising how it had badly been hit by the developments, initiated and sustained for months what Kachikwu referred to then as a shuttle diplomacy to galvanise major oil producers’ blocs to knock out a deal to revive the oil market.
Recalling how the country fared in the 2016 oil output cap negotiations, Kachikwu explained the country had a good negotiation.
According to him, his shuttle diplomacy across member countries of OPEC was a precursor to the agreement. He also said that Nigeria at that time was strategically alert in its conversations with the group.
To give further insight on the roles Nigeria played to get countries in the cartel to sit down to agree on the alternatives available to them to overcome the price slump, Kachikwu, explained the country was available and committed in all the key negotiation stages, as well as in leadership of subcommittees, and crafting of the final agreements parties were then meant to sign.
But, negotiating an exemption for the country, he added was not a walkover as some producing countries resisted the exemption even though she eventually overcame the oppositions and got what it wanted.
“We took over OPEC when prices were plummeting and countries were fighting over who would bring in barrels. It was a very tough time to lead OPEC and my job was stopping the attrition war and see how everybody could cooperate and help OPEC regain its credibility, relevance and premium pricing, and this resulted to the OPEC declaration.
“But more importantly for us, was that we succeeded in negotiating an exemption at a time when countries were compelled to reduce volumes drastically to shore up the volumes that were to be taken out of the market,” said Kachikwu, in his explanation of what the situation was with OPEC at the time the deal was struck.
Gains from the Negotiations
To contextualise what he said were the benefits Nigeria got from the exemption, Kachikwu, said that it helped Nigeria raise its oil production level, and ensured its forex reserves grew to $45 billion, from the $25 billion he said was the level of the reserves then.
From this, he noted that Nigeria produced and sold more oil which resulted in about $20 billion addition to her foreign exchange reserves.
“It wasn’t an easy negotiation for Nigeria but we got it and subsequently renewed the exemption over two periods. This stabilised supplies, income, our budget was able to get largely funded.
“We began to see our reserves for the first time grow dramatically from an all-time $25 billion to as high as $45 billion currently – $20 billion movement in terms of reserves growth,” said Kachikwu, in this regards.
In addition to the reserves growth through output exemption, Kachikwu, stated that Nigeria equally reinforced its commitment and influence in OPEC by getting it to elect Dr. Barkindo Mohammed, as its Secretary General. This he noted has helped the country regain its relevance within the cartel.
Gains Eroded by Rising Subsidy Payments
Though the minister did not admit the country was perhaps not make the most of the exemption for the simple reason that it still maintains a subsidy regime on petrol consumption which by reports drains its oil revenue.
He, however suggested that Nigeria would need to take proactive steps to enjoy the revenues from the improved oil prices.
“We need to continue to look at the global oil market that continues to do a pendulum movement, we need to do this because the earlier Nigeria can reap the best benefits in terms of the incomes from this resource, the better we can do our diversification project, the better we can finance our budgets, the better we can create employment, peace and harmony and the better lifestyle that we have as Nigerian citizens,” he said.
At the moment, reports indicate Nigeria’s fuel subsidy bills have gone way up, and could rise further.
Based on a recent report from Lagos-based research and financial advisory firm, the Financial Derivatives Company (FDC), the continuous rise in crude oil prices are set to send Nigeria’s bill for fuel subsidies rocketing above $3.85 billion.
The $3.85 billion quoted by the FDC, was however different from recent claims by the Nigerian National Petroleum Corporation (NNPC) that funds for subsidy which it kept at the Central Bank of Nigeria (CBN) was revolving around $1.05 billion.
Quoting analysts such as Tunde Ajileye, a partner at SBM Intel – a political and economic risk consultancy, the FDC report said Nigeria currently sits, “on a double-edged sword: when oil prices go down, government revenues go down and it becomes difficult to get foreign exchange. When oil prices go up, while there is usually an increase in government revenues, the big issue is that for refined products like fuel and diesel, the prices go up and the subsidy bill goes up.”
Similarly, in his submission in the report, Jubril Kareem, an energy analyst at Ecobank, explained that no one knows exactly what the NNPC pays itself for under-recovery on petrol it imports into the country being currently the sole supplier for the country.
“At least before, we knew what NNPC was paying in subsidy (because of monthly reports that the NNPC no longer regularly issues). Now you don’t know that. You would understand why a government would want to keep it that way,” Kareem, noted.
Beyond the Exemption
Notwithstanding the impacts of the oil production deal and exemption for Nigeria, Kachikwu, also noted that his other diplomatic shuttles which included strategic visits to International Oil Companies (IOCs) with the aim of galvanising support and mobilising funds for the Nigerian petroleum industry, have yielded results.
He said the travels and one-on-one conversations with the IOCs helped placed Nigeria on their investment tables, adding that Nigeria would be top priority when investment options are being considered by chief executives of the IOCs.
“I embarked on strategic visits to the IOCs and the reason was simple: If we do all we want, in terms of the policy drives, in terms of the need to increase production, in terms of the need to increase infrastructure; but a large amount of those funds comes from abroad.
“We visited all of them in their headquarters, held meetings and aligned them to a lot of the initiatives we have. Initiatives in terms of gas expansion; initiative in terms of crude oil production stabilisation; in terms of a new funding mechanism to deal with the cash call problems that we had and initiative with local content drive,” he said.
Furthermore, the minister noted: “With all these, what can we do in terms of international collaborations? Quite a bit more. We need to get into the financing corridors and be able to find the funding to develop our infrastructure.
“As we move from a public sector driven oil sector model, private sector financing is key.
“We need to be able to find investors, who on the basis of equity investments can come in and massively change some of the dilapidated infrastructure that we see here and create a business model that makes sense for this country.
“We will like to see production go up, at cost that makes a lot of sense. We will like to hold conversations with a lot of people and be able to look at the Production Sharing Contract (PSC) terms and get the very best value for this country.”