How Saudi’s Oil Output Misfortune Affects Nigeria

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There are indications that Nigeria may not benefit immensely from Saudi Arabia’s recent oil production misfortune, which was prompted by a drone attack on its facilities, writes Chineme Okafor

The options available to Nigeria to make the most of the momentary downtime in Saudi Arabia’s oil production are reportedly very few. And this is because the conditions that would have assured the country a good outing on this do not exist now.

Existing production data from the Organisation of Petroleum Exporting Countries (OPEC) showed that Nigeria in August 2019, produced 1.866 million barrels per day (mbd) of oil, up by 86,000 barrels from the 1.780mbd of oil production it recorded in July.

But with Saudi’s oil production out by about 5.7mbd, the most probable benefit available to Nigeria according to industry experts would be an increase in prices of oil barrels, which however could be relative, and raising production levels at moment looks unfeasible.

What Happened to the Saudis?

Recently, Saudi Arabia’s oil production and exports were disrupted by up to 5.7mbd after drone attacks on two of Saudi Aramco’s plants, including its oil processing facility, were reported.

According to Reuters, the attacks which impacted that much of the kingdom’s production volume was almost half of what it produced currently, and about five per cent of global supplies.

It was further gathered that Saudi Aramco operates the world’s largest oil processing facility and crude oil stabilisation plant in the world at Abqaiq, in eastern Saudi Arabia, and the plant has a crude oil processing capacity of more than seven million barrels per day (mbd).

Further reports from Oilprice.com explained that the kingdom’s interior ministry confirmed the drones attacked Abqaiq facility and the Khurais oil field, sparking a massive fire at the crude processing plant, which is essential to global oil supplies.

It noted that the closure will impact about five per cent of the world’s daily oil production, adding that while Aramco was confident that it could recover quickly, the world could face a production shortage of as much as 150mbd per month.

This, according to oilprice.com, could send oil prices into the triple digits, possibly hitting $100 per barrel.

Reports have shown that supported by supply risks brought about by the drone attacks on Saudi Arabia’s oil infrastructure as well as a cut in U.S. interest rates, oil prices rose sharply on Thursday with the Brent crude futures gaining $1.33 to $64.91 a barrel, while U.S. West Texas Intermediate (WTI) crude went up by $1.03 to settle at $59.17 a barrel.

Accordingly, the Houthi rebels, who are reportedly backed by Iran in a year-long Saudi-led battle in Yemen, asserted responsibility for the strikes and pledged that more assaults should be expected in the future.

Reports further explained that a Saudi-led coalition had been at war with the Houthi movement in Yemen since March 2015, and the battle created one of the world’s worst humanitarian crisis, pressing Yemeni citizens to the brink of starvation.

From the conflict, the US-based Armed Conflict Location and Event Data Project, which tracks it, stated that the death toll has soared to more than 90,000 individuals since 2015.

However, oilprice.com quoted a Houthi spokesperson to have said about the drone attack on Saudi oil assets: “We promise the Saudi regime that our future operations will expand and be more painful as long as its aggression and siege continue.”

It said the Iran-backed Houthis have recently been behind a number of assaults on Saudi pipelines, vessels and other energy infrastructure as tensions grow in the region.

Further, Agence France-Presse (AFP) on the day of the attack quoted Saudi’s interior ministry spokesperson, Mansour al-Turki, to have said that there were no human casualties as a result of the attack.

It equally explained that the strike highlighted the risk posed by the Houthis to Saudi Arabia’s oil infrastructure as tension between the groups continues to escalate.

Further, reports said the growing power of the Houthis’ drone operations was likely to re-ignite the debate on where the militant group got their weapons from.

Global Market

Happening just when Nigeria and Saudi Arabia who are key members of the Organisation of Petroleum Exporting Countries (OPEC), recently in Abu Dhabi pledged to cut back their oil production levels in compliance with the production limitation agreement they signed with non-OPEC member countries led by the Russian Federation, to stabilise oil prices, experts suggest compliance to the production limitation would be hard to come by now.

Already, Brent crude futures and WTI have got to $63.84 and $58.32 a barrel respectively pointedly in response to Saudi Arabia’s disclosure it will resume full operations by the end of the month and further bring its output capacity back to 12 million barrels per day by the end of November.

Speaking on CNBC, UBS oil analyst, Mr. Giovanni Staunovo, said in this regards that: “Global available spare capacity is extremely low at present following the weekend attacks, leaving little room for additional outages, which tends to be price supportive.”

After the attack had happened, the U.S. President Donald Trump said he had ordered that his country’s emergency oil reserves be released to mitigate possible supply crunch and price hike from Saudi’s downtime. However, the International Energy Agency (IEA) subsequently said it saw no need to release emergency oil stocks as markets were well supplied.

The IEA explained it was in regular contact with authorities in Saudi Arabia and other major producing and consuming countries, and it was committed to ensuring that global oil markets remain well supplied by taking rapid action in the event of any sustained shortfalls.

“For now, markets remain well supplied with ample stocks available.

IEA member countries hold about 1.55 billion barrels of emergency stocks in government-controlled agencies, which amount to 15 days of total world oil demand. These can be drawn upon in an emergency collective action and would be more than enough to offset any significant disruption in supplies for an extended period of time.

“In addition, IEA member countries also hold 2.9 billion barrels of industry stocks as of the end of July, a two-year high that can cover more than a month of world oil demand. These stocks include about 650 million barrels of obligated emergency stocks, which can be made immediately available to the market when governments lower their holding requirements. Taken together, these emergency reserves can bring ample additional supply to the global market if needed,” it said in the statement.

The statement further quoted IEA’s Executive Director, Dr Fatih Birol, to have said that: “Recent events are a reminder that oil security cannot be taken for granted, even at times when markets are well supplied, and that energy security remains an indispensable pillar of the global economy.”

Birol added that: “This is why the IEA remains vigilant about the risk of disruptions to global oil supplies, whether they are caused by extreme weather events such as hurricanes, major technical outages, or geopolitical crises, and stands ready to act when needed.”

Nigeria in the equation

Based on Saudi Arabia’s loss of production and Nigeria’s attempt to fund its 2019 federal budget worth about N8.91 trillion largely on revenue from on an estimated oil production of 2.3 million barrels a day and an assumed price of $60 per barrel, the development according to expert may not largely be beneficial to Nigeria for several reasons.

Market experts who interacted with THISDAY on the development pointed out that because Nigeria’s production capacity has remained within 2mbd, its possible benefit from the development could be prices remaining within the $60 per barrel it benchmarked in its budget.

The experts equally noted that on the other hand, the menace of oil theft, which has remained unsolved, could affect Nigeria in the making the most of whatever opportunity the Saudi’s misfortune could present it.

For instance, they pointed to a recent disclosure by the National Economic Council (NEC) of the rising levels of crude oil theft in the country which was put at 22 million barrels between January and June 2019 – a space of six months.

The NEC through the Edo State Governor, Mr. Godwin Obaseki, explained the figure could even double by the end of this year.

Its disclosure on oil theft equally coincided with that of the Nigerian National Petroleum Corporation (NNPC), which said in its June 2019 Monthly Financial and Operations Report (MFOR) that it recorded a staggering 77 per cent rise in cases of oil pipeline vandalism across its network of pipeline infrastructure.

According to the NNPC report, 106 pipeline points were breached, representing an alarming increase from the 60 points vandalised in May 2019.

The corporation in fact explained that products theft and vandalism have continued to make it impossible for it to maximise value addition, indicating that between June 2018 and June 2019, it recorded a total of 2,038 vandalised points on its oil lines, from where theft is perhaps also carried out.

Also, based on a report THISDAY recently obtained from the Nigeria Natural Resources Charter (NNRC) on how oil theft in Nigeria is carried out by even operators in the country’s oil fields, the experts considered that theft of oil was a clear impediment to Nigeria gaining from Saudi Arabia’s misfortune.

Often carried out undetected by the country’s authorities, the NNRC report revealed that Nigeria’s revenue losses over the last few years to oil theft were huge. It even estimated that the country loses N995.2 billion annually to oil theft.

According to the NNRC report, various strategies used to undertake this by its perpetrators include small-scale pipeline tapping, bunkering and over lifting.

It stated that while all three types of theft were not mutually exclusive, they each have different sources, actors, markets, and revenue streams.

Although the NNRC did not quantify how much oil the perpetrators often steal from the country, it however explained that when they do, they always resort to a high-wired network of onshore and offshore operators, sellers, financiers, as well as logistics and security firms to pull it through.

It also explored the political economy of oil theft in Nigeria, its causes, dimensions and efforts to curb the practice that have largely been unsuccessful, and pointed that there seem to be an increased cooperation for the practice because of little or no deterrence from enforcement agencies.