Confronting Global Oil Market Headwinds

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Sanusi Barkindo

Emmanuel Addeh writes on how an attempt to proffer solutions to the crisis currently besetting the global oil market, brought together key decision makers and stakeholders in Nigeria’s oil and gas industry, last week, in a virtual meeting

Arguably, no year like 2020, has more aptly conveyed the volatility and unpredictability of the global crude oil market, which has left many countries and companies struggling for survival.
Since March, the spread of the COVID-19 pandemic succeeded in reversing nearly all the positive momentum in oil prices garnered before then, leaving in its trail a pessimistic oil demand outlook on the back of severe oversupply.

For the oil industry, in terms of pricing, it was double whammy as demand totally collapsed and oil prices began a downward spiral, at a point hitting rock bottom and finally falling into the negative zone.
Aside travel restrictions due to containment efforts which affected movement, leading to the shutting down of crude oil-dependent businesses as well as all forms of transportation involving the use of fuel, the price war between Russia and Saudi Arabia, further exacerbated an already bad situation.
What was thought a fundamentally public health crisis eventually led to an economic recession as the COVID-19 pandemic began to deal a huge blow on the country’s revenue sources, a large chunk of which comes from crude oil sales.

Data from the budget office, indicates that crude oil was about 62 per cent of government revenues and 77 per cent of export earnings in 2019, thus, Nigeria has found itself grappling with a dual crisis – an oil crash and the pandemic with all its attendant economic ramifications.

With an initial $57 per barrel projection, the country subsequently reviewed the budget oil price benchmark to $28 per barrel for 2020 and production was revised downwards to 1.8million barrels per day (mbpd) from 2.18 mbpd due to curbs imposed by the Organisation of Petroleum Exporting Countries (OPEC).

In the midst of all the chaos, the Nigeria Oil and Gas Conference & Exhibition (NOG), an annual event, which provides a platform for the international energy industry to interact with Nigerian oil and gas decision makers , last week offered yet another opportunity for key players to discuss the myriad of problems and the possible solutions.

Prominent players in the global oil and gas industry, including the Secretary General of the Organisation of Petroleum Exporting Countries (OPEC), Dr Sanusi Barkindo and the Minister of State, Petroleum, Chief Timipre Sylva, assessed the state of the sector, agreeing that urgent decisions must be taken to ensure its survival.

Speaking during the conference, Barkindo who chaired the occasion, recalled the catastrophe visited on the global oil and gas industry by the COVID-19 pandemic and oversupply of inventory from April this year, stressing that Nigeria’s exports plunged by 77 per cent in just three months.
Also present at the event tagged “Fortifying the Nigerian Oil & Gas Industry for Economic Stability & Growth” were the Group Managing Director, Nigerian National Petroleum Corporation (NNPC), Mallam Mele Kyari, Director of the Department of Petroleum Resources (DPR), Mr Sarki Auwalu and Managing Director, Nigeria LNG, Mr Tony Attah.

In attendance also at the ceremony was the Executive Secretary of the Nigerian Content Development and Monitoring Board (NCDMB), Mr Simbi Wabote.
Barkindo, noted , however, that in the last couple of months the oil and gas industry in Nigeria has rebounded by over 116 per cent due to what he said were robust decisions taken by key stakeholders, including President Muhammadu Buhari, who he said played a pivotal role in the OPEC Declaration of Cooperation (DoC) document.
“Nigerian crude oil export earnings plunged by 77 per cent within three months between January to April 2020, but since then they have gradually improved and rebounded by 116 per cent in November compared to April 2020 levels.

“The government should be applauded for its quick and robust actions. From the perspective of OPEC, I would also wish to express our deep gratitude to President Buhari, who has long been an advocate of OPEC in its overarching commitment to market stability,” he stated.

He posited that the government’s proactive response with economic stimulus packages helped protect the economy from a more severe contraction, adding that Nigeria is now consistently regarded as one of the most admired and respected members of the OPEC family, particularly in the realm of consensus building.
Describing the impact of COVID-19 on the global oil and gas market as unprecedented, the OPEC boss stated that today, the world faces a new wave of infections and renewed lockdowns in many regions.

“Let me quote from OPEC’s January 2020 Monthly Oil Market Report published at the beginning of this year. In that report, global economic growth was at a positive 3.1 per cent for 2020. For this year, total world oil demand was projected to rise from 99.77 mb/d in 2019 to 100.98 mb/d.
“Only a few weeks later the world plunged into an unparalleled health crisis that has had severe implications on every aspect of our lives. The economy plunged into a deep recession.

“The global economy is now forecast to shrink by 4.3 per cent in 2020; all OECD economies are forecast to see a contraction, and all countries in Africa are anticipated to see a drop in GDP too. China is the only major economy expected to witness growth in 2020,” Barkindo lamented.
He stated that with the latest estimations for the year 2020, overall oil demand will contract by 9.8 mb/d to average 90 mb/d, an overall loss of about 10 per cent.

Barkindo emphasised that as part of efforts to revamp the market, last Thursday, OPEC member countries and participants in the DoC decided to reconfirm the existing commitment of the DoC decision from April 12, amended in June and September 2020, and to gradually return 2 mb/d to the market, with effect from January 1, 2021.
“Starting in January 2021, participating countries will adjust production by 500,000 tb/d from 7.7 mb/d to 7.2 mb/d. Additionally, the meeting decided to hold monthly OPEC and non-OPEC ministerial meetings starting in January 2021 to assess market conditions.

“It will also determine further production adjustments on a month-by-month basis while the compensation period for overproduction by DoC participating countries was also extended until the end of March 2021 to ensure full compensation,” he added.

The former NNPC GMD said between May and October, participating OPEC and non-OPEC countries contributed to reducing the global supply by approximately 1.6 billion barrels, including voluntary adjustments, which has been key to market rebalancing.

Drawing from the World Oil Outlook (WOO) 2020, he explained that after a large drop in 2020, global primary energy demand is forecast to continue growing in the long term, increasing by a significant 25 per cent in the period to 2045.

Barkindo noted: “The key drivers of this demand are the more than doubling of GDP from $121 trillion in 2019 to more than $258 trillion in 2045 and the addition of around 1.7 billion people worldwide by 2045 to a level of close to 9.5 billion.

“We expect oil to retain the largest share of the energy mix throughout the forecast period, providing nearly 28 per cent of global requirements in 2045, followed by gas at around 25 per cent and coal at around 20 per cent.”

In his remarks, Sylva stated that President Muhammadu Buhari was focused on cost cutting measures that will enable growth and development of the economy.
“For us in the ministry’s of petroleum we are looking at the National Gas Expansion Programme (NGEP) which will boost the use of natural gas in the short and medium terms.
“It is also part of the plan by the federal government to shift from crude oil to gas. We have initiated efforts to improve gas accessibility and availability and boosting gas based industrialisation and promoting economic diversification.

“With a proven gas reserve of over 200tcf, Nigeria has huge potential on the path to become an industrialised nation with the right policies . The federal government is committed to these programmes which will develop genuine partnerships,” he noted.
Sylva added that deregulation will save Nigeria N1 trillion every year, while market forces will continue to determine fuel prices.

Also commenting, the NNPC GMD, Kyari, projected that the demand in the oil and gas industry will remain suppressed substantially till the end of 2020.
But he noted that despite all the forecasts , oil will continue to play a significant role in the energy mix till 2050.

“ So, it doesn’t mean oil will vanish. What it means is that in terms of its significance, in terms of the volumes of contribution, it will reduce as the years go by.
“It is also true that many countries have made significant business decisions in the use of fossil fuel , including the United Kingdom, which has said that no car will run on fossil fuel in the next 10 years.

“This portends a huge change in the way we consume fuel and as we progress, many countries may follow. If they do and it has an impact on our production, it means that only companies and businesses that are cost efficient and are quick to get to the market will benefit from this environment.
“That’s why we are bringing down cost of production so that we will become competitive and we are able to get to market earlier and remain in this game,” he stated.

He said the national oil company was committed to bringing down the unit cost of oil production in the country to $10 per barrel, so as to remain competitive in the industry and deliver value to all Nigerians.
He explained that the NNPC was already working hard to deepen domestic gas utilisation by putting in place the right fiscal environment and the right infrastructure in order to generate more employment and broaden Nigeria’s economy.

According to the GMD, the Petroleum Industry Bill (PIB) was the key enabler that would ensure NNPC’s fiscal environment becomes more competitive and transparent, where investors can project into the next 30 years.
Also, the DPR boss, Auwalu, noted that the department is no longer just a regulator, but an opportunity provider and business enabler.

“There’s no gainsaying that oil and gas is pivotal to our economy because it accounts for 10 per cent of GDP, 65 per cent to 70 per cent in government revenues and over 80 per cent foreign exchange earnings,” he said.
Managing Director, Nigeria LNG, Mr Tony Attah, argued that though Nigeria has recently ramped up its gas production activities, there’s no better time to reposition since the use of fossil fuel is becoming outdated, with countries now using alternative sources of energy like electricity to power their vehicles.

“ Oil is definitely running out of time. But we are very rich in gas. So, it’s an opportunity to reposition ahead of the changing energy mix to bring about a greater future.
“Look at what other countries have been able to do with their gas reserves. Australia has less than 200 TCF of gas, but it has 89 million tonnes capacity.

“We have over 200tcf plus the 600tcf scope I talked about , but we are just working towards 30 million tonnes. It tells me that we have a lot more work to do. Gas is power, gas is safer, gas is cleaner, affordable and available,” he said.

For the oil and gas industry, it has been a tortuous year, but then it has also offered opportunities for countries and businesses huge opportunities to do things differently to navigate what the NNPC GMD, Kyari would call the “voodoo market”, one in which even facts and figures, sometimes fail, largely due to extraneous and unforeseen circumstances.

The battle to return the market to stability is far from over, yet for the stakeholders , the struggle has begun to bear fruits, with crude oil prices gradually climbing and indeed hitting $50 per barrel last Thursday, the first in nine months for a commodity that fell to the negative territory around April this year.