Emmanuel Addeh writes that Nigeria’s inability to meet its allocated oil production quota by the Organisation of Petroleum Exporting Countries (OPEC) for months, not only poses a clear challenge to its much-needed drive to earn foreign exchange, but could also distort the cartel’s global monthly output plan.
Nigeria’s dire need to inject more petro-dollars into its economy has recently seen the Central Bank of Nigeria (CBN) taking all kinds of measures, including unorthodox ones, to place tight controls on the movement of the much sought after American greenback.
But while the problem of dollar scarcity persists, Nigeria, which is heavily dependent on its main forex earner, oil, has been struggling to meet even its ‘paltry’ share of the OPEC production quota. The commodity still accounts for up to 90 per cent of Nigeria’s total fx earnings.
For at least three months, the federal government, represented by the Nigerian National Petroleum Corporation (NNPC) and its partners, the International Oil Companies (IOCs) and a handful of indigenous producers have been unable to fully fill the vacuum created for it by OPEC.
Background
In April last year, OPEC and its allies led by Russia agreed to a record cut in output to prop up oil prices amid the coronavirus pandemic in an unprecedented deal which also involved fellow oil nations like the United States.
Countries embarked upon measures to slow the spread of the coronavirus, which had then crippled demand for fuel and driven down oil prices, severely impacted budgets of oil producers like Nigeria.
Known as OPEC+, with the reactivation of the Declaration of Cooperation (DoC), upon which many such decisions are based, the cartel agreed to reduce output by a whopping 9.7 million barrels per day (bpd) after four days of intense talks.
It was the biggest oil cut ever, quadrupling the previous record cut in 2008, with oil demand dropping by around a third and further worsened by a price war between Russia and Saudi Arabia that brought a flood of supply just as demand for fuel was crushed by the pandemic.
It was a bad time for the global oil industry as prices snowballed into the negative territory and countries indeed offered monies as incentives to buyers to evacuate their inventories or risk shutting down their facilities, which could pose a huge challenge to restart.
Nigeria, like other countries were allocated oil production quotas lower than what they had the capacity to pump, a decision that has remarkably turned the situation around and stabilised the global oil market.
With the industry gradually bouncing back, OPEC has continued to return the production shut in by its decision to curb over-supply. But the challenge is that Nigeria has been unable to meet that allocation given to it, although ironically, it is asking for an increase in its supply to the market.
Originally set to expire in April 2022, the OPEC+ group’s decision to extend a recent deal allows for more time to unwind the 5.8 million bpd that is still being withheld to be unwound in a more gradual manner.
Deteriorating facilities, shut-ins
But despite asking for a higher baseline in August, Nigeria failed to meet the existing quota assigned to it, in all, losing as much as 114,000 barrels per day in the month according to OPEC’s September Monthly Market Report (MOMR), quoting secondary sources.
When cumulated for the entire month, this would amount to roughly 3.4 million barrels, making last month’s production of 1.43 million bpd one of the lowest in five years and amounting to roughly $238 million badly needed foreign exchange when multiplied by a conservative average of $70 to a barrel for the month.
Nigeria, which has a capacity to produce 2 million bpd, other things being equal, slumped from its July figure of 1.520 million bpd, according to the OPEC document.
This meant that production growth in Nigeria, Africa’s highest oil producer, was proving a major challenge due to infrastructure challenges and technical difficulties, leading to shut-ins.
In addition to the above problems, there have also been instances of community workers’ protests, which incessantly disrupt operations, leading to severe losses.
The previous month, a document seen by THISDAY showed that the Nigerian NNPC and its partners lost 6.035 million barrels of crude oil to emergency shutdowns.
In its August presentation to the Federation Account Allocation Committee (FAAC), which held between the 18th and 19th of last month, the corporation recorded that there were 32 of such incidents throughout its facilities in the country.
A breakdown of the losses, according to the document, indicated that the highest combined shortage of 1.62 million barrels was from Qua Iboe, with 200,000 barrels due to production shut-in arising from flare management and low well head pressure.
Still on Qua Iboe, a further 530,000 barrels were lost to shut-ins following tank top concerns, 650,000 barrels as a result of production cut-back as directed by the Department of Petroleum Resources (DPR) as well as a loss of 240,000 barrels due to a gas leak on one of the assets.
This was followed by losses from the Forcados facility, which shed 200,000 barrels, 84,000 barrels, 30, 000 barrels and 80,000 barrels respectively on different days, with reasons ranging from leak repairs, tank top issues, a fire incident and declaration of a force majeure.
Forcados continued its shut-ins, shedding an additional 405,000 barrels of crude oil at the Uzere/Afisere/Kokori axis following a shutdown as a result of protests by community workers as well as a loss of 80, 000 barrels due to a fire incident.
In the same vein, Anyala Madu shed 105,000 barrels, Bonny suffered total shut-ins of 335,000 barrels, Ugo Ocha lost 30,000, Okono’s shutdown led to loss of 96,000 barrels, while Sea Eagle lost 750,000 barrels.
Implications for global supply
Due to Nigeria’s inability to meet its quota, plus challenges in Angola, another African nation, OPEC produced about 10 per cent below its overall quota in the month, but kept output from its 13 members at about 27.11 million barrels a day in August.
If Nigeria, Angola and other countries are unable to meet production due to a build-up of the technical problems resulting from years of investment constraints and market supply remains in a deficit, countries with spare production capacity, including Saudi Arabia, Iraq and the United Arab Emirates may be called upon to make up for the shortfall.
The baseline for the calculation of the current adjustments, according to OPEC, is the oil production of October 2018, except for the Kingdom of Saudi Arabia and the Russian Federation, both with the same baseline level of 11 million barrels per day.
Sylva explains under-performance
After a verbal request when the OPEC Secretary General Dr Sanusi Barkindo, visited him in his office, the Minister of State, Petroleum Resources, Chief Timipre Sylva, last week disclosed that Nigeria has now officially written OPEC, requesting a higher production quota under the OPEC+ accord.
Speaking on the sidelines of the Gastech 2021 conference in Dubai, the minister noted that the technical problems that had hampered the country’s output will soon be resolved.
Sylva said the country’s full production capacity was closer to 2.2 million bpd, which should be reflected in a revised quota, even though Nigeria has struggled to produce at its current allocation.
He insisted that the country deserves a higher quota, noting that aside its efforts to fix the technical difficulties, the basis for the current production quota, which was mainly because of the problems in the Niger Delta at the time, no longer exists.
“We’ve just put a request on the table, and we expect that to be looked at. We have capacity for more production than we are producing right now. Unfortunately, we are constrained by the quota,” the minister said.
If this request is up for discussion, it is likely to come up at its next scheduled meeting for October 4, with the current OPEC+ agreement calling for the group to collectively raise output by 400,000 bpd each month through the end of 2022.
Sylva attributed Nigeria’s production struggles to technical problems from re-tapping reservoirs that had been shuttered to comply with the stringent OPEC+ cuts of the past 17 months and said output could rebound to around 1.7 million bpd by November and 2 million bpd by the end of the year.
“We had some issues from shutting down the reservoirs,” he said. “When you shut down a reservoir, to restart it, sometimes there are challenges,” he said.
“The basis for giving us this quota was (that Nigeria was in) a crisis. Right now, we don’t have any crisis anymore, and we believe we can produce more,” Sylva argued.
NNPC assures of normalcy
Also, NNPC head, Mallam Mele Kyari assured that Nigeria’s underperformance in the last few months in relation to the quota allocated by OPEC will be halted by the end of October this year or mid November.
“From everything we’re doing, we’ll get back to the OPEC level probably by the end of October and maximum middle of November. We’re not far from that, ”he assured.
The GMD pointed out that the national oil company was currently going through some transformation that will see it invest more in renewable energy sources, going forward.
“We are undergoing a transformation and what this means is that we’re going to lead a company that will become the biggest company in Africa, not just the company that will lead the transition into renewables as we go forward to zero carbon situation,” he noted.
Hope rises
But the first time since 2020, Nigeria’s decreasing rig counts soared to 11 in August, signalling readiness by the NNPC and its partners to pump more oil from next month.
Data from the OPEC Monthly Oil Market Report (MOMR) indicated that the country’s oil rigs have climbed from a low of five in the second quarter of 2021 to 11 as of last month.
A further analysis of the data showed that while in 2018, the average rigs count was 13, it was 16 in 2019 but fell to 11 in 2020, a reduction by five oil rigs.
Since the third quota of 2020, the count has continued to slump, first to eight in that quarter and seven in July, but with an addition of four rigs for the month of August, raising hope of more production.
Put side by side a country like Algeria, the north African nation has a high of 50 and low of 21, while the United Arab Emirates (UAE), for instance has a high of 62 and a low of 40.
In the oil industry, the rig count is a major index of measuring activities in the upstream sector, with a breakdown showing that Nigeria utilised six, seven, and six rigs in January, February, and March 2021, respectively, against 21, 23, and 21 used in the corresponding period of 2020, when production was at about 2 million bpd.
In addition to decreasing rig counts and highly degraded facilities due to old age and lack of investments, there have also been instances of community workers’ protests, which incessantly disrupt operations, leading to severe losses.
Nigeria’s production deficit
OPEC latest data has further confirmed that Nigeria was unable to meet its oil production quota for the month of August.
Based on secondary sources, the OPEC document revealed that the country was unable to take full advantage of the latest adjustments by the oil producers’ group, losing a whopping 114,000 barrels per day in the month under review.
While crude oil output increased in Iraq, Saudi Arabia, the United Arab Emirates and Angola, Nigeria was one of the three member countries, which were unable to fully pump its quota, the rest being Congo with a deficit of 14,000bpd and Iran with 8,000 bpd.
Many of the shut-ins, it was gathered are attributable to assets’ breakdowns, unresolved community issues as well as shutdowns to carry out routine maintenance, although the NNPC had recently said that it was difficult getting its facilities back to production after they were closed down due to OPEC cuts.
Double whammy
Aside under-performance, Nigeria has also sent a signal that the recovery in global oil demand still has some way to go, with volumes for next month’s loading struggling to find a home, even among its main customers, according to a Bloomberg report.
As much as two-thirds of Nigeria’s crude for October export has yet to find buyers, according to traders specialising in the West African market, volume that’s enough to fill 30 Suezmax tankers, each carrying 1 million barrels of oil.
Indian Oil Corporation (IOC), Asia’s biggest buyer of Nigerian crude from the region has disappointed the market, compounding already sluggish sales to Europe. The news medium reported that earnings for ships hauling West African oil to that region were at the lowest level in a month.
The state oil refining giant purchased just 2 million barrels of Nigerian oil in its latest tender, after a 1-million-barrel buy the previous week as opposed to the IOC typically buying as much as 20 million barrels of West African crude per month before the pandemic.
THISDAY recently exclusively reported that India, Netherlands and Spain, according to a Nigerian National Petroleum Corporation (NNPC) document , top over 50 countries cutting across Western Europe, Oceania/Pacific, South America, North America, Middle East, Asia and Far East as well as Africa, which are favourite destinations for Nigeria’s oil.
Need for investment
One of Nigeria’s biggest challenges is the waning investment in oil infrastructure, some of which were last upgraded decades ago, but the problem may even get worse as investors turn their attention to renewable sources of energy.
Secretary General of OPEC, Barkindo, recently warned that lack of investments in the oil and gas industry may eventually lead to price volatility if the decline is left uncurbed.
The Nigerian-born OPEC chief, noted that more than $12 trillion will be needed in the upstream, midstream and downstream globally by 2045, but lamented that capital expenditure in the upstream oil could fall by more than 30 per cent in 2021.
“To put this in some perspective, globally, to 2045, our projections show that investments of more than $12 trillion will be needed in the upstream, midstream and downstream,” Barkindo said.
Restarting wells
The temporary shutting in of wells is one thing that oil companies would like to avoid at all costs. That’s because restarting production is expensive and wells are not guaranteed to return to their flow rate when restarted. In the wake of the Covid-19 pandemic amid production curbs, Nigeria shut down some of its less prolific wells, which is posing a major problem to bring back on stream.
Faced with a massive drop in oil prices and a lack of storage tanks, oil companies were faced with a difficult dilemma whether to ride out the unprofitable streak or decrease production to cut their losses.
Unlike a tap, a well cannot just be adjusted as and when needed. Either it operates at full capacity or not at all. That’s part of Nigeria’s problems with meeting its production quota.
Shutting down completely can have serious consequences: including that fact wells may never return to their previous production rate, pumping equipment must be repaired and refitted at great cost, while other facilities, such as refineries and pipelines, cannot be kept in operation without some minimal level of production.
