The cut in the nation’s oil production quota by the Organisation of Petroleum Exporting Countries has twinned with the recent decline in prices to pose risks to the proposed 2019 budget, ’FEMI ASU writes
The Nigerian economy is facing a double whammy of the drop in global oil prices and a reduction in the production of the commodity from which the government generates more than half of its revenue.
Early October last year, the international oil benchmark, Brent crude, hit a new four-year high of $86.74 per barrel, fuelled by concerns about a shortfall in global supply as the United States sanctions whittle away at Iranian crude exports.
Towards the end of the month, the Federal Executive Council, in a meeting presided over by President Muhammadu Buhari, approved the 2019-2021 Medium-Term Expenditure Framework and Fiscal Strategy Paper as well as the government’s proposal of N8.73tn for the 2019 budget.
The rally in oil prices must have spurred the council on to peg the price of crude oil for the budget at $60 per barrel, up from $50.5 for the 2018 budget.
But Brent crude plummeted in November, trading below the $60 per barrel mark, with experts describing the development as a cause for concern for the country.
Some economic and financial experts including the Managing Director of Financial Derivatives Company Limited, Mr Bismarck Rewane, said the government would need to review the oil price benchmark downwards.
They said the decline in oil prices would reduce foreign exchange earnings and government revenue, with implications for capital project financing and forex reserves.
On December 7, OPEC members, at their meeting in Vienna, Austria, saw the need to extend efforts to ward off oil supply glut and prop up prices.
OPEC and its Russia-led allies agreed to slash oil production by 1.2 million barrels per day effective from January for an initial period of six months to shore up what many expect to be weakening market fundamentals ahead.
It emerged two weeks ago that Nigeria was expected to cut its crude oil production by 3.04 per cent to 1.685 million bpd (excluding condensates) for the first half of 2019.
With a reference level of 1.738 million bpd, the nation’s oil production is to be cut by 53,000 barrels to arrive at the new quota, according to a breakdown of member quotas under OPEC’s supply accord obtained by S&P Global Platts.
The 2019 budget proposal, presented to the National Assembly on December 19 by President Buhari, was based on oil production of 2.3 million bpd (including condensates), with an oil benchmark price of $60 per barrel.
The Minister of State for Petroleum Resources, Dr Ibe Kachikwu, ahead of the OPEC meeting, said that it was very difficult for Nigeria to reduce its crude oil production.
Kachikwu, who spoke on ‘Bloomberg Daybreak: Europe’, however, stated that there was a need for an extension of production cuts to stabilise the global oil market.
Asked if Nigeria would be able to reduce production, he said, “It is very difficult to do that but where we are now, everybody must be seen to contribute. Obviously, the smaller it is, the more amenable we are to participate; the larger it is, the more we will struggle to participate.”
A professor of economics at the Olabisi Onabanjo University, Ago Iwoye, Sheriffdeen Tella, told our correspondent that many of our traditional buyers like the US, China and India had significantly reduced the imports of Nigerian crude.
“We have to solve this problem by widening the market to other countries,” he said, stressing the importance of peace in the Niger Delta to enable oil firms to operate smoothly and ramp up production.
He added, “Given the current circumstances, the proposed oil price benchmark and production volume are quite ambitious, and this will make the budget not to perform.”
Tella is of the view that the oil price is likely to fall further because the production in the United States and some other non-OPEC members had been on the increase.
He also said the nation’s budget had often underperformed “because of the delay in its passage.”
“When the budget is passed in the middle of the year, it will be three months after before it can even affect the economy. This is a problem on its own. The 2018 budget was presented early in November 2017 but it was not approved until the middle of 2018. Now, the 2019 budget was presented towards the end of 2018; you can imagine when it will be approved by the National Assembly.
“To me, it seems the executive and the legislature don’t see the budget as a very critical instrument for development, and so they think they can just put any figure for anything; what they want to spend is what they will spend.”
The Head of Research at Agusto & Co, Mr Jimi Ogbobine, said in a telephone interview that there was still a potential for oil prices to rise above the benchmark, considering the demand and supply dynamics of the oil market.
Ogbobine noted that there were risks to the benchmark price but said, “I am not sure we should actually panic about the price risk.”
Citing the start of production from Total’s Egina deepwater field, he said, “So, whatever we may lose in terms of prices, we may gain somewhat in terms of production volumes.”
The Director-General, West African Institute for Financial and Economic Management, Prof. Akpan Ekpo, told our correspondent in a recent interview that it was high time the country stopped relying heavily on oil.
He said, “You cannot rely on a commodity whose price you don’t control. We should see oil revenue as a windfall, not to rely on it. It is not reliable at all because oil price fluctuates; so we are vulnerable to this negative oil shock, and people have been saying it for long that we need to get out of it.
“But once the oil price starts going up, we relax. The price decline should be a major source of concern because the economy depends heavily on oil. We need to diversify away from oil.”
The Department of Petroleum Resources said in November that the country had lost its most valued crude oil buyers, even as its erstwhile gas customers were competing with it.
The Director, DPR, Mr Mordecai Ladan, said the oil and gas industry seemed to be under a new threat, which he described as the renewed dislike and global war against fossil fuels and the quest for renewable and cleaner energy.
“As sweet as Nigeria’s crudes are renowned to be globally, we have recently lost our most valued customers and our gas buyers are themselves now competing with us in the same market space as suppliers,” he said.