Saudi Arabia’s Oil Price Cut Threatens Nigeria’s ₦820b Revenue Target

• Country loses ₦300b monthly to production shut-in

The expected oil-related ₦820 billion revenue to finance the 2016 budget is being threatened by the recent reduction of prices for Arab light by the world’s highest producer of crude oil, Saudi Arabia.

The Guardian Nigeria report continues:

The Federal Government had pegged the 2016 budget on crude oil benchmark of US$38 a barrel and 2.2 million barrels per day production, which would have earned the country ₦840 billion this year.

Besides the low oil prices, the country’s production output has been brought down to 1.4 million barrels daily on account of attacks on oil facilities by the militants, thereby making the anticipated crude oil revenue unrealistic.

At 1.4 million barrels, Nigeria is already having a shortfall of 800,000 barrels daily, representing 25 per cent of the 2.2 million barrels per day targeted output.

Using the current price of US$40 a barrel, the country is losing about US$32 million (₦10 billion) daily and ₦300 billion monthly to production shut-in.

The recent decision by Saudi Arabia to cut its crude oil prices for United States (U.S.) and Asian markets is already putting pressure on Nigeria to follow suit.

As such, Nigeria will experience even higher losses if it succumbed to pressure to join the global price war for market share by also slashing the prices of its oil grades.

Some industry experts are warning that if Nigeria delayed in cutting price, it may lose its crude oil buyers to Saudi Arabia.

The Nigerian National Petroleum Corporation (NNPC) has reduced the prices of its premium oil grades, Bonny Light and Qua Iboe, to arrest declining demand. The NNPC also lowered the official selling price last year for Nigeria’s largest crude oil stream, Qua Iboe and Dated Brent.

But other industry experts argued that whether the country slashed prices or not, the ability of crude oil revenue meeting set targets in the 2016 budget remained a mirage, with less than six months into the end of the year. They stressed the need for the Federal Government to address the challenges facing its oil production, including militancy in the Niger Delta and lack of transparency.

Speaking with The Guardian yesterday, the Head of Energy Research, Ecobank Capital, Dolapo Oni, argued that Nigeria would have to offer more discounts to enable it to secure its market share, which translates to lower revenue for the government.

“Lower prices just mean that Nigeria too will have to sell at a discount because the bulk of our oil is going to Asia and Europe. So, it means for us to be able to sell our crude oil, we have to offer massive discounts in Asia, especially. It is not a good thing for Nigeria.”

He called on the new Secretary-General of Organization of Petroleum Exporting Countries (OPEC), Muhammed Barkindo, to prevail on member-countries to reach an agreement to curb price reduction in order to tackle the current challenges.

According to him, OPEC needs to work together to influence prices positively as slashing by Saudi Arabia will greatly affect the market share of member-countries apart from Nigeria.

Dolapo stated: “I think Barkindo has a major task in his front. OPEC as an institution in the global oil market has lost a lot of market share and influence on prices. To regain that relevance, they need to achieve ‘cohesion’ and ‘expansion.’ Cohesion is when they are able to take uniform decisions adhered to by all members. Expansion refers to having more market share. The way they are currently going about having more market share is only going to depress prices further.”

The Chairman of Petroleum and Technology Association of Nigeria, (PETAN), Bank Anthony Okoroafor, argued that it would not be wise for Nigeria to cut the prices of its crude oil at this point in time.

According to him, the country is already dealing with reduction in production due to militancy, therefore, cutting prices will not be the best option now.

Also, the Managing Director and Chief Executive Officer of First E&P, Development Company Limited, Ademola Adeyemi Bero, argued that despite these challenges and many uncertainties, Nigeria can produce crude oil at US$10 to US$20 a barrel, if internal factors are addressed.

Adeyemi-Bero said that oil-producing countries with low cost of production will win higher market share in the volatile environment, adding that volatility is expected to continue into the future.