Nigeria's oil economy is living on borrowed time, as the global market, especially the United States (U.S.), becomes less dependent on Africa's crude and prices face more and more volatility.
Rystad Energy, the energy data warehouse, predicts oil production in the U.S. is growing so fast that an all-time high of 10 million barrels per day could be reached before December 31.
Until recently -- when it was upstaged by China and India -- the U.S. was a major destination for Nigeria's crude. But ramped-up production of shale is providing an alternative. Nigeria has been losing its market share in Europe, its biggest regional market, as exports from the U.S. grow. In December 2015, the U.S. removed the 40-year-old restrictions on its crude exports in line with the rapid growth of its oil production, which started two years earlier.
Reduction in Nigeria's oil revenue as a result of production and export boost in the U.S. will put the economy on a tight run and create distortions in budget implementation and monetary policy controls.
"Projections for revenue in 2017 will be adversely affected if the U.S. continues to grow production of shale," says Mr. Moritz Abazie, who runs the Port Harcourt-based oil services firm, Strides Energy and Maritime Limited.
With foreign reserves, which dropped from $30.49 billion to some $30.2 billion in June, the Central Bank of Nigeria (CBN) says it will continue to defend the naira in a policy that has gulped more than $700 million savings in the last five months. Pundits, including Mr. Abazie, say Governor Godwin Emefiele's position remains a comfortable one for now, in the light of the fact that the savings had grown from $24 billion in October/November last year, leaving monetary policy makers with more than $6 billion headroom from the current $30.2 billion savings. The $6 billion accruals can sustain imports in the next four months.
"The shale oil market is playing on crude oil pricing mechanism which determines the rate of production," says Abazie. He adds that rise in crude oil prices is encouraging the growth of shale production in the U.S., just as volatility in global prices would keep it in check.
The U.S. Energy Information Administration (EIA) in March said the country exported oil to 26 different countries in 2016, compared with 10 countries the previous year. These countries included Nigeria crude buyers -- Netherlands, China, Italy, the United Kingdom, Colombia, Singapore, Peru, France and Spain.
Besides, President Donald Trump's latest trade deal with China would allow 105 bcf/d gas production at 3 USD/MMbtu. Analysts at Rystad Energy say the abundant supply potential will see U.S. energy gas companies export a large Liquefied Natural Gas (LNG) to China after President Trump and President Xi Jinping reached the bilateral trade agreement more than a month ago. "SINOPEC's invitation to welcome Cheniere in their offices in China... clearly underpins Chinese energy companies' mutual interest," Rystad Energy analysts said in an email exchange with The Guardian.
The monthly report on latest oil market trends notes that since the start of Cheniere's Sabine Pass terminals in 2015, 7% of the exported cargoes have reached China, despite no financial transaction agreement (FTA) with U.S., through spot agreements and intermediaries. The agreement between the two countries will encourage China to buy highly competitive U.S. LNG directly through long-term agreements linked to Henry Hub. The U.S.' new-found 'oil love' with China and European countries is a major threat to Nigeria's fortunes in crude oil exports, especially as prices remain volatile.
U.S. oil production is growing at 95 kbbld per month during 2017, which stems from shale drilling, as the more modest growth from Gulf of Mexico deepwater fields offsets declines from other U.S. conventional oilfields.
"U.S. oil production has grown faster at 50 USD than any analysts in the market predicted. As these numbers are getting confirmed, the initial optimism about OPEC's temporary cuts, may turn to increasing skepticism about OPEC's choice of policy once the current output deal expires next year," says Bjornar Tonhaugen, VP Oil Markets at Rystad Energy.
"The reason shale oil and gas production is expanding in the U.S. is high price of crude oil which makes it economically viable -- shale oil and gas production is very expensive and a barrel costs between $35 and $40. So, fall in price of crude will have negative impact on production," Abazie of Streides Energy and Maritime Ltd told The Guardian in a telephone interview.
Having risen to as high as $54 a barrel earlier in the year, crude oil price volatility still persists in the global market.Oil prices had fallen to their lowest level since 2003, sinking below $28 a barrel before recovering to as high as $54 a barrel in the third week of May 2017.
But, it went below $50 a barrel last week to settle at $47.74 per barrel on Thursday due to the U.S. crude oil stockpile and the lifting of force majeure on exports of Nigeria's Forcados crude, bringing all the country's oil grades fully online for the first time in 16 months.
Specifically, on the New York Mercantile Exchange, Nigeria's brand of crude oil - light, sweet crude future for delivery in July, lost 27 cents, or 0.6 per cent, at $45.45 a barrel while Brent crude oil on London's ICE futures exchange lost 27 cent or 0.6 per cent, to $47.74 a barrel.
Though the crude oil price is still above Nigeria's 2017 oil benchmark of $44.5 a barrel, it has lost $3.24 from each barrel of crude oil export.Giving the 2.2 million barrels per day crude oil target in the country's 2017 budget, Nigeria is losing about N2.1 billion daily, an amount that would have been saved as excess revenue from the sale of crude oil.
In the 2017 budget, the senate pushed the benchmark to $44.5 a barrel with hopes that the black gold would remain at its January rate, which was above $50.Current realities, however, show that oil prices may fall below the current price as OPEC deal loses steam to shale producers.
Experts, who spoke with The Guardian emphasised the need to focus on a policy that will strengthen the economy with specific interest in alternative sources of government revenue.
They believed that there should be reduction in monetisation of crude oil receipts, aggressive saving of proceeds from oil booms in future to withstand vicissitudes of oil price volatility in future.
Professor of Economics, Philip Alege Olasupo, said if crude oil prices drop below Nigeria's benchmark of $44.5 a barrel, it would have to seek alternative ways of funding its budget.
Currency and research analyst at Cyprus-based FXTM, Lukman Otunuga, explained that the possibility of lower global oil prices and reduced production levels have long been highlighted among the investing community as points of concerns, since they could hinder export earnings, which account for a major share of total foreign exchange revenues.
With the oversupply issue still a dominant theme in oil markets and OPEC's valiant efforts to stabilise the markets disrupted by U.S. shale production, a breakdown below $45 per barrel would also open a path lower and commodity dependent countries like Nigeria would pay for it.