Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Mallam Mele Kyari, has warned that rather than being a positive development, the rising prices of crude oil in the international market could cause major challenges for resource-dependent nations like Nigeria.
He spoke just as the International Monetary Fund (IMF) expressed concern over the re-emergence of fuel subsidy in Nigeria in the face of the country's low revenue mobilisation.
The Washington-based institution, however, welcomed recent moves by the Central Bank of Nigeria (CBN) to unify exchange rates, certifying Nigerian banks as being liquid and well-capitalised.
Kyari, at the virtual Citizens Energy Congress, tagged: "Securing a Sustainable Future Energy System through Strategy, Collaboration and Innovation," yesterday described the rising price of crude oil as a "chicken and egg" situation.
He added that oil prices had started exiting the comfort zone set by the NNPC, and becoming a burden.
The forum was organised by DMG Events, a London-based Public Relations company, which said the occasion was to provide an opportunity for players to reset the energy agenda post- COVID-19 and connect the divergent and polarising perspectives.
Kyari put the comfort zone globally at $58-$60, saying that for the NNPC, anything above $70-$80 will create major distortions in the projections of the corporation and add more problems to the company.
Brent crude, Nigeria's oil benchmark, is currently selling for over $74 and is likely to increase further in the coming days as the NNPC continues to battle the dilemma of shouldering the payment of petrol subsidy, which has made it unable to contribute to the Federal Account Allocation Committee (FAAC) on two occasions.
Kyari expressed the concern that as the commodity prices rise, buyers of Nigeria's crude may be compelled to accelerate their investment in renewable sources of energy, thereby leaving the industry in a quagmire.
He said: "In a resource-dependent nation like Nigeria when it gets too high, it creates a big problem because your consumers shut down their demand. Demand will go down and obviously even as the prices go up, you will have less volume to sell.
"So, it's a chicken and egg story and that's why in the industry when people make estimates for the future, they always make it about $50 to $60. Nobody puts it beyond $60.
"But for us as a country, as prices go up, the burden of providing cheap fuel also increases and that's a challenge for us but on a net basis, you know, the high prices, as long as it doesn't exceed $70 to $80, it's okay for us."
According to him, Nigeria will have no problems supporting the restoration of about 5.8 million barrels a day that the Organisation of Petroleum Exporting Countries (OPEC) still has offline since the pandemic, due to the curbs in production quota imposed by the oil cartel.
He said adding that number to demand will stabilise and probably bring oil prices down to about $60 level or a little below $60, stressing that that's a comfort zone for every producing company or country.
"I don't see them (Nigeria) having any difficulty agreeing to add additional volume to cushion the effect of these high prices for this period," he said.
He stated that Nigeria is already producing well below its capacity, because in early 2020, the country actually produced up to 2.4 million barrels of oil per day for both oil and condensates.
With declining investments in the oil sector, Kyari stated that in a short time, most likely the next five years, the world may experience an energy crisis if the current situation is not properly managed.
"But we know that a number of things are going on in the transition journey at renewables. Many oil companies are transiting to renewables in the future. And that means that emphasis will be on gas and I see a very turbulent next five years and potentially some stability in the next 10 years," he said.
He described the transition to renewables as a reality, adding that for Nigeria, what is clear is that the country is deficient in infrastructure and, therefore, needs resources from oil to exit poverty.
He stated that for Nigeria, to transit means to go for a low-carbon option and move towards more gas development than the liquids, adding that in the long term, the country needs to find a way out of dependence on oil.
"Renewables are real and we are making efforts to go in that direction, but obviously, our first step is to develop our gas resources.
"In this industry, you can't do anything except you have the financing and financing is now clearly constrained both in terms of available resources and the decision of some of the shareholders of some of the lending institutions," he said.
He added that although everyone seems to be talking about peak oil, there is no reference to gas, which contains lower carbon.
Kyari said: "Everybody is saying that in the next 10 years, we will get to peak oil. But nobody has said peak gas. And it's very difficult to distinguish the two because as you get peak oil, in many cases, you know, oil is produced alongside gas.
"Yes, it's possible, it can be in 10 years time but you also know that what we are doing today in the industry is also curtailing investment and meeting the transition target in 2050.
"What that means is that in five years' time, you could be in a situation of shock and this shock will mean that people will have to put more money into producing the liquids and that means that it will defer the date for liquid oil and potentially pushing it by 20 to 30 years."
Re-emergence of Fuel Subsidy Worrisome, Says IMF
Meanwhile, the IMF has expressed concern over the re-emergence of fuel subsidy in Nigeria in the face of the country's low revenue mobilisation.
The IMF in a statement at the end of its staff virtual meeting with top Nigerian officials, said the views expressed in the statement were those of the IMF staff and did not represent those of the IMF's Executive Board.
The IMF team was led by IMF's Mission Chief for Nigeria, Ms. Jesmin Rahman, in the virtual meetings with the Nigerian authorities, held from June 1st to June 8th, 2021, to discuss recent economic, financial developments and outlook.
At the end of the visit, Rahman, in the statement, said the Nigerian economy had started to gradually recover from the negative effects of the COVID-19 global pandemic.
He said: "The mission expressed its concern with the resurgence of fuel subsidies. It reiterated the importance of introducing market-based fuel pricing mechanism and the need to deploy well-targeted social support to cushion any impact on the poor.
"The mission recommended stepping up efforts to strengthen tax administration to mobilise additional revenues and help address priority spending pressures."
It stated that tax revenue collections in Nigeria were gradually recovering but with fuel subsidies resurfacing, additional spending for COVID-19 vaccines, added to address security challenges, the fiscal deficit of the consolidated government was expected to remain elevated at 5.5 per cent of Gross Domestic Product (GDP).
It added that following sharp output contractions in the second and third quarters, GDP growth turned positive in the fourth quarter (Q4 2020) and growth reached 0.5 per cent (year-on-year) in Q1 2021, supported by agriculture and services sectors.
However, it said employment level in the country continued to fall dramatically and, together with other socio-economic indicators, remained below pre-pandemic levels.
"Inflation slightly decelerated in May but remained elevated at 17.93 per cent, owing to high food price inflation. With the recovery in oil prices and remittance flows, the strong pressures on the balance of payments have somewhat abated, although imports are rebounding faster than exports and foreign investor appetite remains subdued resulting in continued forex shortage.
"The incipient recovery in economic activity is projected to take root and broaden among sectors, with GDP growth expected to reach 2.5 per cent in 2021," it added.
It anticipated that inflation in Nigeria would remain elevated in 2021, but likely to decelerate in the second half of the year to reach about 15.5 per cent, following the removal of border controls and the elimination of base effects from elevated food price levels.
Downside risks to the near-term arise from further deterioration of security conditions, and the still uncertain course of the pandemic both globally and in Nigeria, it added.
"The mission commended the authorities' measures to contain the transmission of COVID-19 in Nigeria, including the ongoing vaccination programme under the COVAX initiative, and strongly supported the authorities' efforts to acquire additional doses from countries with surplus stocks.
"The mission urged the authorities to keep reliance on CBN overdrafts for deficit financing within legal limits, while the government continues to make efforts to strengthen budget planning and public finance management practices to allow for flexible financing from domestic markets and better integration of cash and debt management.
"The recent removal of the official exchange rate from the CBN website and measures to enhance transparency in the setting of the NAFEX exchange rate are encouraging," it stated.
The mission recommended maintaining the momentum toward fully unifying all exchange rate windows and establishing a market-clearing exchange rate.
On the monetary policy to strengthen the monetary targeting regime, the mission recommended integrating the interbank and debt markets and using the central bank or government bills of short-maturity as the main liquidity management tool, instead of the cash reserve requirements.
"The banking sector remains liquid and well-capitalised while non-performing loans (NPLs) are contained. The extension of the moratorium on principal payments of qualifying credit facilities on a case-by-case basis through March 2022 should be limited to viable debtors with strong pre-crisis fundamentals.
"CBN stress tests purport that the banking system would remain adequately capitalised except in case of a severe deterioration of credit quality.
"Nevertheless, it remains to be seen what share of forborne loans may turn non-performing as the impact of the pandemic abates. Since NPLs often rise at the later part of economic crisis, CBN's strong oversight remains critical to safeguarding financial sector stability," it said.