By Wisdom Enang (PhD) & Jerome Onoja Okojokwu-Idu (MEM)

Introduction
At the start of 2021, the bullish oil price was attributable to the Organization of Petroleum Exporting Countries (OPEC+) sticking to its original plan of adding 400,000 barrels per day. The decision to stick to this plan came at a time when the global economy was just recovering from the COVID-19 pandemic.
So, recovery from the pandemic implied an increase in economic activity, and an uptick in travel by everyone around the world. This ultimately resulted in increased demand for fuel compared to the previous year when the benchmarks turned negative due to covid-induced lack of demand.
Even with OPEC+’s decision to stick to the output plan, many of its members have continued to struggle to hit their monthly quota. OPEC+’s compliance with long-installed oil production cuts rose to about 122% in December 2021, indicating that some of its members continue to struggle to raise their output. Members that fall in this category include Nigeria and Libya.
Like in previous times, the United States and other nations tried to slow the rising price of oil at the start of the year by appealing to the OPEC+ cartel, and even launching a coordinated reserve release. However, these actions ultimately bore no fruit as the world was faced with the unexpected: The Russian-Ukraine War. The war is responsible for the multi-year highs in oil prices today.
In late February, as Russian President, Vladimir Putin, announced a special military operation in Ukraine, it marked the beginning of the war, resulting in an upward swing in prices of oil, and a supply gap for refined petroleum products. Traces of the price effect was almost immediate as Russia is the second-largest exporter of crude and refined oil, accounting for 5 million bpd of crude and 2.8 million bpd of refined products, and 7% of the world’s global supply,
Bank of America Research, headed by the bank’s head of global economics research, Ethan Harris projects oil to reach $200, if the US or NATO initiates a move to curb Russian energy exports.“If West cuts off most of Russia’s energy exports it would be a major shock to global markets,” Harris wrote.
On its part, JPMorgan’s analysts have also predicted that the Brent crude could end the year at $185 a barrel if the Russian supply continues to be disrupted.

If West cuts off most of Russia’s energy exports it would be a major shock to global markets,” Harris wrote. 

The last time oil prices were above $100 was in 2014 and recently it came close to levels

that almost doubled its February price. Another analyst at UBS Global chief investment office forecasts a rise as high as $150.
“A prolonged war which causes widespread disruption to commodity supplies could see Brent moving above the $150 a barrel mark,” Giovanni Staunovo, commodity analyst at UBS, said.

Giovanni Staunovo

Whatever be the case, neither a $185 nor a $200 per barrel price of oil will be of benefit to Nigeria. Rather, it will constitute more of an inconvenience than a blessing to Africa’s largest economy – Nigeria.

Paradox: Crude Oil Producer Desiring Low Selling Price per Barrel
Speaking on the economic effects of a $200 per barrel oil, Olumide Adesina, a financial analyst at Quantum Economics, had this to say, “If global oil prices continued to rise at the same time as the Naira fell in the IEFX window, the resultant increase in domestic gasoline prices would almost certainly occur.
He further added, “moreover, we do not have a working refinery, so we must purchase petroleum products for domestic use. That reduces revenue potential.
“Yet, one thing is clear: the Nigerian economy cannot afford subventions in the energy sector; it is just a matter of time, and how much more Nigerians will pay per litre of gasoline in the future.”
Opeoluwa Dapo-Thomas, an International financial analyst, with a specialty in oil and gas had this to say, “It means less revenue and more allocation to subsidy payments – simply put”.
The Nigerian economy has not benefitted from higher oil prices in recent months. There are months where the NNPC paid no revenue into the Federation Account.
Dapo-Thomas continued, “the fact that Nigeria does not also produce so much oil also restricts the revenue potential from higher oil prices. You heard the Minister of Petroleum, the other day on Bloomberg TV, who said we are not currently happy with higher oil prices – that is a frank reflection of our oil economy now. The chicken has come home to roost”.
The analyst believes that continued increase in the price of crude is rather detrimental to the health of the nation’s economy.

Opeoluwa Dapo-Thomas,

the Nigerian economy cannot afford subventions in the energy sector; it is just a matter of time, and how much more Nigerians will pay per litre of gasoline in the future.”

“Prices at this level would have strengthened our fiscal positions, oreign exchange reserves, Excess Crude accounts (ECA), and Sovereign Wealth Fund, but what we will see is north of 300 – 400 billion Naira payments for “subsidy”. What’s the point of having a $62 per barrel benchmark for the 2022 budget, when you are not inherently happy with $200 per barrel?”, he quipped.

The Chicken Comes Home to Roost
Previously, high oil prices would mean a boost in foreign reserves. This enables the country to meet its foreign trade obligations more comfortably, without rationing its limited stock of foreign exchange.
Rise in oil price is also expected to boost the excess crude account (ECA), where the difference between the budget price for oil and the actual income is saved for the “rainy day”.
Another common scenario that should have played out was the availability of more funds for allocation to the states and projects at the monthly meeting of the Federation Account Allocation Committee (FAAC).
However, as we know today, Nigeria cannot celebrate more money despite oil prices reaching $130 per barrel. Higher pump prices, higher government expenditure on subsidy, inflation, low export due to declining oil production and crude oil theft, high oil production costs, are issues that come with such high prices.

Declining Production & Rising Cost of Subsidy
Given Nigeria’s 2022 budget benchmark of $62 per barrel, the oil rich Nation should be saving at least $38 per barrel, with oil trading above $100 per barrel, which implies growing bank balance. The nation’s foreign reserves, oil revenue and ECA should have recorded significant growth. Instead, there are signs depicting throes of economic challenges.
These challenges will persist for a while because the nation is not producing enough oil to take advantage of the high prices. Since 2015, average production has been less than 2m bpd. At some point, daily production dipped below 1m bpd due to attacks by the Niger Delta Avengers.
As at January 2022, Nigeria’s OPEC quota was 1.683m bpd, but it only achieved a production of level of 1.46m bpd. However, the national budget pegged production level at 1.88m bpd.

we are not currently happy with higher oil prices – that is a frank reflection of our oil economy now. The chicken has come home to roost”.

According to NNPC’s financial report for August 2021, Nigeria’s share of production from June 2020 to July 2021 was a mere 28 per cent of the total 682.55 million barrels.

Mele Kyari

By contrast, Nigeria used to get about 40 per cent share when production levels were close to one billion barrels in a year, out of which allocations were made for exports and domestic crude use. By design, it is from the federation export that Nigeria earns forex, while the domestic crude allocation is intended to make fuel available locally. However, due mostly to non-functional refineries, Nigeria imports most of its petroleum products for domestic use through the NNPC.
Because the NNPC is saddled with the full responsibility of making fuel available at N165 per litre by all means necessary, domestic crude allocation now takes priority over export. Thus, more than half of Nigeria’s share of oil production is allocated to the NNPC. This implies that just over 200,000 bpd or less is available for export.
The domestic crude allocation is typically used by the NNPC to import gasoline (PMS) under the direct sale direct purchase (DSDP) scheme. DSDP is a sophisticated name for trade by barter. For instance, it exchanges petroleum products worth $1 billion for crude oil worth $1 billion. Nigeria typically does this through third party firms.
Fuel subsidy is expected to cost Nigeria N3 trillion Naira in 2022 (N210 billion was spent on fuel subsidy in January 2022). With an oil price of $130 per barrel for example, Nigeria is expected to earn at least N75.6 billion ($180.7m) per day. However, when you factor a litre of gasoline which costs between N550 to N600, compared to Nigeria’s official pump price of N162 – N165 per litre, it indicates that the Federal Government is paying at least N400 per litre to maintain the price as low as possible.
Now, average daily consumption of the same gasoline by Nigerians is 60 million litres. That equals a subsidy payment of about N24 billion per day. So, for every N100 received from crude export sales, Nigeria spends at least N32 to keep the price low.

These challenges will persist for a while because the nation is not producing enough oil to take advantage of the high prices.

Because of this huge bill, in January 2022, state governments were left in surprise when it was revealed that there will be no money coming from the NNPC into the account of the federal government despite oil trading above $90 per barrel. All the money went into subsidy. Because domestic allocation is used to subsidize petrol, revenue to the federation account cannot grow.
Diesel, on the other hand, is not subjected to subsidy intervention. As at March 10, 2022 it traded for N670 per litre in Abuja, and between N610 – N645 per litre in Lagos (a price which indicates more than a 200% increase in the January 2021 price of N225 per litre).

Root Cause of Production Dip
Under-investment in the Nigeria’s upstream sector and the high cost of reopening shut-in production (due to OPEC+ production cuts implemented during the peak of the COVID-19 pandemic) are some other notable factors truncating Nigeria’s crude production growth potentials. Underlying these key factors are root causes like:
Uncertainty around government policy. Analysts have said the delay in passing the Petroleum Industry Bill (PIB) into law (now Petroleum Industry Act – PIA) reduced investor confidence in the Nigerian petroleum sector and made the economy lose an estimated $235bn worth of investments across two decades. The Minister of State for Petroleum Resources, Timipre Sylva puts the loss at $15bn annually.

Timipre Sylva

He said, “A report by Financial Derivatives Company Limited indicated that Nigeria’s oil and gas industry lost as much as $15bn in investments annually due to the delayed passage of the PIB.
This prolonged delay has culminated in under-investments over time, and divestments ultimately.

Thus, more than half of Nigeria’s share of oil production is allocated to the NNPC. This implies that just over 200,000 bpd or less is available for export.

Change in IOC investment portfolios. The joint ventures (JVs) with the oil majors, in which the nation has 60 per cent, used to give Nigeria its biggest crude production share, from where forex can be earned easily. But currently, IOC operators of the JV have re-strategized their investment portfolios, and are moving deeper offshore, utilising the more fiscally-rewarding production sharing contracts (PSCs). Preceding the recently announced divestment plans by some of the IOCs, was a period of prolonged under-investment.
Africa Report, a journal on African politics and business, recently stated that “in the past 11 years the IOCs have divested a total of 26 Oil Mining Licences (OMLs) in the Niger Delta Basin with more set to be sold”.
Generally speaking, the international oil companies are comfortable moving further offshore because they are safer and more secure there, and loose virtually no barrel of crude to theft.
Nigeria needs to leverage the recently passed PIA to ramp up crude oil production on existing discoveries that have not yet materialized, to be able to sustain a secure supply in future to meet local, regional and international demand.
The need for complete removal of fuel subsidies, and revamp of the state-owned refineries cannot be over stated. These should, in fact, be declared emergency priority.

The Oil Theft Menace:
There are indications that oil theft may be escalating in Nigeria as a result of skyrocketing crude prices at the international market. Consequently, indigenous oil producers have called on the Federal Government to urgently tackle the menace of oil theft in the Niger Delta, which is impacting negatively on their operations. According to the immediate past Director General and Chief Executive of Nigerian Maritime Administration and Safety Agency (NIMASA), Dakuku Peterside “It is estimated that 80 per cent of the stolen oil is exported, while the balance of 20 per cent goes into illegal refining in ‘refineries’ dotting the landscape of the Niger Delta creeks.”

Dakuku Peterside

The Federal Government has also raised an alarm over the rising rate of crude oil theft in the Niger Delta, disclosing that about $3.27 billion worth of oil has been lost to vandalism between January 2021 and February

Fuel subsidy is expected to cost Nigeria N3 trillion Naira in 2022 (N210 billion was spent on fuel subsidy in January 2022).

2022. This statement was made by the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) chief executive officer, Gbenga Komolafe.

Gbenga Komolafe.

“Nigeria may have lost as much as $3.27 billion to vandalism between January 2021 and February 2022”, the NUPRC boss said.
This translates to an average monthly value loss of $233.99m, and an average daily value loss of $7.72m. Most of these losses come from the Bonny Terminal Network, Forcados Terminal Network and Brass Terminal Network.
The Independent Petroleum Producers Group (IPPG) also disclosed that about 82 per cent of its oil production was stolen in the month of February 2022 from the Trans Niger Pipeline (TNP).
According to the Managing Director of Waltersmith Petroman, Chikeze Nwosu, the oil theft challenge has grown from 4% in the past to 91% as at December 2021, 75% as at January 2022, and 82% as at February 2022.
Reports according to Business Insider Africa shows that only 5% of all the crude oil that were pumped through the Trans Niger Pipeline (a major pipeline crisscrossing through the creeks of Nigeria’s Niger Delta Region) between October 2021 and February 2022 were received by the producers. The rest were lost to illegal oil bunkering, a problem that has since become worse with skyrocketing global oil prices.
Recent preliminary work showed that about 150 illegal tapings were used in siphoning crude oil from the TNP. This has forced all operators injecting crude into the TNP to suspend export/injection, thereby shutting-in production.

Chikeze Nwosu

in the past 11 years the IOCs have divested a total of 26 Oil Mining Licences (OMLs) in the Niger Delta Basin with more set to be sold”.

TOTAL Energies and Shell Petroleum Development Company, for example, stopped production into the TNP pipeline, while Agip ENI declared force majeure on their Brass Terminal.
Recent reports also shows that the Bonny Terminal that should be receiving over 200k barrels of crude oil daily, is instead receiving less than 3k barrels, leading the operator Shell to declare force majeure.
Austin Avuru, founding Managing Director of Seplat Energy and Executive Chairman AA Holdings, said Nigeria’s oil production has reached an emergency critical status. He stated that some oil production wells do not get to see 80% of its production making it to the terminals due to oil theft.
Tony Elumelu, Chairman of UBA Banking Group and Heirs Holdings also stated that one key reason why Nigeria cannot meet its crude oil production quota and benefit from high oil prices is due to theft.
According to NUPRC, Nigeria loses more than 115,000 barrels per day to oil theft and vandalism. The commission delineated factors that aided crude oil theft to include inadequate security, poor community engagement, economic challenges, poor surveillance, stakeholder compromise, and exposed facilities.
The Commission further stated that a work team has been setup to deliberate on workable solutions to mitigate crude oil losses, identify various responsible parties along the crude oil loss value chain, and propose improvement areas for effective surveillance. It also confirmed the setup of a panel of experts to audit the activities of oil companies in the upstream petroleum sector within the last two years, to ascertain the actual volume of crude oil stolen by vandals.

“It is estimated that 80 per cent of the stolen oil is exported, while the balance of 20 per cent goes into illegal refining in ‘refineries’ dotting the landscape of the Niger Delta creeks.”

In addition to this effort, the Nigeria Government needs to work with the host communities and operators to provide adequate security for pipeline installations. Also, the deployed security personnel should be empowered with the right equipment to ensure regular surveillance of the pipelines to detect and prevent the action of pipeline vandals. Assigned security personnel should also be periodically redeployed to reduce the chances of compromise.

Global Energy Supply Deficit: An Opportunity for African Energy Producers
While Africa lacks the capacity to meet 40% of Europe’s energy consumption which is currently provided by Russia, its individual countries have already begun to ramp up production activities. Algeria, the Republic of Niger, and Nigeria, having signed the Declaration of Niamey on February 22, 2022 during the Economic Communities of West African States Mining and Petroleum Forum, have laid the groundwork for the development and construction of the $21 billion, 4,128km Trans-Saharan Gas Pipeline, which is expected to transport 30 billion cubic meters (bcm) of natural gas per year to European markets.
In response to the rise of geopolitical tension between Europe and Russia, and in condemnation of the invasion of Ukraine, the International Energy Agency has established a ten-point plan to reduce Europe’s reliance on Russian natural gas, with significant progress being made to establish Africa as the preferred supplier of hydrocarbons to international markets.
With members from 31 national governments, the global energy group aims to reduce Europe’s dependence on Russian gas by a third by 2023, with the second measure of the ten-point program stipulating a plan to increase European imports of Liquefied Natural Gas from other sources such as Africa.
While the potential is there for Africa to step in as the largest supplier of natural gas to Europe, low supply and infrastructural bottlenecks inhibit the continent’s position as an attractive market for international investors, at least in the near term.
Increased investment towards Africa’s energy sector will allow African gas producers to develop a robust gas strategy which will cater for European demand. Africa’s state actors can leverage the current geopolitical climate to attract investment towards the development of infrastructure in order to expedite gas production and facilitate exportation.

Nigeria may have lost as much as $3.27 billion to vandalism between January 2021 and February 2022”,

In addition, the multi-billion 4,128km Trans-Saharan Natural Gas Pipeline being built by the governments of Nigeria, Niger and Algeria will enable the integration of Trans-Mediterranean, Maghreb-Europe, Medgaz, and Galsi Pipelines, for Europe to leverage West and North Africa’s oil and gas resources to meet its demand.
Once completed, this pipeline will transport 30 billion cubic metres of natural gas per year, and Nigeria as a leading energy producer in Africa, can produce a significant share of that capacity. This potential can only be realized if Nigeria’s gas production and processing capacities (LNG and CNG) are improved.
However, without an intervention, current natural gas producing fields are expected to see a steep decline as we approach mid-2020s, a worrying situation that can reduce the country’s gas production capacity.
Some of the IOCs who have been top producers of oil and gas in Nigeria are expected to diversify their portfolios from 2022 onwards, and exit the market. Though indigenous firms are buying up these assets, the needed resilience and financial capacity to stay afloat are yet to be tested.
It is expedient that the country urgently begins a scheme where it works with the National Oil Companies taking over operatorship of the divested assets to aggressively develop its gas reserves, to prevent the impending production decline.
Funding for this could happen through pan-African project financing via syndication by multiple banks, export-import banks and other development finance providers.
Also, the government needs to enter into some form of negotiations with the local population around the onshore crude oil assets to incentivise them towards securing the assets and preventing crude oil theft with the use of local vigilantes.

the oil theft challenge has grown from 4% in the past to 91% as at December 2021, 75% as at January 2022, and 82% as at February 2022.

There is a huge potential in finding solutions to fix the funding deficit in the Nigeria’s oil and gas industry. From the needs of developing African states to advanced European countries under pressure to close the gas supply gap, there is an enormous market Nigeria can effectively take advantage of to attract the needed forex for continued development and industrialisation of its economy.

While the potential is there for Africa to step in as the largest supplier of natural gas to Europe, low supply and infrastructural bottlenecks inhibit the continent’s position as an attractive market for international investors, at least in the near term.

AUTHORS

About Dr. Wisdom Enang

Engr. (Dr.) Wisdom Enang is a quintessential leader, technocrat and astute scholar who hails from Akwa Ibom State, Nigeria. He obtained his Undergraduate, Masters and Doctorate degrees in Mechanical Engineering from the University of Bath, a leading institution in engineering, in the UK.
Dr. Enang is a Chartered Engineer with the Institution of Mechanical Engineers UK, and an internationally published expert in the field of engineering.
He currently serves as an Operations Engineering Consultant, and is in charge of the operations and maintenance of 24 shallow water oil and gas assets in Nigeria. Prior to this, Dr. Enang served as an engineering technical lead, responsible for the project management and design engineering oversight for more than 20 oil and gas execution projects between 2015 and 2020

About Jerome Onoja Okojokwu-Idu

Jerome Onoja Okojokwu-Idu is the Managing Editor of Majorwaves Energy Report. Prior to his current role, he has had stints with Orient Energy Review and Nigeria Oilfield Technology Review (NOTR). While he has over 16 years experience in media management as an Associate member of Nigerian Institute of Public Relations, he also holds a Masters degree in Environmental Management from the University of Lagos. Okojokwu-Idu has driven a couple of environmental advocacy projects with the Centre for Investment and Sustainable Development, Management and Environment (CISME). Under his leadership, Majorwaves Energy Report has won multiple awards and international recognition.