A Review of the Nigerian Energy Industry

Nigeria worries over fall in oil price

02 November 2012, Sweetcrude, LONDON – Nigeria’s Finance Minister, Dr. Ngozi Okonjo-Iweala, says she is concerned that oil and gas prices could fall as more countries uncover reserves and make plans to adapt to this new environment in the sector.

“We are worried, we are concerned, because obviously so many countries are discovering oil and gas so the supply will be increasing over the next few years and therefore we need to plan accordingly to make sure we have the necessary buffers in our own economy,” Okonjo-Iweala told reporters during a visit to London.

She was speaking in the context of a domestic budget debate which has seen parliament press for the government to count on a higher oil price and save less of its current high revenues from the sector.

Oil makes up around 80 percent of government revenues in the Organisation of Petroleum Exporting Countries, OPEC, member nation.

The draft 2013 budget assumes a global oil price of $75 a barrel, up from $72 a barrel in 2012, but parliament has pushed to raise the benchmark to as much as $80 per barrel.

Money earned from oil over the benchmark price is deposited into a savings mechanism called the Excess Crude Account, ECA.

Any increase in the benchmark price will therefore reduce savings and make Nigeria less resistant to oil price shocks.

“In terms of benchmark price, we strongly believe that 75 dollars is the right benchmark for us, it will help us to build buffers,” Okonjo-Iweala said.

“The national assembly thinks differently. We are a democracy, they want to have it slightly higher (so) we’re in dialogue.”

The minister added that Nigeria was still considering issuing a Eurobond next year.

Nigeria has said over the past few months that it was looking at issuing an infrastructure bond worth up to $1 billion in 2013, but without confirming whether it would go ahead with the plan or not.

“We are planning one, we are working hard on it, we have to gauge appetite out there and see what we can do, but yes we do have that in mind,” she said.
Nigeria issued a debut $500 million Eurobond in January last year, which was 2.5 times oversubscribed.

“But I can tell you that we’re going, whatever the case may be, to maintain a tight fiscal stance.”

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  • Crude oil prices cannot possibly remain high indefinitely. It’s either more sources of supply are discovered and more volumes brought to the market or science discovers newer, cleaner and cheaper sources of energy supplies. It is inevitable that whichever happens sooner, oil prices must go down. May we therefore advise developing countries such as Nigeria to diversify their economy as fast as possible or be faced with the consequence of plumeting revenues in the not too distant future.

  • Market structure (Opportuinity Cost) export marginal ratio.

  • Why worry, when you can pray..?