22 April 2013, Lagos – In an article on this column on May 30, 2012, titled “The proverbial rains are here,” many Nigerians including the Federal Government, did not take the warning seriously. In Washington DC on Thursday, Minister of Finance and Coordinating Minister of the Economy, Dr. Ngozi Okonzo-Iweala, called an emergency press conference to warn the nation of the impending drop in the nation’s finances as a result of falling oil prices and the continued vandalism of pipelines by oil thieves.
Okonzo-Iweala said that the ability of government to finance the 2013 budget has come under threat as Nigeria was losing N160 billion ($1billion) a month in revenue following the drop in oil production and the falling prices of crude oil at the international market. Oil price has dropped to close to the $79 per barrel budget bench mark and could even drop further.
Total losses, which stemmed from shut-in due to force majeure declared by oil companies, oil theft and illegal bunkering, was put at 300,000 barrels per day, bpd, by the Finance Minister and Coordinating Minister of the economy, Dr Ngozi Okonjo-Iweala.
Addressing an emergency press conference at the on-going World Bank/International Monetary Fund, IMF, meetings in Washington D.C, the minister said the briefing was important because of the avowed transparency of President Jonathan’s administration.
The Nigerian National Petroleum Corporation, NNPC, had said last Tuesday that oil production fell below projections in the first quarter due to crude theft and pipeline sabotage. The current production according to Finance Minster, ranged from 2.1 million bpd to 2.2 million barrels per day, less than an estimated 2.5 million barrels per day for the 2013 budget.
The N4.93 trillion ($31.35 billion) budget for 2013 was based on an assumption of a $79-per-barrel budget oil price, higher than the $75-per-barrel proposed by the Executive and up from $72 for last year’s budget.
There is the persistent drop in price of oil in the international market ($97 per barrel), coupled with the monthly N160 billion revenue loss, in addition to the shortfalls in other revenues from the Federal Inland Revenue
Looking at development in the international oil market, Nigeria may be heading for another difficult time from external shock. This time, the impact on the economy may be worse than the impact the 2008 global financial crisis had on it. Oil prices are tumbling and traditional importers of crude oil are either finding alternatives or are over-supplied. Nigerian economy may face very difficult times in the next two or so years.
What are the various arms of government doing about this? The excess crude account that the governors were bickering over is now the saving grace for now as it now cushions the effect of loss in revenue. This column in another article, Hear these bickering Governors, warned the nation that more oil discoveries are being made across the globe and that the US was becoming self-sufficient in crude production.
Nigeria has over the years come to depend on crude oil export for its revenue that is shared among the three tiers of government.
Crude oil production was estimated to have declined by 2.32 per cent in first quarter of 2012 compared with the decline of 2.41 per cent in the corresponding period of 2011. Now crude estimate for 2013 was put at 2.5 million barrels per day, now production has fallen to 2.1 million barrels per day.
Non-oil real GDP growth estimated at 7.93 per cent in Q1 of 2012 was much lower than 8.73 per cent recorded in Q1 of 2011.” Growth in agriculture in the first quarter of 2012 also declined to 4.15 per cent compared with 5.54 per cent in Q1 of 2011 and 5.74 in fourth quarter of 2011.
In general, the paradox of rising poverty incidence in the face of impressive economic growth further reinforces the call for the implementation of appropriate structural reforms in the key sectors notably agriculture, power and the petroleum sector to stimulate productivity
What does this imply for the average Nigerian? In a period when oil prices are high, the economy is struggling, what then happens when oil prices fall below the budget bench mark? Many states, local government and even the Federal Government will find it difficult to pay salaries not to talk of embarking on development projects. Poverty which is staring the nation in the face, will worsen.
Every Nigerian must learn to save now, do not spend that extra cash in your hands, the rains are here and it seems it is too late to save for the rainy day. But Nigeria’s policymakers are not addressing their minds to this trend and development in the oil market. Instead, they are politicking with creation of more states as cost center. From where will these new states if created, be financed?
Equally saddening is the fact that the nation’s leading politicians instead of facing governance are busy scheming for who becomes president in 2015. Nigerians are more at home with whoever will put food on their table, ensure their children attend good schools, and provide health care, security of property and lives.
The only way to achieve this is when there are resources to carry out governance. For too long, successive governments have paid lip service to the transformation of the nation’s economy, yet 52 years after independence, the nation’s economy is at risk as a result of the vagaries of the international oil market.
Oil market reports last week indicated that Europe is facing a glut of high quality crude oil grades, only a year after the war in Libya created a serious shortage. Continental Europe faced with sovereign debt crisis, its demand for oil has fallen and the United States has cut imports due to greater availability of domestic supply.
This development has led to a steep weakening in values for much high quality sweet and low-sulphur grades in a rare market development potentially suggesting oil futures prices have scope to correct yet lower in a much oversupplied market.
“Oil prices have come down, refining margins have improved but it is still a terribly bleak picture for me. I’m struggling to sell in Europe, the U.S. has cut barrels and it is only Asia which regularly saves (us) from a steeper fall, a major trader in sweet grades in Europe was quoted by Reuters as saying.
Physical crude grades are priced via differentials versus benchmark dated Brent and these diffs – as they are known in the industry jargon – have sunk over the past weeks to the lowest level in years on the Mediterranean sweet grade market. For instance, Algeria’s light sweet Saharan Blend BFO-SAH fell to a seven-year low and Kazakhstan’s CPC Blend BFO-CPC hit a two-year low by mid-May.
Libyan grades have been trading at large discounts to their official selling prices, OSP, and even the market favourite – super high quality Azeri Light – has fallen steeply BFO-AZR. Traders cite multiple reasons for the drops. Prominent among them is the return to the market of the much missed 1.3 million barrels per day, bpd, of Libyan crude, which dramatically changed the picture from last year, when consuming nations released 60 million barrels of strategic stockpiles.
Second is an overhang of West African crude as the US, a significant buyer of Nigerian and Algerian grades, is becoming increasingly reliant on new domestic production of sweet crude from its shale reserves in North Dakota and Texas. Those are estimated to have produced 1.2 million bpd in April.
U.S. imports of Algerian crude are on a steep downward trend from a high of 827,000 bpd in 2007. Imports in February this year were 256,000 bpd, down from the 2011 average of 358,000 bpd, according to U.S. Energy Information Administration data.
Imports of Iraqi crude are shrinking but at a slower rate. February imports were 271,000 bpd, nearly a one-year low, far below the average for the last four years of 480,000 bpd, EIA data showed. U.S. imports from Africa and the Middle East will fall even further in the months to come owing to the reversal of the Seaway pipeline, which unlocked a crude supply glut in the U.S. mid-continent for Gulf Coast refiners.
Seaway’s initial flows will be 150,000 barrels per day, expected to rise to 400,000 barrels per day. BP was already offered two 500,000 pipeline cargoes of U.S. sweet crude from Cushing, Oklahoma, just prior to the pipelines re-opening.
With the U.S. domestic production rising, we are seeing the arbitrage drying up, a trader in West African crude said. U.S. data shows oil imports from Nigeria fell to 352,000 bpd in February, the lowest since December 1996, compared with 948,000 bpd a year earlier.
In late April, differentials for Nigeria’s Qua Iboe grade BFO-QUA hit multi-month lows as traders cited slack U.S. demand. The picture will be, however, different in June as a plunge in Brent futures has prompted traders to take more Basra Light into Europe to capture a price advantage. Bickering governors and oil thieves, now that the chickens have come home to roost which way for Nigeria?
*Omoh Gabriel, Vanguard