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Crude oil

Nigeria’s quest to generate more proceeds from its crude oil and liquefied natural gas (LNG) exports is threatened by falling prices of both commodities in international market with attendant negative consequences on the country’s economy, reports Olisemeka Obeche

The Nigerian economy may take a plunge following the sharp drop in prices of crude oil and liquefied natural gas in the international market in recent times. Brent crude, Nigeria’s stock sold for $102 per barrel in late August, almost a 14-month historic low while the price of liquefied natural gas (LNG), another major revenue earner for the country, has reportedly fallen by more than 40 percent since January, this year.

Investigations by TheEconomy show that Brent crude has fallen more than $10 per barrel since mid-June while Urals–the US crude trading–reached its lowest point since January at $93.38 a barrel, down 7 cents. The latest drop in crude oil prices was largely attributed to increase in supply from many competing sellers at a time demand is waning as well as non-interference of raging conflicts in North Africa and the Middle East on oil production and supply.

For a country whose more than 95 percent export proceeds comes from oil and gas sales, the drop in the prices of crude oil and LNG portends a grave danger for the economy, even as the country heads into a crucial election year. Signs of Nigeria’s dire straight are already visible: the Presidency disclosed in August that its collectable revenues dropped by about N154.56 billion in July as a result of oil production disruptions. According to an account given by Minister of State for Finance, Bashir Yuguda, only about N630.32 billion revenue was realized in July 2014 down from N784.88 billion collected the preceding month.

Besides, a Federal Government’s report made public last June shows that Nigeria recorded a colossal drop of N1.43 trillion (from N4.24 trillion in 2012 to N2.81 trillion), about 33.69 percent fall in crude oil sales in the 2013 fiscal period. The document co-signed by the Coordinating Minister of the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala and the Director General of the Budget Office of the Federation (BOF), Dr. Bright Okogu further revealed that gas sales which were N225.22 billion and Brent of N180 million had fallen below their corresponding annual projections of N359.58 billion and N880 million by N104.46 billion and N700 million; a drop of 29.05 percent and 79.67 percent respectively.

“The volume of oil lifted in the period also fell short of the 2.26 million barrels per day and 2.2mbpd recorded in the third quarter of 2013 and the fourth quarter of 2012 by 0.11mbpd and 0.05mbpd, respectively,” the report read in parts.

Although, Nigeria’s oil revenue earnings have declined in recent times, the trend is largely attributed to crude theft, frequent pipeline vandalism, defective tax process, activities of middlemen and crude swop, among others. Analysts see the latest crude oil price fall at international market as a major setback for the country’s monolithic economy.

For Mr. Cliff Nneli, an energy analyst, any major slump in oil price portends grave danger for Nigeria, especially the masses. “Definitely, it is a major setback for Nigeria because our government does not have any other means of getting revenue but spends over 70 percent of its budget on recurrent expenditure, with salaries and allowances of the political class and civil servants taking larger chunk of it; thereby leaving very little for economic development,” he said.

With the recent announcement by the United States and China, two major global consumers of oil, that they had ordered a massive cut on importation of crude oil from Nigeria, there are growing concerns that the world’s 8th largest producer of oil may find its revenue stream further drying up. However, to most industry players, the present economic realities have made it imperative for Nigeria to wean itself from over-dependency on oil as its revenue base. “The extreme dependence of government finances and external trade balances on proceeds from the (oil and gas) sector exposes the nation to significant risks from oil price and production shocks,” Mr. Goodie Ibru, President of Lagos Chambers of Commerce and Industry (LCCI) said.

Mr. Timothy Odaah, the Chairman of Forum of Commissioners, Federation Account Allocation Committee (FAAC), also stressed the need to diversify the economy away from oil. “Our focus on oil is making our economic activities to be monolithic, it is like we are putting all our eggs in one basket; and when there is a crack, it will affect all. We should transform the pattern of our industrialization and investments, that is the only way it will help. So all states, especially now that we don’t have enough funds, should embark on projects that are revenue-yielding,” he said.


The LNG dilemma

In a similar vein, there are growing fears that the Federal Government’s effort to develop the country’s vast natural gas resources as a major source of revenue earner may not be fruitful as expected, at least in the interim, due to changing dynamics in the international liquefied natural gas market that has orchestrated falling price of the energy commodity.

TheEconomy’s latest finding shows that LNG prices in Europe and Asia, Nigeria’s major export destination, have fallen significantly since January this year. LNG market indicators show that spot prices in Asia have dropped by more than 40 percent, as many suppliers scramble for market share, including Nigeria. For instance, Asian LNG prices – known as the Japan Korea Marker (JKM) – plummeted to $10.92 per million British thermal units (MMBtu) for August deliveries, while the Europe LNG slipped down to $8.11/MMBtu in Northwest Europe and $8.61/MMBtu in Southwest Europe.

According to Platts, an international energy research firm, the JKM price fall which has surpassed the $18/MMBtudrop witnessed after Japan switched off its nuclear reactors following the 2011 Fukushima meltdown is less likely to abate soon. “As Japan has adjusted to life without nuclear power, demand is not expected to rise (adjusting for seasonal fluctuations). And new LNG suppliers have entered the market, such as ExxonMobil’s Papua New Guinea LNG facility,” it stated.

And with the unusually weak market right now beginning to bleed into winter demand, analysts fear LNG demand for December, January, and February could be further weakened as the market is currently oversupplied. “Winter deliveries would still clear at a much higher prices than the current JKM price of around $11/MMBtu, but prices will not likely climb back to the highs exhibited in the immediate aftermath of the Fukushima crisis,” wrote Nick Cunningham, an energy analyst.

Besides, there are fears that Japan’s pending decision to restart some of its nuclear reactors could slash demand for LNG and force price further down. China’s historic $400 billion gas deal with Russia sealed last May could exacerbate the LNG demand crisis. “For sure, China needs lots of natural gas to power its plants in its bid to curb air pollution and this supposed to drive LNG demand growth for the foreseeable future.  But piped gas from Russia to China will leave less room for LNG demands from other suppliers like Nigeria,” Nneli told TheEconomy.

Expectedly, Nigeria’s liquefied natural gas project, just like many others around the world, could suffer revenue shortfalls and investment breaches should the market price for the commodity fail to rebound soon. Although, the Nigeria Liquefied Natural Gas (NLNG) which made about $25 billion as at November 2013 has been designated as another major national cash-cow, there are fears that the $15 billion worth six-train plant may not meet its revenue target for the year due to the price slump in the international market.

The six-train LNG plant currently produces about 22 Metric Tonnes Per Annum (mtpa) of liquefied natural gas for export and 5 MTPA of natural gas liquids (NGLS). It also supplies the Nigerian domestic market with 250,000 tonnes of Liquefied Petroleum Gas (LPG) otherwise known as cooking gas.

Despite this milestone, many observers believe Nigeria is yet to derive maximum benefits from its abundant gas resources due to complications arising from politicization of LNG ownership structure, investments and tax regime.

Mr. Gbenga Adesanya, an energy economist, said besides the fluctuations at the international market, Nigeria’s LNG investment is heckled by legal and policy constraints arising from non-passage of the Petroleum Industry Bill (PIB). “Federal Government is not seeing the benefit that is expected from LNG at the moment; because the IOCs are moving to places like Angola, Gabon, Ghana, Australia’s Sarkalin Island considered more lucrative for LNG investment. The issue of ownership of non-associated gas has to be addressed first before the country can derive maximum benefit from its non-associated gas endowment,” he said.


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