President Muhammadu Buhari is in Saudi Arabia this week to hold talks with King Salman Bin Abdulaziz Al Saud and senior officials of the kingdom on ways to stabilise crude oil prices, according to a statement from the presidency on Sunday. Buhari will also fly to Doha, Qatar, after his visit to the kingdom to discuss oil price stability and investments with Qatar’s ruler and businessmen. This coincides with the release of the International Energy Agency (IEA) 2016 Medium Term Oil Market Report this week stating that oil prices are unlikely to stabilise in the near term implying they will remain low until 2017.
The IEA report highlights several major uncertainties such as impact of low prices on demand growth, expectations of mass shut-ins of so-called high cost oil and probability of production cuts from OPEC. It was previously thought that by the end of 2015, there will be a return-to-balance (that is demand matching supply) but this has proved elusive as supply exceeded demand by 2mb/d in 2015 up from 0.9mb/d in 2014. In 2016, according to IEA, the imbalance is projected to reduce to 1.1mb/d – enough to keep prices down until 2017, according to the report.
It is hasty to conclude that we are in an era of low oil prices as geopolitical factors can still disrupt the delicate balance. However, evidence is compelling that prices are unlikely to recover due to not just the abundance of resources in the ground but also strong technical innovations forcing costs down aggressively. Also low economic growth in OECD countries is not helping demand, as non-OECD Asia remains the major source of demand growth. The US’ LTO (Light Tight Oil) will continue to fall back until further improvements in efficiency/cost cutting allows a gradual recovery. This recovery for now remains the key factor in assessing when the oil market will rebalance. Large-scale export of US crude is seen as presently uneconomic and unlikely despite the lifting of the crude oil export ban.
The refinery sector will also continue to be typified by overcapacity – forcing old inefficient refining facilities to shut down.
OPEC and Nigeria
Given Saudi Arabia’s recent collaboration with Russia to freeze production, there is some hope of a potential revision from the “market share” strategy to accelerate the return-to-balance of the oil markets, given that many members like Nigeria could face severe socio-economic tensions. But the report indicates that Nigeria has more to worry about. It predicts that many OPEC countries like Algeria, Nigeria, and Venezuela due to economic difficulties and weak competitiveness will experience severely reduced investments to sustain production in a low-return global environment with major potential supply implications. Only Saudi Arabia seems to have spare capacity to quickly stabilise a situation of sudden shortages in an increasingly free market.
According to the report, due to investment challenges, Nigeria’s production is estimated to drop from an average of 1.91mb/d in 2015 to 1.75mb/d in 2018, noting that Angola would have overtaken Nigeria in 2018 as Africa’s leading producer.
The report stated that in 2015, Angola, Bahrain, Iran, Kuwait, China, Ghana, India, Indonesia, Iran, Thailand, Saudi Arabia, UAE, Vietnam, Qatar, Oman, Morocco and Malaysia – made progress in eliminating fuel subsidies. The report was silent on Nigeria’s dull assertion that it has already eliminated subsidies when subsidy computations are priced based on a fixed exchange rate that is over 70 per cent below rates on the street. It also states that Nigeria’s “outmoded” refineries in 2015 operated at 5 per cent of their combined capacity, processing only 1 per cent of the country’s output.
According to IEA, the original equipment manufacturers have refused to participate in the rehabilitation project on cost, security (and perhaps feasibility) grounds … causing analysts to be suspicious about the quality of work that can be expected. The only saving grace in the horizon – Aliko Dangote’s 650 kb/d Lekki refinery is expected to come on stream in 2018 amidst a rapidly escalating budget from initially $5 billion to $9 billion… but the unstable/unpredictable foreign exchange regime has understandably caused problems with the numbers, again according to the report.
In discussing with the Nigeria team, the Saudis and Qataris will recognise that the obviously multi-troubled visitors are in desperate need of investment funds to barely sustain Nigerian production. Saudi Arabia – also facing fiscal challenges – does have extra production capacity/flexibility in a more competitive economy (which attracts money like a magnet) and stands to gain from any difficulties other countries like Nigeria may face in meeting their quotas especially as oil prices remain low.
Nigeria will perhaps learn more from pondering the lessons on how the Saudi’s built a modern petrochemical industry in a competitive business environment.
Many Nigerians – weary of being asked to be patient, criticise the president as making too many foreign trips. But, if the Saudis agree to OPEC cuts to accelerate the stabilising of the markets, if investment funds are successfully attracted from the wealthy Saudis and Qataris to help Nigeria’s oil sector bleeding from different fronts… then we can conclude that this is one trip that was needed. But what will they be asking from Nigeria in return?
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