On Wednesday, March 11th 2020, the Group Managing Director of the Nigerian National Petroleum Corporation, Mele Kyari, sat among national stakeholders during the CBN roundtable and addressed the elephant in the Nigerian economy – declining crude oil revenue.
Of course, he blamed everything on Coronavirus and the disagreement between Saudi Arabia and Russia to reach a deal on output cut. As you may well know, the disagreement between the two countries, which are two of the world’s biggest oil producers, has resulted in a full-blown global oil price war. Smaller producers like Nigeria are, therefore, left in a really precarious situation.
This is the question that has been on everybody’s lips since oil price began to tank. What is Nigeria’s strategy towards handling ths situation? Mele Kyari, who heads the country’s state-owned oil company, attempted to answer this question yesterday by proffering two possible solutions. The first solution has to do with cutting down on oil production cost.
As the name implies, oil production cost basically entails how much it costs to produce a barrel of crude in a country. At the moment, the cost of crude production in Nigeria is about $30 per barrel of crude. And this is quite problematic when you consider the fact that oil is currently trading at $34.48 per barrel according to Oilprice.com.
Nigeria is trying to survive in a “voodoo market”
It is understandable to see how frustrating the current situation must be for Nigeria, a country whose main source of income is oil revenue. Unfortunately, all the odds are stacked against it, because not only are oil prices low, the country’s production cost is high and the country cannot even produce more than 2 million barrels of crude per day. Little wonder Kyari describe the international oil market as “voodoo market”.
The situation is so bad such that if Brent Crude ever declines below the current price, Nigeria might as well be out of business, as Kyari noted.
He did, however, come up with a second possible solution, and it is all about ramping up Nigeria’s oil output. According to him, the NNPC is working earnestly towards increasing Nigeria’s daily production to 3 million barrels per day. But even this plan is problematic.
Nobody is buying Nigeria’s sweet crude as revenue crisis becomes complicated.
According to Nairametrics’ commentator and economic expert, Kalu Aja, the solution to Nigeria’s oil problem is much more about finding buyers than any other thing. He tweeted:
“Brent Crude is trading about $35 per barrel. That’s the small problem, the bigger problem is where to sell the Nigerian high-grade oil. Saudi Arabia and Russia are not just in a price war but a market share war. Nigeria can drop prices as well; can she boost production?”
This is a real problem by the way, one that was confirmed yesterday by Kyari. According to him, Nigeria has about 50 cargoes of crude that nobody wants to buy. Therefore, even if production cost is reduced and Nigeria slashes prices, if it cannot find buyers, the country is in for serious trouble.
Once again, Nigeria depends mainly on oil revenue to finance its budget. The country has recently been battling a revenue crisis, a situation that was exacerbated by the recent developments in the oil market. Earlier this week, Nairametrics reported that the Nigerian Government was taking steps to scale down on the country’s N10.6 trillion 2020 budget, in response to the dramatic crash in global oil prices.