Falling oil prices dominated discussions in the energy sector late 2014 and last year. From an all-time high of $106 per barrel in 2014, the price crashed to $28 last Monday. Oil price will still be the issue this year. Will it continue to drop or go up? Since oil is Nigeria’s major revenue earner, 2016 will be a tough year for the country, reports. EMEKA UGWUANYI.
The slide in oil price has become worrisome to players in the industry. The concerns are higher in producer countries, such as Nigeria.
To explain how challenging the situation is, this year, the government has proposed to borrow N1.8 trillion to fund the budget and may be compelled to even borrow more.
When the budget was being proposed, oil price was above $30 a barrel, hence the oil benchmark for the budget was pegged at $38 a barrel.
Today, the price has dropped to below $30 a barrel, creating a huge gap between the benchmark and the current reality. The fall will also adversely affect the power sector despite being controlled by the private sector.
Ordinarily, Saudi Arabia’s and Iran’s escalating conflict could have spiked oil price in the international market, but this has not been as price slumped just after rising marginally for one day, with Brent crude, the world’s benchmark oil, selling at $34.27 a barrel, showing the level of supply glut in the global oil market.
Saudi Arabia and Iran are leading oil producers in the Organisation of Petroleum Exporting Countries (OPEC) and indeed in the world. At the outset of the conflict, oil price rose marginally to $39 a barrel from about $37, but dropped below $35 a barrel. The OPEC reference basket rose to $31.79 a barrel from $31.27, and fell the next day to $31.21 a barrel and last Monday it had further dropped to $27.07.
Expectedly, the Saudi Arabia- Iran conflict ought to have sent the price of crude skyrocketing, but this was not to be, as several factors, including excess supply turned the tide against the norm.
According to analysts, the market oversupply was caused by self-sufficiency attained by the US, which previously was a major importer of crude oil. The US has just shipped its first oil export in many years. Also, other members of OPEC, especially Saudi Arabia, refused to approve production cuts by OPEC despite entreaties from other members of the organisation.
The deteriorating Chinese economy also didn’t help matters. According to economists, Chinese yuan’s depreciation could mean the world’s second-biggest economy is even weaker than had been expected. Chinese Yuan last week exchanged 6.6956 to a dollar; the lowest since trading began in 2010 and the weakest in four and half years.
The slump in oil price may continue despite the conflict between OPEC’s largest and second largest producers, as there seems to be no plan to cut production. If demand for oil continues to drop and supply remains unchanged, the prediction that price will fall as low as $20 a barrel this year could happen.
The last time oil traded at $30 a barrel was in December, 2008, following decline in demand. But, unfortunately, the current situation stemmed from a massive oversupply, which may take price to the levels of the early 2000s when the market experienced a glut.
Many traders view the current oil price decline as a sign that the world’s economies are falling apart. They are worried that the decline in the energy sector will overwhelm the rest of the economy, despite the fact that higher oil and gas prices are actually bad for most businesses.
But the fact is that most businesses are getting a huge boost from the decline in oil. According to the President of Petroleum Technology Association of Nigeria (PETAN), an umbrella body of oil producers and services companies, Mr. Emeka Ene, the period of low oil price is the best for oil producing countries to invest in exploration to find more oil in preparation for the era of high oil price.
“We have to recognise that we are going through a lot of uncertainties within the industry globally. Oil prices have fallen more than half of what they were a year ago. Invariably, people are asking, how is this industry going to go? Within the Nigerian context, the Nigerian economy depends a lot on oil. The oil industry is driven primarily by the price and the volume of oil being produced.
“With these challenges, there are lots of great expectations of change and opportunities to grow the industry within these uncertainties. Oil exploration has to be continuous because you are taking something out of the ground without replacing it. Therefore, the day we start to cut down on exploration is the day our reserves will be limited and at some time, we will start to have a decline in our production. If that is not today, it will come in future. The beautiful thing is that it is not too late to start. This is the best time to do exploration, when the oil price is low and prices of services are low.
“Therefore, this is the time to encourage exploration. However, exploration has to be actively encouraged. That is the key. Exploration will then create jobs. Apart from that, it will create multiplier effects, with the possibility of jobs to emanate from the process of finding and producing oil.”
“We are also optimistic that the engagements across all the different stakeholders will continue to emphasise the importance of growing capacity of Nigerian companies in the Nigerian oil industry”, he added.
Analysts are of the view that with the lifting of sanction against Iran, output will double, which will further put prices under pressure. Iran has repeatedly said it plans to raise oil output by 500,000 barrels per day post-sanctions, and another 500,000 barrels per day shortly after that, to reclaim its position as OPEC’s second-largest producer.
Impact of declining oil price on firms
Since last year, oil firms have been taking measures to tackle the impact of the oil price slump. Over 20,000 workers have been laid-off since oil price crash in 2014. Emeka Ene, told The Nation that the over 6,000 technical workers, including geologists, engineers and other ancillary workers have been sacked following oil price slump.
He said: “The oil service companies employ about 20,000 technical workers with indirect employees of about 100,000. These are people that by virtue of their services, do not have direct dealings with members of the Petroleum Technology Association of Nigeria.”
He said the fall in price of crude oil has affected the operations of firms that provide technical services. Ene said the current reality in the oil industry is evident in the failure of service firms to secure and implement good contracts. “At a point, oil service firms were directed by oil exploration and production companies to reduce the cost of contracts by 30 per cent,” he said.
Oil companies in North America are planning to cut $12.6 billion to $18.9 billion in capital spending this year on top of a $68.3 billion reduction last year amid falling oil prices, a Barclays survey found. The report said cutting spending by another 10 per cent to 15 per cent this year would bring North American oil investments down to as low as $106.9 billion. The same corporate budgets totaled $194.1 billion in 2014 and $125.8 billion last year, the British bank found in its breakdown of spending plans by about 175 oil companies.
Even so, technological advances in drilling and bringing wells into production have “helped usher in a new era of efficiency in the oil field” and U.S. crude output probably will “remain surprisingly robust” though oil prices have crumpled, it said.
Globally, Barclays’ survey found oil companies shed about 20 percent of their capital budgets to a total $521 billion last year and will cut another three percent to eight percent from their investments next year, marking the first time since the mid-1980s that oil companies will reduce spending two years in a row.
Last year Nigeria through the Nigerian National Petroleum Corporation (NNPC) reduced its capital budget for joint venture oil operations by 40 per cent to $8.1 billion from $13.5 billion due to the slump in crude oil prices. The joint venture partners of NNPC include Shell, ExxonMobil, Chevron, Total and Eni (Agip).
The report said: “The NNPC has informed the joint venture partners that capital expenditures be cut down by 40 per cent from the proposed budget of $13.5 billion. $13.5 billion was the level that has been maintained in the past three years, but because of the drastic decline in oil prices that level cannot be sustained.”
The government had proposed N1.22 trillion ($7.5 billion) to fund its share of the oil joint venture operations last year with foreign oil firms providing $6 billion. “But since this budget was agreed in the last quarter of 2014, there have been drastic changes in the parameters considered by the partners,” the report added.
The former NNPC Group Managing Director, Joseph Dawha, also stated last year that three deepwater offshore oil projects and one shallow water oil field were at risk of being delayed or cancelled outright because of the decline in oil prices.
Plans to check continued price fall
Since early last year, some OPEC member countries have been making moves to persuade Saudi Arabia to agree to cut oil production to shore up price. Even at the OPEC meeting in December, OPEC President and Nigeria’s Minister of Petroleum Resources, Dr Ibe Kachikwu tried to convince the organisation’s largest oil producer but it refused to budge.
Also Ecuadorian Ambassador to Nigeria, Mr. Leopoldo Rovayo Verdesoto recently called for cooperation of Nigeria as part of the efforts to halt the free fall of price of crude oil at the international market. Ecuador is a major oil producing country and a member of OPEC.
Leopoldo Rovayo Verdesoto said there is need for cut in the current OPEC daily production, which is over 30 million barrels per day. He also called for the support of Nigeria in the push for the resuscitation of the OPEC monitoring committee, adding it would go a very long way towards halting the free fall of price of crude.
He said Nigeria and Ecuador could play the lead role in addressing the current situation in the international oil market. “Nigeria and Ecuador could make a sign to the market and work towards reducing production on daily basis. What I would like to do is to improve the relationship between both countries in the field of petroleum and as you have known we are both members of OPEC, and there is a lot of work to do because there are lots of interest and even in OPEC there are different points of views, but it seems that we have to make signs to the market that we could work together to put production in a less daily basis.”
The OPEC Reference Basket of Crudes (ORB) is made up of the following: Saharan Blend (Algeria), Girassol (Angola), Oriente (Ecuador), Minas (Indonesia), Iran Heavy (Islamic Republic of Iran), Basra Light (Iraq), Kuwait Export (Kuwait), Es Sider (Libya), Bonny Light (Nigeria), Qatar Marine (Qatar), Arab Light (Saudi Arabia), Murban (UAE) and Merey (Venezuela).