Nigeria’s oil production will reduce further in the coming months as exemptions granted from Organisation of Petroleum Exporting Countries (OPEC) production cuts has ceased.
The oil cartel and its allies, led by Russia, agreed to cut oil production by 1.2 million barrels per day (bpd) at their 5th ministerial meeting in Vienna on December 7.
Beginning from January 2019, OPEC members will reduce production by 800,000 bpd or 2.5 percent of the total amount, while non-OPEC producing countries will cut production by 400,000 bpd or 2.0 percent.
The move, according to OPEC, was “following deliberations on the immediate oil market prospects and in view of a growing imbalance between global oil supply and demand in 2019”.
Nigeria and Libya had been exempted from the supply cuts when the deal went into effect in January 2017, due to internal unrest and other peculiarities that affected their oil infrastructure.
But with the new deal, Saudi Arabia, the largest producer in the cartel will absorb the highest cut, while Nigeria which currently produces an average of 1.7 million bpd will reduce output by some 40,000 bpd.
In an interview with Bloomberg before the OPEC meeting, Ibe Kachikwu, minister of state for petroleum resources, said Nigeria will struggle to participate in the supply cut.
“Some countries will struggle because their economies are very constrained” and Nigeria itself could only manage a small cut,” he said.
“It is very difficult to do that but where we are now, everybody must be seen to contribute. Obviously, the smaller it is, the more amenable we are to participate; the larger it is, the more we will struggle to participate.
“We have got exemption three times understandably. This time around, I think there is a decision that everybody should be seen to chip in.”
Reduced oil output and its effect on the economy
The OPEC production cut comes at a time when oil production has been projected to hit 2.2 million bpd by early 2019 when the 200,000 bpd Egina field comes on stream in the same period.
Considering the federal government’s 2018 budget benchmark of 2.3 million bpd (including condensates), to operate within the OPEC limit and still achieve its target, Nigeria would need to produce at least 640,000 bpd of condensates.
Although supply disruptions caused by militant activities in the oil-rich Niger-Delta have reduced considerably from what was recorded in 2016, production capacity has been unstable.
The nation’s ailing refineries which have been operating below capacity and uncertainties in the passage of the Petroleum Industry Governance Bill (PIGB) has been linked closely to reduced investment in the oil and gas sector as a whole.
A consistent reduction in production volumes as a result of OPEC cuts would, therefore, affect government revenue, and in turn, affect budget implementation.
Also, being that oil remains Nigeria’s largest source of foreign exchange, any shortfall in production would impact the economy negatively, akin to the recession experienced in 2016.
Hence, if production volumes fall below the budget benchmark coupled with a reduction in oil prices, this could place Nigeria in the trenches.