Nigeria’s crude oil revenue is set to take a hit as the country’s largest buyer, India, has struck a deal worth $1.5 billion, to buy oil from the US.
In a statement on Monday, state-owned Indian Oil Corporation Ltd (IOC), announced a year-long contract that will see the delivery of up to 60,000 barrels of oil per day (bpd) or three million tonnes worth of crude cargoes.
“Indian Oil has finalised a term contract for import of up to 3 million tonnes of crude oil of US origin grades as a part of its strategy to diversify term crude sources, Sanjiv Singh, IOC’s chairman said on Monday.
The new deal– the first of its kind– would cut India’s dependence on the Organisation of Petroleum Exporting Countries (OPEC) and its members including Middle Eastern nations and their West African counterparts.
This would enhance India’s bargaining power with the US, Sri Paravaikkarasu, an international energy consultant, told Reuters.
“Lots of geopolitical issues are going around. We expect lots of volume going away from Venezuela, west Africa and Iran, so it makes sense to have guaranteed term supplies from the U.S., where crude production is increasing,” she said.
As at 2017, India was the largest importer of Nigeria’s crude, buying over 131 million barrels of oil in that year, according to a report by the Nigerian National Petroleum Corporation (NNPC).
The second largest importer of Nigeria’s crude in 2017 was the US, with over 94 million barrels of oil sold to the North American country.
But with the changing dynamics in the global oil market, the US has now become the biggest producer of crude oil in the world, making it offer terms that address its location disadvantage with respect to its rivals in OPEC– all in a bid to secure the Indian market.
Oil sector’s contribution to GDP
In Nigeria, crude oil exports account for about 90 percent of foreign exchange earnings and 80 percent of government revenue, thereby making the nation’s economy heavily reliant on the petroleum sector.
The oil sector witnessed negative growth between 2013 and 2017 on the back of volatility in the international market and challenges to output as a result of militant attacks on pipelines and other infrastructures.
Although the sector picked up in 2017 after Nigeria exited its worst recession in 29 years, the latest figures released by the National Bureau of Statistics (NBS), shows that the nation may be heading for dire straits once again.
The NBS report shows that the oil sector recorded a real GDP growth rate of –1.62% (year-on-year) in Q4 2018, indicating a decline of –12.81% points relative to the growth rate recorded in the corresponding quarter of 2017.
On an annual basis, real GDP growth for the oil sector stood at 1.14% as against 4.69% recorded in 2017.
Contribution to aggregate real GDP in 2018 was 8.60%, slightly lower than the 8.67% recorded in 2017.
Conversely, the non-oil sector’s annual contribution to GDP was 91.40% as against 91.33% in year 2017.
The “key performing activities” responsible for the growth were said to include transport, information & communication, electricity, water, and arts & entertainment.
OPEC cuts and Nigeria’s oil revenue: risk or reward?
In 2018, Ibe Kachikwu, minister of state for petroleum resources had said foreign exchange reserves grew by about $20 billion as a result of oil production exemption granted to Nigeria in 2016 by OPEC, as well as the relative peace that has returned to the Niger Delta.
Nigeria’s exemption for the output cut deal has however ended and the nation is expected to cut her production by 53,000 barrels of oil per day (bpd), which is approximately 2.5 % of current productions figures.
This would bring the nation’s oil production to 1.68 million bpd excluding condensates.
Rather than being a cause for concern, the minister said Nigeria can cope with the reduced contribution to OPEC by focusing on local refining to meet local demand for petroleum products.
“If we can develop in-house production and just feed into our refineries, then what we are taking out becomes very minimal. That is what we are going to focus on,” Kachikwu had told TheCable Petrobarometer.
Compliance to OPEC cuts may also pose new challenges as a result of spike in oil production expected from new deepwater projects coming on stream including Total’s Egina and SNEPCo’s Bonga South-West Aparo.
But Kachikwu has said that in the case of oil produced from the Egina field, it might be classified as a condensate — a much lighter, more gasoline-rich oil that’s not bound by the OPEC cuts.
“We are trying to look at Egina more as a condensate production. We are looking at the crude configurations of Egina. Once we can certify that some of that, if not most of that is from condensates, then it (production cap) really won’t have much of an application,” he said.