Nigerian output to surge after dodging OPEC cuts

Posted by Bayo Okoya - Delta Analytics Lagos


In a boost to Nigerian oil production, Royal Dutch Shell on Tuesday lifted its force majeure on exports of Forcados crude oil shipments. The force majeure, which allows companies to miss contractual obligations as a result of events out of their control, was imposed on 21 February 2016 following militant attacks.

Nigeria was recovering from attacks which had seen its output drop by over a third in 2016 due to militant attacks, from a peak of 2.2 million barrels per day (bpd). With the Forcados terminal back on track, shipments are set to average around 250,000 barrels a day with output will be set to increase by around 10 per cent, bringing the output of Africa's largest economy up to around 2 million barrels per day (bpd).

The timing could not be better for Nigeria. Not least because the Nigerian Senate last month passed the long-awaited Petroleum Industry Bill (PIB) after 17 years of debate. Amongst other things, the Bill seeks to turn the national oil company – the Nigerian National Petroleum Corporation into a commercially viable entity.

OPEC ramifications

The resumption of Forcados exports also works to Nigerians' favour having been exempted from the latest round of OPEC production cuts. The extension of cuts to OPEC members and non-members (led by Russia), was agreed to in March for a further nine months in a bid to increase the global price of oil, as the previous six-month deal came to an end.

There was speculation that Nigeria and Libya, the other nation exempt from cutting output, may have to join in for the second round. Militant violence reduced capacity in both countries last year, but both saw their production creep up in 2017. Any imposition of cutbacks was likely to have been ruinous to the Nigerian economy, which still remains dependent on oil, and on the Nigerian government budget, which was written earlier this year based on a return to peak output.  

The global picture is less rosy, though. The resumption of Forcados production is likely to undermine the effectiveness of the latest OPEC deal, which committed nations to reduce global oil output by 1.8 million barrels per day. The news from Nigeria will negate about 20 per cent of this. Analysts at the time of the new deal feared that recovery of Nigerian and Libyan capacity could entirely outweigh the effect on the global oil price as a result of any production cut.

Boost for indigenous firms

The Forcados terminal is a major artery for the Nigerian oil industry, depended upon by a huge numerous of indigenous Nigerian firms, who the Federal Government have gone to pains to support despite the global downturn in the price of crude.

Earlier this year it was reported that without the use of the Forcados pipeline an increasing number of cash-strapped local firms were turning to barges and other small vessels to transfer tens of thousands of barrels over water directly from wellheads to other terminals.

With the pressures of militancy and the glut in oil prices creating pressure on global players, indigenous firms in Nigerian such as Aiteo, Seplat and Sahara energy have prospered in the last two years. Indigenous Nigerian firms control the majority of onshore oil sites, which make up a third of Nigeria's total output.

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