A key question which Nigeria as a nation needs to address is - what value is OPEC adding to Nigeria’s economy today? This is a critical conversation that oil and gas companies need to encourage Nigeria and other African oil and gas producing countries to engage in.

Historical Context

The Organisation of the Petroleum Exporting Countries (OPEC) was formed in 1960. Nigeria joined OPEC in 1971 as its 11^th member state and has remained a member country to date.

OPEC’s primary mission is to coordinate and unify the petroleum policies of its Member Countries and ensure stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry.

OPEC has at times been described as a cartel. Generally, cartels are inherently unstable as a result of the high likelihood by members to cheat and undermine their collective missions.

OPEC and Price Volatility

In early 2020, OPEC and its allies (OPEC+) committed to making significant, unprecedented cuts of about 10 million barrels of oil production per day. For Nigeria, the obligatory cuts translate to a reduction of about 22% of barrels of oil production per day.

The general perception is that OPEC’s influence is dominant in the control of global oil prices. However, analysts posited that it is difficult to find a trend of consistent correlation between OPEC’s crude oil production volume and oil price volatility.

We support other experts’ view argued that implicit in OPEC’s mission is the focus to shift control of oil pricing from International Oil Companies (IOCs) to governments of producing countries. Over the course of several decades, OPEC had proved to be a major force in managing crude oil supply and by implication, influencing the commodity’s price on the global market.

In recent times it can be observed that the US shale and gas producers have emerged as the new balance of power that will influence oil prices, is emerging. The consensus among energy scholars is that a sustained low oil price could significantly hurt economies of countries such as Angola and Nigeria that rely heavily on revenues from the commodity.

The Nigerian challenge

Nigeria is undoubtedly a monolithic economy. The Country’s main source of revenue is derived from oil and gas exports. A significant fall in global oil prices, worsened by a slump in demand arising from the COVID-19 pandemic has led to a sharp drop in the country’s revenues.

Stunted progression
We joined Nigeria’s oil and gas industry in the 1990s as employees. At that time, the country’s daily oil production averaged a little over 2 million, with a vision to grow this to 4 million barrels per day by 2010. In fact, in the mid-1970s Shell Nigeria alone produced as much as 1.4 million barrels of oil per day.

In 2020, Nigeria oil production and export stand at less than 2 million barrels of oil per day, while the country’s population continues to rise and is now estimated at about 200 million people. Nigeria’s current oil output is equivalent to its production as far back as 1990.

This stunted progression in oil output is due to many factors. Some of these factors include a significant decline in investments, security challenges, constrained OPEC quota, unfavourable government policies and investment environment.

Current projections

Nigeria’s revenue projections are based on a higher output volume of 2.18 million barrels per day which is higher than the 2019 level of 1.9 million barrels per day; and an oil price benchmark that is significantly higher than most of the levels seen so far this year.

Although oil prices have been very difficult to predict, many analysts have forecasted that the ‘low’ oil prices may persist for many years. It is advisable that as a country, we get ready for an oil price that will float around $50 per barrel into the foreseeable future.

With this undesirable scenario which portends an imminent bumpy ride, it is a huge challenge to meet Nigeria’s debt, infrastructure and other welfare obligations.

Medium-term concerns

The relevance of crude oil as a source of energy is dwindling. There are many segments of the oil and gas industry such as gas processing, petrochemicals and oil products retail, that could be targeted by investors.

Nigeria is in the process of awarding new oil blocks to investors. This implies that the country expects these investors to progress their activities into oil and gas production in the near future. Already, there are several other oil blocks that are in various stages of development.

All of these are expected to add to the country’s production and hopefully, export. However, with a constrained oil production scenario, it means the potential investors could be cautious of investing in activities that could lead to more production of oil if the commodity cannot be exported due to quota constraints.

Diversification strategy

Many other cleaner energy sources such as solar, hydrogen, shale oil and electric cells are becoming increasingly sought after. It is therefore great news that Nigeria’s government is keen on diversifying the country’s economy. The vision to diversify Nigeria’s economy, however, requires huge investments and behavioural changes

For example, it is no longer news that Nigeria is richly blessed with vital solid minerals such as gold, diamond, barite, limestone and iron ore, among several others. Also, the country has significant arable land for agriculture, the large youthful population as well as great tourism potential.

The bold move by the current Government of Nigeria to pass into law the Petroleum Industry Bill is expected to attract more investments into the nation’s oil and gas industry. We advocate ‘squeezing’ as much revenue as we can from oil exports while it lasts.

OPEC as continued option

There should be a medium to long term plan of investing these funds into the country’s diversification strategy. This option may require taking a bold step to rethink our continued membership of OPEC vis-à-vis national interests.

The 650,000 barrels per day Dangote Refinery Complex under construction is a remarkable development. It is also great news that a few other business entities such as WalterSmith, Niger Delta Petroleum Resources (NDPR) and others are assiduously working towards establishing refineries. Hopefully, these will absorb some of the country’s oil production which will not count as part of OPEC’s quota.

It will also go a long way to reduce unemployment, intensify competition and lower prices of refined petroleum products. Expectantly, this will cushion the impact of the removal of subsidy on petroleum products in Nigeria. 

Takeaways

In our view, Nigeria has at least three options in the discourse about its membership of OPEC; these are:

1. Do nothing.
2. Leverage OPEC platform to negotiate a better production quota and technical collaborations.
3. Quit membership of OPEC.

With the hydra-headed multi-faceted challenges that Nigeria is facing currently, a steady income (part of OPEC’s mission) is good but the Country probably needs more than that to survive and thrive. It is important to note that all three options above (regarding OPEC), have significant implications.

We recommend a careful review of each option in light of the potential value that they can add to our nation’s growth and development. It is time to ask questions such as “How best do we balance our national interests with the objectives of OPEC?’ ‘’Is our continued membership of OPEC in Nigeria’s best interests’’ ‘’Can Nigeria truly reconcile its energy policy with OPEC’s expectations?” ‘’What will happen if Nigeria exits the OPEC?’’

This article is not aimed at answering these and other pertinent questions but prompting us to think out of the proverbial box and challenging the status quo with the aim of contributing our quota positively, to Nigeria’s future.

Authors

The authors of this article are experienced oil and gas experts with over two decades of experience who worked with the leading multinational oil and gas company SHELL.

Godwin Ikwue |  Nigeria 

Dr Leesi Gborogbosi  |  Nigeria  

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