By Bunmi Christiana Aduloju
NAPREP Fellow
The COVID-19 pandemic roiled global markets for most of 2020, and kept down demand for crude oil in the earlier part of the year, nudging the price per barrel of the commodity to as low as $-37.63 on April 20th, 2020, (West Texas Intermediate, an international oil benchmark), for the first time in history.
OPEC+ AGREEMENT
As the demand collapse held up, the Organisation of Petroleum Exporting Countries (OPEC) and its allies, OPEC+, an intergovernmental cartel, reached an agreement on the 9th of April, 2020, to reduce their crude oil production output in order to rebalance the international oil market. This was the beginning of a journey to periodic cuts of crude oil by member states of OPEC and its allies.
On the 12th of April, 2020, they finalised the agreement and decided to reduce oil output to 9.7Million barrels per day(9.7MMBOPD) from May 1, 2020 to June 30, 2020. From July 1, 2020 to December 31, 2020, 7.7MMBOPD and a 5.8MMBOPD cut in output from January 1, 2021 to April 30, 2022. The reference point for the calculation of the cut down was the oil production for October 2018.
OPEC is on familiar grounds whenever it takes a decision to modify crude oil production output. According to a Reuters report, the cartel has changed production output 34 times – often exempting some of its member countries from these cuts – from 1998 to 2018.
But this particular cut which started in May 2020 was referred to as the “single largest output cut in history.” With this cut, the oil production in OPEC member countries sank to the lowest in almost 20 years, in the first month of the curtailment.
Prior to this agreement, there had been a price war between Russia and Saudi Arabia which instigated a major oil price crashing the global market. Nigeria, Africa’s giant, being a member country of OPEC, joined in the production cuts.
OPEC+ CUTS AND NIGERIA
In fulfilment of the OPEC+ decision, Nigeria agreed to cut its production to 1.412MMBOPD for May to June 2020, 1.495MMBOPD for July to December 2020 and 1.579MMBOPD for January 2021 to April 2022, based on the reference production of October 2018 of 1.829MMBOPD. These production cuts exclude condensate production which is exempt from OPEC’s output cuts.
These periodical cuts have proven to be an effective mechanism for cushioning the oil glut that pervaded the international oil market in the early months of 2020.
Oil prices skyrocketed with the OPEC cuts. Brent crude oil futures, an international oil benchmark, jumped from as low as $26 on April 20th, 2020 to as high as $71.49 on June 7, 2021 and WTI price, from as low as $-37.63 on the 20th of April, 2020 to as high as $69.23 on June 7, 2021.
Oil prices may have increased with the OPEC+ cuts, which is an advantage for oil revenue generation in terms of FX, but “the rising oil prices could also be a curse for Nigeria as it has to pay more because of an operating cost of about $40,” notes Bamidele Samuel, a senior research analyst with one of the big four accounting firms in Lagos.
Compliance or Non-compliance
Nigeria started on a discordant note, in the first month of the curtailment, by complying only partially with its agreed portion of the cut. The country overproduced crude oil in May 2020, with about 1.61MMBOPD, accounting for about 52% compliance.
However, Nigeria promised to make up for the non-compliance by the end of June 2020 or no later than mid-July 2020.
As OPEC+ alliance extended the 9.7Million barrels oil production cut – which was supposed to end in June 2020 – into July 2020 to further rebalance the oil market, again, Nigeria overproduced oil at 1. 49MMBOPD, against its promised 1.41MMBOPD production for July, according to OPEC monthly oil market report.
In the following months until the end of the year, OPEC recorded that Nigeria was mostly compliant with its designated quota of crude oil production.
The country recorded the lowest production output for 2020 at 1.42MMBOPD in December, which was the lowest production level since August 2016, according to OPEC’s report. This was largely due to disruption in production at ten terminals including Yoho, Agbami, Pennington, Qua Iboe and Erha terminals.
OIL PRODUCTION IN NIGERIA
On one hand, Nigeria promised to make up for the OPEC cuts loopholes with condensates, which is not part of the OPEC+ curtailment. Timipre Sylva Minister of State, Petroleum, reiterated that through the respective periods of the OPEC+ cuts, Nigeria would add “condensate production of between 360-460 KBOPD.”
In November 2020, Nigeria urged OPEC to reconsider the oil production cuts designated to Nigeria due to the confusion over the categorisation of Agbami field as condensate or as crude oil.
However, OPEC declined Nigeria’s request with a comment that the production cuts was in the best interest of the international oil market.
With these cuts and other production challenges, Nigeria’s overall oil and condensate production slumped drastically in 2020 to around 1.66MMBOPD in 2020 from 2.04MMBOPD in 2019, according to an S&P Platts analysis, a UK-based market intelligence firm. This was its lowest annual output figure since 2016 when militancy in the Niger Delta pushed output to as low as 1.60MMBOPD.
According to data obtained from the NNPC Annual Statistics Bulletin, total crude oil and condensate production for the year 2019 was 735,244,080 barrels of oil and the daily average production was 2.01MMBOPD. In 2020, however, Nigeria produced 643,938,257 barrels of oil and condensate, the lowest ever produced since 1990, when the production figure was 630,245,500 barrels of oil and condensates.
In January 2020, Nigeria produced 64,260,394 barrels of oil and condensate, representing an average daily production of 2.07Million barrels, the highest in the year and in December 2020, it produced 44,018,411 barrels of crude oil and condensate, with an average daily production of 1.42Million barrels, accounting for the lowest.
Mr. Bamidele Samuel regards the operating cost to the upstream sector – which is around $40 – as a major shortfall for oil exploration and production in Nigeria.
2021 PRODUCTION CUTS
In December 2020, the OPEC+ alliance agreed to increase production by 500,000BOPD, from January 2021. This brought the total production cut for OPEC+ in January to 7.2MMBOPD. This production cut decreased gradually to 7.13MMBOPD in February and 7.05MMBOPD in March 2021 through April 2021. Saudi Arabia, OPEC kingpin, stepped in with a voluntary cut of 1MMBOPD from February 2021 till April 2021.
On April 1, 2020, OPEC+ alliance decided to ease cuts to 5.8mb/d spanning from May 2021 till July 2021.
Some analysts believe that the OPEC+ cuts would continue to go down the slope until April 2022 as the world recovers from coronavirus and the oil glut that accompanied it.
According to OPEC monthly crude oil production data obtained from its secondary sources, in 2021, Nigeria’s crude oil production figures stood at 1.34MMBOPD in January, 1.49MMBOPD in February, 1.48MMBOPD in March 2021 and 1.56MMBOPD in April 2021.
“The fact that Nigeria cannot do as much as an average capacity of 1.9MMBOPD is a challenge, especially with oil prices trading above $70 per barrels,” Bamidele Samuel argues.
“If we are producing more, that is more revenue for the government to stimulate the economy on the part of recovery,” he added.
Russia and Saudi Arabia keep disagreeing on the change in production output. While Russia has been pushing for increase in OPEC+ production output, Saudi Arabia has been more conservative, contending that another wave of coronavirus in India and other parts of Asia, is capable of assaulting demand for crude oil.
This story was produced under the NAREP Media Oil and Gas 2021 Fellowship of the Premium Times Centre for Investigative Journalism.
