The Oil and Gas (O&G) industry has continued to be the mainstay of the Nigerian economy despite Government’s best efforts at diversification into Agriculture and Mining. According to a recent report, even though the sector is less than 10% of the country’s GDP, it contributes about 65%, of Government revenue and 88% of Nigeria’s foreign exchange earnings (Ajayi (2019). Since the discovery of oil in commercial quantity by Shell-BP in Oloibiri in the present day Bayelsa State of Nigeria as far back as 1956, petroleum production and export has largely played a dominant role in Nigeria's economy.
Nigeria is currently the largest oil producer in Africa and was the world's fourth-largest exporter of LNG in 2015. According to 2018 estimates, 79.4% of the world's proven oil reserves are located in OPEC Member Countries, with 36.97 billion barrels of that reserves in Nigeria, amounting to 3.1% of the OPEC total (BP, 2015, OPEC, 2019).
The 2020 Appropriation Act envisages a crude oil production volume of 2.18 million barrels per day with a $57 benchmark per barrel. As at January 2020, the price of Brent Crude was approximately $70 per barrel, however with the recent turn of events globally, especially the emergence of the novel Coronavirus Disease (COVID-19) and the resultant Saudi-Russia Oil Standoff, a chain-reaction of problems threatens the Nigerian Oil and Gas Sector (Ibebuike and Amadi 2020).
The COVID-19 outbreak, which has been spreading rapidly, has come with a devastating global impact. This Coronavirus pandemic has become a global threat, increasing from 179,165 infections and 7,081 deaths in March 16, 2020, to 4,721,848 infections and 313,260 deaths as at May 16, 2020—barely two months (Worldometer, 2020). The bid to contain the spread of the Coronavirus disease has led to lockdowns and travel restrictions across countries globally, with the oil and gas industry being adversely affected.
As at December 31, 2019, Brent crude averaged $60 per barrel; members of the Organisation of Petroleum Exporting Countries with allies (OPEC+) were on 2.1 million barrels per day (mbpd) cut to help steady prices. The arrangement was in place until March 2020 when the first OPEC meeting held. At the March 2020 meeting of OPEC+, the agenda was to extend the cut but there was no deal. It led to price wars between Russia and Saudi Arabia and further impacted the crude oil prices negatively as prices went as low as $20 per barrel. Both countries increased production and this resulted in over-supply of crude oil in the international market with lower demand ("Impact of COVID-19," 2020). Because of the nature of their oil fields, Russia and Saudi Arabia were able to produce oil at costs much lower than most other countries. In those other, higher-cost countries, companies can’t afford to continue pumping without losing money on every barrel. At that point, a company will close the well temporarily. Among the hardest hit is U.S. shale oil. As a consequence, the United States will likely have to give up share in the global market, to others’ gain. However, because lower crude price below $30 per barrel will affect Shale producers in the United States, President Donald Trump intervened and suddenly crude prices jumped above $30 per barrel (("Impact of COVID-19," 2020). As at April 21, the Dated Brent benchmark, a global reference for almost two-thirds of the world’s physical flows, plunged to an all-time low of $13.24 a barrel, the lowest since 1999, according to price reporting service S&P Global Platts while oil production in 2020 year-to-date dropped significantly below 2.0 million barrels per day (Raimonde and Waller, 2020).
Nigeria was hard hit by the low oil price. Because the 2020 Appropriation Act was based on certain fiscal assumptions, government was compelled to revise the benchmark oil price for 2020 from $57 to $30 per barrel and oil production to 1.7 million barrels per day given the emerging economic realities. However, with the new agreement by OPEC, Nigeria joined OPEC+ to cut supply by 9.7 million barrels per day between May and June 2020, eight million barrels per day between July and December 2020 and six million barrels per day from January 2021 to April 2022. Based on Nigerian reference production of 1.829 million barrels per day of dry crude oil in October 2018, Nigeria will now be producing 1.412 million barrels per day, 1.495 million barrels per day and 1.579 million barrels per day respectively for the corresponding periods in the agreement. This is in addition to condensate production of between 360,000 and 460,000 bpd of which is exempt from OPEC curtailment (Ibebuike and Amadi 2020).
Nigeria produces only high value, low sulphur content, light crude oils - Antan Blend, Bonny Light, Bonny Medium, Brass Blend, Escravos Light, Forcados Blend, IMA, Odudu Blend, Pennington Light, Qua-Iboe Light and Ukpokiti. Bonny Light, a high grade of Nigerian crude oil with high API gravity and low sulfur content by world standards, is more often than not correlated with the price of Brent and typically trades above Brent (Olisa, 2020). Bonny light fell below the prices of Brent crude and US headline WTI crude. Available information shows that the Brent crude shot up to $29.30 per barrel as at May 5, 2020. The American headline crude, West Texas Intermediate (WTI) surged 8.30$ to sell at $24.67 per barrel. This makes it the fifth session in a row that WTI has risen. The Nigerian headline crude, Bonny Light, also moved up slightly to sell at $18.94 per barrel. The new crude oil prices way below the revised budget 2020 benchmark of $30 per barrel will make a dent on government revenues and threaten the viability of upstream projects.