Long-term outlook for Nigeria’s oil sector is unfavourable

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By The Economist

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A dramatic fall in US imports of Nigerian crude oil raises concerns about the implications for the long-term economic outlook for Africa’s biggest oil-producing nation. The US is Nigeria’s biggest oil export market, but its purchase of Nigerian petroleum dropped by 49% in 2012 to an average of 420,000 barrels/day (b/d), compared with 800,000 b/d in 2011 and 1m b/d in 2010. This sharp decline reflects a trend of falling demand for Nigeria’s light grades of oil as US refineries shift to comparable but less expensive domestically produced crudes. The growth in US production of light-sweet crudes poses a clear challenge to the Nigerian oil industry, with US imports expected to continue to decline. Other threats to the Nigerian oil sector include growing regional competition and continuing domestic problems.

Oil accounts for around 80% of government revenue in Nigeria and about 95% of the country’s total exports, so the prospects of a diminishing US market for Nigerian petroleum could be devastating if the country cannot find large replacement buyers of its mainstay commodity. However, despite the fall in exports to America, Nigeria has so far had markets for all the oil it wants to sell. Nigerian oil exports have increased to other parts of the Americas, Europe and Asia. For example, the value of Nigeria’s exports to China, composed mainly of oil, totalled N629.1bn (US$4bn) in the first three quarters of 2012, compared with N392.6bn in the whole of 2011 and N216.5bn in 2010, according to Nigeria’s National Bureau of Statistics. It is likely that demand for African oil from refiners in China and other fast-growing Asian economies will continue to rise in coming years.

Officials are aware of the threat, but not yet concerned

Nigerian oil officials, although acknowledging the challenge posed by the development of shale hydrocarbons, appear to be undaunted by it. Andrew Yakubu, the group managing director of the Nigerian National Petroleum Corporation (NNPC), last month told an oil and gas conference in Abuja that, in spite of the industry-wide apprehension generated by the development of shale hydrocarbons, he was confident that Nigeria would remain a vital energy supplier. He said that the country was already thinking ahead by repositioning its exports in the light of the emerging threats, but also noted a number of factors that are likely to slow down the development of shale oil production outside of the US, including high production costs and environmental pollution. Although this might be true in the medium term, over the longer term production costs are likely to come down as technology improves, and ways to mitigate the environmental impact are likely to be discovered.

Regional competition is increasing

It is not just competition from US shale oil that Nigeria faces. Countries around Africa are starting to exploit their own recent discoveries of oil and gas. Ghana began oil exports in 2011 as other West African countries increased their own production, and there has been a recent flurry of positive exploration results in East Africa. Indeed, the East African discoveries will be better placed to serve Asian markets once commercial production begins. Although the new discoveries are unlikely to rival Nigerian production capacity for many years (Ghana has struggled to get to 100,000 b/d, less than 5% of Nigerian production, for example), competition will also increase from established regional producers. Algeria and Angola have been similarly affected by lower US exports and will, therefore, be competing for new customers.

A focus on resource management

The current focus on the challenges posed by shale oil and regional competition has led to questions about the management of Nigeria’s oil resources by successive governments over the past four decades. Despite declarations of intent to increase local processing of oil to transform Nigeria into a major exporter of petroleum products, the country still only refines a small portion of its crude output and remains dependent on fuel importation. In recent years a number of foreign companies have pledged to construct refineries in Nigeria; for example, the NNPC and a Chinese firm have agreed to build three refineries with a combined capacity of 750,000 b/d. If these projects were to materialise they could provide significant domestic demand for the country’s crude output. However, it is unlikely that many will see the light of day as long as the government fails to muster the political will to deregulate and liberalise the downstream oil sector.

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