A combination of external factors should help Nigeria maintain elevated oil production over the short term, with the government hoping to further enhance output through a long awaited overhaul of the sector’s regulatory framework.
An exemption from OPEC’s decision to cut global production, along with a drop in incidents in the oil-producing Niger Delta, have helped sustain the increased output and allowed Nigeria to overtake Angola as Africa’s biggest producer.
The Ministry of Petroleum Resources revealed earlier this month that crude production had reached the 2m-bpd mark. That figure is up from the first eleven months of 2016, when the country averaged 1.85m bpd, according to a December report by the state-owned Nigerian National Petroleum Corporation (NNPC).
A key contributing factor in Nigeria’s improved performance is its exemption from OPEC’s lower production targets, which come in an effort to shore up falling oil prices.
The organisation agreed late last year to limit output, together with 11 other non-member countries, including Russia, Mexico and Oman. Prices had reached a 13-year low of $26.05per barrel early in 2016, averaging around $45 a barrel for the year.
A number of OPEC members have curtailed their production accordingly, withKuwait and Oman both cuttingoutput by more than 4%.
Nigeria was granted an exemption to the production cut due to the challenges it has faced maintaining output and broader economic headwinds, including its first recession in almost 30 years and a depreciating currency.
Crude output had fallen from 2.1m bpd in the first three months of 2016 to 1.7mbpd by the second quarter, while GDP is estimated to have shrunk by 1.54% over the year, according to the Ministry of Budget and National Planning.
Equally important in achieving higher production is a decline in militant attacks in the Niger Delta.
Violent incidents from local militias -including bunkering and infrastructure sabotage – increased in early 2016.This was partly due to uneven implementation of a 2010 amnesty agreement, as well as a move by the national government to deploy the army to guard the country’s pipelines – a role that was previously allocated to militants under the amnesty.
The impact of the attacks on output varied, but they slowed the country’s production noticeably –generally by between 100,000 and 300,000 bpd, although sometimes rising to as much as 500,000 bpd. Overall, they led to a revenue loss of $4.8bn last year, according to Maikanti Baru, managing director of the NNPC.
However, a series of talks between militants and the government to review the amnesty agreement appears to have borne fruit, with thelast major attack occurring in mid-November.More recently, the government announced that it will meet overdue payments to former militants under a 2009 amnesty deal.
The impact of the decline in violence was immediate, and led to a 28% month-on-month increase in output to 1.8m bpd in November,which roseto 1.94m bpd by the close of the year.
Continuing government efforts to reform the energy sector should attract additional investment and further enhanceoutput.
Last year, top executives at the NNPC were replaced and the government initiated restructuring talks that could see the company relinquish policymaking and regulatory activities, with its constituent parts regrouped. This would leave policy and regulation to the Ministry of Petroleum Resources, while givingthenew oil company the ability to raise finance separately – including via capital markets – in a model similar to Brazil’s Petrobras.
In a move towards improved transparency, the company released its financial results in early 2016, the first time in 10 years.
Perhaps of equal importance, in November a portion of the Petroleum Industry Bill (PIB) – some 10 years in the making – passed a second reading in the Senate. The pending passage of the PIB, and the policy uncertainty it has engendered, has been one of the key bottlenecks to spurring greater investment into the country’s upstream sector.
Drafts of the National Oil Policy and the National Policy on Gas were also approved by the Cabinet and submitted to the National Assembly.
These moves have not gone unnoticed. A total of 224 oil companies submitted bids for this year’s crude oil lifting contracts, according to the NNPC, which it said was a testament to its improved transparency. While that number was a substantial drop on the 278 bids received last year, the NNPC attributed this to more stringent bid requirements.Of this year’s bids, 39 were successful, with lifting to account for roughly 1.3m bpd.
This Nigeria economic update was produced by Oxford Business Group.