Nigeria still remains the dominant crude oil producer in the
West African region, but the country has clearly lost its monopolistic claim of
being the sole producer in the region. All around West Africa, new crude oil
reserves are being discovered almost on a monthly basis. Ghana, Ivory Coast,
Chad, Mauritania are among the few West African neighbours where crude oil in
commercial quantities have been discovered in the last few years. In 2010 and
2011, commercial quantities of crude oil were discovered in Sierra Leone,
Ghana, Niger, Cameroon, Gabon, and Angola.
Diezani Allison Madueke-Nigeria's Minister of Petroleum Resources
Discoveries have already been confirmed in Liberia, while
explorations are on-going in Togo, Mauritania and even Benin republic. The West
African Coast has become a crude oil coast with significant discoveries and
more expected. Outside West Africa, East Africa, especially Kenya and Uganda
are all positioned to become major producers of crude oil within the next one
to two years.
With proven crude oil reserves of about 36 billion barrels,
Nigeria is like a giant compared to its neighbours in the crude oil store but
then Nigeria also has the largest mouths to feed compared to its African
neighbours. Angola has a population of about 18 million but with proven crude
oil reserves of about 13 billion barrels, an average of 722 barrels per head.
Nigeria on the other hand has a population of about 160 million with proven
reserves of 36 billion, an average reserve of 225 barrels per head.
So Nigeria has more reserves but it has more mouths to feed
and therefore should be prudent in managing the revenues that come from those
reserves. That, however, seem not to be the case with the constant bickering
between the National Assembly and the Presidency over an appropriate benchmark
price for crude oil revenues rather than an appropriate beyond oil strategy.
With the increasing discovery of crude oil reserves all over
Africa, Nigeria’s proven reserves buried underground are becoming less
valuable. Simple economics teaches us that the more the quantity of any
commodity, the less the price. With increasing number of countries joining the
crude oil producing club, and most of these countries having more crude oil
than they actually need, not only does it reduce the number of countries that
Nigeria can sell crude oil to, but also increases the number of countries in
the market to sell crude oil.
The oil outlook looks even bleaker when the fact that the US
is increasingly becoming less dependent on external crude oil is thrown in. The
Energy Information Administration (EIA), the US agency which provides data on
US energy consumption notes that only 45% of petroleum consumed in the United
States were imported in 2011, the lowest since 1995.
The EIA gives different reasons for the decline in US
consumption of foreign crude oil. The reasons include, the economic downturn
after the financial crisis of 2008, improvements in efficiency, changes in
consumer behaviour and patterns of economic growth, increased use of domestic
biofuels (ethanol and biodiesel), and strong gains in domestic production of
crude oil and natural gas plant liquids, expanded domestic supplies and reduced
the need for imports.
Efficiency, changes in consumer behaviour, substitution of
petroleum products with biofuel and increased crude oil production in the US
are permanent changes that will likely see the world’s largest consumer of
crude continue reducing its consumption of the product. There are analysts who
expect the US to eventually become a net exporter of crude oil soon maybe as
early as 2013.
In 2011, Nigeria supplied just 10% of US crude oil needs
compared to an average of 20% a few years ago. China and other Asian countries
have moved in to fill the drop in demand from the US, however, with potential
supplies coming from many other sources, the natural trajectory for future
crude oil prices is a downward spiral. Many agree that tensions in the Middle
East accounts largely for current price levels.
But while the dynamics of the crude oil environment is
changing fast, Nigerian leaders seem stuck in lethargic past unable to take the
necessary steps to take maximum advantage of its current crude oil resources or
diversify its economy from over dependence on a volatile product.
Nigerian leaders seem not to be reading the writing on the
wall. Current crude oil prices, which bring in 80% of government revenues, are
not sustainable in the very short term. There are analysts estimating that a
steep fall is likely very soon with projections that it may fall as low as US$
30. True. There are alternative forecasts that even see crude oil prices rising,
fuelled by demand from China and India assuming both countries sustains their
current economic growth rates.
But the uncertainty over the future direction of crude oil
prices certainly makes it a slippery platform for Nigeria to continually benchmark
its economic future. There is an urgent need for a post oil boom strategy. Any
sustained drop in crude prices, as it happened in 2008, when prices dropped to
as low as US$ 40 per barrel, would certainly plunge the country into a
financial crisis with current external at US$41 billion reserves able to cover
export for just eight months and portfolio investments in Nigerian bonds
reaching significant levels.
The debate that Nigerian leaders should be having should not
be about an appropriate crude oil benchmark but a debate about the best
strategy to diversify the Nigerian economy from its over dependence on oil
revenues and what incentives should be in place to maximize our current crude
oil and gas reserves before they become less valuable commodities in
international trade.
first published in BusinessDay of October 09, 2012
