Macro Analysis /

Nigeria's oil recovery target sounds too good to be true

  • Nigeria's oil minister sets target to increase oil production to OPEC quota levels by August

  • The country is currently underproducing by more than 700kbpd (vs quota) – the biggest laggard among OPEC members

  • There is a dire need for oil receipts, as revenues are being wiped out by ballooning subsidies. FX reserves are low

Nigeria's oil recovery target sounds too good to be true
Janet Ogabi
Janet Ogabi

Senior Research Analyst

Tellimer Research
28 June 2022
Published byTellimer Research

At the end of last week, Nigeria's oil minister announced that the country is increasing oil production and has set a target to meet OPEC quota by August.

According to Minister Sylva, the country plans to improve security at oil and gas facilities to curb oil theft and vandalism, while also activating oil wells that have been shut-in since the oil price crash more than two years ago at the onset of the Covid pandemic.

The obvious question is why wait until Nigeria's production has dropped over 1mbpd lower than its pre-Covid levels of 2mbpd (1.8mbpd, ex-condensates), to bring out the wand that is supposed to magically turn on oil taps within a month? And how feasible are the minister's ambitious targets?

Nigerian oil production (kbpd)

Nigeria's oil production is at a record low, and it's no longer Africa's top oil producer

The significant drop in Nigeria oil production currently makes up the bulk of total OPEC underproduction. The country's production has declined so much that it is losing its coveted position as Africa's top oil producer.

According to OPEC's latest data, Nigeria's oil production slumped to a record low of 1.02mbpd in May (ex-condensates, based on direct communication), compared to Angola's 1.16mbpd. This is 537mbpd lower than its allocated quota for the month of 1.75mbpd (Angola: 1.47mbpd).

Africa's top producers are the biggest laggards in meeting OPEC stipulated quota

Both Nigeria and Angola have seen their production decline due to receding investment. We had highlighted in our earlier research the imminent risk of International Oil Company (IOCs) exits, particularly in the two top-producing countries on the continent. Now we see these risks play out as oil and gas reserves and assets are starved of investment.

In Nigeria, Mobil, Shell and Total have all put major oil and gas assets up for sale, as they look to more profitable sites for investment. The increased above-ground risks in oil theft and vandalism have damaged the investment case for Nigeria's oil sector. Not to mention the environmental implication this has on the IOCs who are looking to 'green-up' their operations.

Production could recover soon, but August is unlikely

We agree with the minister that oil theft and oil well shut-ins are indeed the major factors stymying oil and gas production. And addressing these would improve oil production. However, the country needs more investment and definitely more than one month to see key improvements in the sector.

Given how much of the country's oil production is stolen via oil pipeline vandalism, it is unlikely the government will be able to curb the widespread theft by August. If it was so easy to prevent, surely we could have seen some improvement by now. According to NNPC, c200kbpd was stolen on average in 2021. This is likely to have increased significantly this year, given the steep decline in official oil production. On the other hand, activating shut-in wells would require capital investment. Thus, the likelihood the government can recover oil production to meet OPEC quotas this year, let alone by August, is slim.

Nigeria is in dire need of oil receipts

Crude oil and other petroleum products make up 90% of Nigeria's total exports, as at Q1 22. However, the bulk of the receipts is being wiped out by increased spend on subsidies. According to NNPC's presentation, as of May, the state oil firm has not remitted any oil revenues to the Federation's coffers this year, meanwhile NGN1.2tn (US$2.9bn) has been spent on subsidies over the five-month period. The World Bank estimates this could spike to US$9.6bn (NGN4tn) in 2022, assuming a US$100/bbl oil price.

Rising oil prices are significantly reducing the NNPC's transfers to the government

As a net oil exporter, Nigeria is missing out on the US$100+ oil price wave, as foreign reserves have dropped US$1.6bn so far this year to US$38.9bn as of 24 June. Nigeria has also lost out on US$7.6bn in oil revenue, taking the crude oil production shortfall (vs quota, excluding condensates), and assuming a ytd average Brent oil price of US$104. This is much worse than we previously estimated (using production estimates with condensates).

Hopefully, a recovery in production can come in time to benefit from this period of high oil prices. Time is of the essence, as growing concerns for the global economic outlook are beginning to put the brakes on oil prices, despite tight market supply.

FX reserves down US$1.6bn YtD despite high oil prices.