Discovery of oil in US, India, other places threatens Nigeria

Nigeria’s continued dominance in oil production in Africa may soon be history following current oil deposit discoveries in other African countries.

There are numerous discoveries in sub-Saharan Africa in the last five years, with the majority coming from East African countries like Tanzania, Uganda and Mozambique. By extension, Nigeria’s revenue profile is likely to suf
fer the same fate too.

The competition has become stiffer with the discovery of shale oil (light tight oil) that is rapidly emerging as a significant and relatively low-cost new unconventional resource in the US, with domestic energy boom leading to sharp cut in demand for Nigeria’s crude oil.

Since the past nine years, the US imported between 9-11 percent of its crude oil from Nigeria. However, the US had to reduce its import due to its crude oil and shale gas discovery.

The United States Energy Information Agency (EIA), a US-government agency report, showed in 2011, 767,000bbl/d of crude (33%) of Nigeria’s crude exports were sent to the US, making Nigeria the fourth largest foreign oil supplier to the US.

Although Nigeria’s high-quality light, sweet crude is a preferred gasoline feed-stock, US imports of Nigeria’s crude decreased in volume and as a share of total imports in 2011, with the trend continuing in 2012.

The main reasons underlying this trend are that some Gulf Coast refiners reduced Nigerian imports in favour of domestically-produced crude, and that two refineries in the US East Coast, which were significant buyers of Nigerian crude, were idled in late 2011.
As a result, the nation’s crude as a share of total US imports fell to 5 percent in the first half of 2012, down from 10 and 11 percent in the first half of 2011 and 2010, respectively, according to the EIA.

This, Organisation of Petroleum Exporting Countries (OPEC) confirmed, saying that rising domestic oil production in the US would gradually shrink Nigeria and other member countries’ export to the US. OPEC, in its annual world oil outlook released recently, said this would result in a sharp cut in purchases from African and Middle-Eastern oil producers, who are OPEC members.

The Indian government revealed it was working on a detailed roadmap to cut the country’s oil imports by half in the next seven years, a move that can reduce the nation’s crude oil import from Nigeria. The proposed plan is to reduce import dependence by 50 percent by 2020, 75 percent by 2025 and 100 percent by 2030, and increase its dependence on natural gas.

Huge natural gas presence in Australia, Qatar, Mozambique, Nigeria and Tanzania offers credible alternative as an environment-friendly and probably cheaper fossil fuel. Shale gas is usually recovered from rock formations using hydraulic fracturing or horizontal drilling techniques.

Global shale production
Shale oil production has been accelerating in the US, growing from 111,000 barrels per day in 2004 to 553,000 barrels per day in 2011 (equivalent to a growth rate of around 26% annually), according to PricewaterhouseCoopers (PwC) 2013 report on ‘Shale Oil; the next revolution.’ As a result, the US oil import is forecast to fall in 2013 to its lowest levels for over 25 years.

Estimates by the US EIA suggest that shale oil production in the US will rise more slowly in the future to about 1.2 million barrels per day by 2035 (equivalent to 12% of projected US production).
The report hinted that these projections seem conservatively relative to other market analysts, who forecast US shale oil production of up to 3-4 million barrels per day by that date. Outside the US, the development of shale oil is still at an early stage. There are indications that point to large amounts of technically recoverable resources distributed globally.

Global shale oil resources are estimated at between 330 billion and 1,465 billion barrels. Shale oil is projected to make the largest single contribution to total US oil production growth by 2020, with the proportion of production from conventional sources remaining relatively stable.

Investment is already underway to characterise, quantify and develop shale oil resources outside the US, Argentina, Russia and China. Since the beginning of 2012, there have been a number of announcements, from Argentina to New Zealand, of discoveries of shale oil resources as well as government initiatives to encourage the exploration and production of it.
With the potential for shale oil production to spread globally over the next couple of decades, there is likelihood that this development would revolutionise global energy markets, providing greater long-term energy security at lower cost for many countries.
The report added that successful development of shale oil resources was dependent on the presence of globally distributed, large scale, good quality resources, with overall technical and economic recoverability that is broadly in line with the produced shale oil resource in the US.

Competitiveness of Nigeria’s crude
Industry operators fear that recent gas discoveries in other parts of Africa may negatively affect the nation’s crude oil potential and its competitiveness.
“The competitiveness of Nigeria’s crude oil and the numerous opportunities to monetise it would be impacted by recent discoveries of large reserves of gas in other parts of Africa, especially offshore East Africa, as well as huge exploitation of shale gas in different parts of the world,” an industry source told Reuters.

Already, Angola is now Africa’s third largest oil producer behind Nigeria and Libya. According to the 2012 BP Statistics Energy Survey, Angola had oil reserves of 13. 5 billion barrels at the end of 2011, equivalent to 21.1 years of current production and 0.81 percent of the world’s thousand barrels of crude oil per day in 2011.

With oil accounting for around 80 percent of government revenue and 95 percent of foreign exchange reserves, Nigeria looks vulnerable to any negative shifts in oil and gas prices and demand.

The US accounted for 35 percent of oil exports from Nigeria in 2011. But it imported around 40 percent less last year, taking purchases from Nigeria to their lowest in over 20 years, according to EIA data.

This drop in demand has already resulted in Nigerian barrels selling for around 40 cents, lower than its official selling price, and left dozens of cargoes unsold and rolled over to future months, according to research by Africa’s Ecobank.
Analysts have previously warned that Nigeria would eventually have to look to different markets to compensate for a fall in exports to the US, and have predicted its sales could shift toward Asia.

“The world is now becoming even more competitive all around. US shale oil and an increase in their gas production is already affecting our exports to the US. Bear in mind that the US is one of our major importers in this sector,” Diezani Alison-Madueke, minister of petroleum, told journalists during an annual conference of industry heavyweights in Abuja, recently.
Paul Collier, professor of economics at Oxford University, warned that in the face of continuous depletion of oil resource and its revenue globally, Nigeria, which heavily depends on oil, should ensure pru dence and embark on sustainable savings and investments.

According to Collier, oil is depleting twice a year and this is precarious as Nigeria’s population is also rising, warning Nigeria, which has over 85 percent revenue from oil, to recognise oil as a depleting asset and devise other diversification strategies, without which the future generation would face dire economic challenges.
It is the recognition of the threat of oil volatility to the economy that pushed the nation to set up the Sovereign Wealth Fund (SWF), which is expected to kick off this month.
The International Energy Agency has said the US could become the world’s biggest oil producer by around 2020. Domestic output has been particularly boosted by new techniques like fracking. Nigeria is Africa’s largest oil producer, with a current output of around 2 million barrels per day.

Impact on oil prices
Lower global oil prices indicated by PwC 2013 report suggest a major impact on the future evolution of global economy, given the key role oil prices still play. These effects, the report states, are not as great now as in the 1970s, when oil price hikes had severe negative impacts on major oil importing economies, helping to push the United Kingdom and many other countries into prolonged periods of stagflation.

Using National Institute Global Econometric Model (NiGEM) to explore consequences of lower oil price across the global economy and selected major national economies such as the US, Japan, Germany, UK and the BRICs – Brazil, Russia, India and China, it indicated that the level of global GDP could be between 2.3 percent and 3.7 percent higher at the end of the projection period.

“We have used NiGEM to model the impact of the two different scenarios considered; a decrease of either $33 or $50 in real global oil prices, phased in over two decades (the maximum time horizon of the model). At today’s GDP values, this is equivalent to an increase in the size of the global economy of around $1.7-2.7 trillion per annum.

“This could imply a rise by 2035 in average global GDP per person of between $230 and $370 per annum (at today’s prices) relative to the EIA baseline case with minimal shale oil production. At the other end of the spectrum, the model shows that some major net oil producers could see their current account balances deteriorate significantly as a result of lower oil prices. A lower oil price acts as a boost to consumers’ real disposable income similar to an indirect tax cut, with a consequent positive effect on real household spending levels,” the report explained.

A decrease in the price of oil will improve the terms of trade for a net oil importer, and conversely see them deteriorate for a net oil exporter, the report adds.

Opportunities, challenges
The possibility of increases in shale oil production and the potential macro-economic impact raise challenging questions for stakeholders in the energy industry. At a global level, shale oil has the potential to reshape the global economy, increasing energy security, independence and affordability in the long term and its impacts stretch far beyond the oil industry.

OPEC nations and other major net oil exporters need to assess the likely impact of shale oil on global oil prices and their own revenues, budgets and economies. While these nations considers how best to respond in terms of potentially limiting growth in oil production to counteract the potential price effects of increased production outside OPEC, mitigating the long-term impacts on governments’ revenues more generally of oil prices below current projections is another priority, the PwC report states.

“Where feasible, they also need to consider pursuing their own shale oil exploration and production options. Businesses that support national and international oil companies with services and equipment need to consider the implications for their strategy and operating model, as their clients shift focus from offshore to onshore operations with very different implications for the services and capabilities required. Already, many IOCs are staring to invest in shale oil exploration and production outside the US, including sites in China, Argentina, Australia and Russia.

“More generally, companies across the economy which rely on oil and related products (e.g. plastics, airlines, road haulage, automotive manufacturers and heavy industry more generally) could see significant favourable shifts in their cost structures over the next couple of decades. These will need to be factored into longer-term business planning and investment appraisal decisions.

“The potential magnitude of the impact of shale oil makes it a profound force for change in energy markets and the wider global economy. It is therefore critical for companies and policy makers to consider the strategic implications of these changes now,” according to the report.

Source: businessdayonline.com