Oil politics and price direction and the Return of the tempest

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After surging to over $80 per barrel, oil prices have begun to plummet. As at the close of the year, the price of the global benchmark, Brent, was below $52 per barrel. Other crude grades have gone below $50 per barrel. The dwindling price sends adverse signals to oil producing nations, especially those economies that depend on oil revenues for survival, such as Nigeria. EMEKA UGWUANYI examines the underlying factors determining the current oil price and its impact on the economy.

Volatile market conditions are back in the global oil and gas industry, with prices below $50 per barrel. Brent, the global benchmark crude, traded at $51.60 per barrel while other crude grades were below $50 per barrel. With the falling prices, countries, such as Nigeria, may not be able to implement their budgets.

Some economists and industry operators expressed concern that the way oil price is falling, implementation of Nigeria’s 2019 budget may be difficult. To  Adetunji Adepeju and Phil Aragbada, Nigeria’s woes are compounded by the reduction of its OPEC production quota. Some industry players described the oil price slump as an economic tempest for Nigeria as most of the 2019 budget projections will not be realizable should oil price continues to fall.

Adepeju said: “The unstable price of crude in the international market is a major factor in the implementation of the 2019 budget. “We should also bear in mind that OPEC has reduced the production quota of crude oil. We will not be able to meet the target of 2.3 barrels per day (bpd) even though the production level has been about 1.9 bpd due to the activities of the Niger Delta militants. This has caused instability and unless our refineries start working, we will not make some gains. Also, the burden on dollars for importing refined petroleum products will be less if we locally produce what we consume.” He also expressed concern that nothing much could be achieved in terms of capital projects, given that more than 70 per cent of the budget goes to recurrent expenditure.

“The fact that about 52 per cent of the recurrent expenditure goes to salaries and emoluments is not a good omen for the next fiscal year. What should have been done instead is that our capital expenditure should be more than the recurrent expenditure or at most the two should be at par. It is good that the capital expenditure is focused on developing transportation, power and housing. If these are done and fully implemented as planned in the budget, it will be a good foundation for development in future.”For Aragbada, “to reposition the nation’s economy requires a lot of sacrifice from all Nigerians. Nigerians would have to suffer a while to enjoy the gains later. “The 2019 appropriation bill is an ambitious one not a budget of hope. If you read the details, it was based on $60 per barrel. The fall in the price of crude and production quota would negatively affect the budget implementation. We have a combination of two tragedies, reduction in oil price and oil production quota and both situations will affect the implementation of the budget.”

He, however, said oil subsidy policy is politically expedient but not economically, adding that the policy favoured mainly the elite. He said it is advisable for the nation to borrow to finance infrastructure rather than subsidy. Building infrastructure would help to create employment, boost disposable income and improve the economy. “But when money is borrowed for subsidy, there would be no gain for us economically as a nation, just political satisfaction,” he said.

 

Oil politics and price direction

 

The direction of international oil market was majorly determined by the United States. The United States was the world’s greatest oil consumer and importer as well as a major producer, which was buoyed by in recent times by shale oil. But the emergence of China as big economy and oil consumer is gradually taking that glory from the United States. The growing strengths of OPEC members and its partners such as Russia, have substantial impacts on the direction of the oil market, hence the production cut option was able to stop free-fall of oil price in 2016 until now when prices started going down.

When oil prices climbed above $80 per barrel this year, the U.S. Congress considered “NOPEC Act,” which is No Oil Producing and Exporting Cartels Act.” The proposal to establish the NOPEC Act was necessitated by high gasoline prices, which raised the ire of U.S. politicians. The Congress started to mull “No Oil Producing and Exporting Cartels Act,” which would make OPEC subject to Sherman antitrust law, meaning the U.S. government could sue OPEC for manipulating the oil market. The bill was said to have been around in some form for more than a decade, but previous presidents have opposed it. President Donald Trump has voiced support for the measure in the past, and because of his unpredictable nature, analysts say the odds of it becoming law, while still low, have never been better. Of course, if OPEC announces a production increase in a few days, it could take the steam out of the legislative effort. Currently, the United States is considered the largest oil producer in the world with outputs put at average of 11.6 million barrels per day in November and 11.7 million barrels in December.

Besides, the developed and oil consuming nations, stockpile reserves when oil prices are low, which creates relief for them during high price era. Also the International Energy Agency (IEA) said that non-OPEC supply could still outgrow demand next year, expanding by 1.5 million barrels per day while demand may only soak up 1.4 million barrels per day of that additional supply. As such, OPEC and partners might be forced to maintain the cuts through the end of the year, which happened.

 

PetroYuan – the emerging global oil market game-changer

 

The pricing of oil futures in Chinese Yuan may be one of the major determinants of the direction oil prices will go in future. Currently, its impact may not be well-perceived but certainly it is going to be a game-changer forthe global oil market.

China is not unaware of its potentials. It has the population, market and technology and it is fully using the elements to her advantage. When it overtook the United States as the world’s biggest oil buyer and consumer, it opened a domestic market to trade futures contracts culminating in realisation of a long-term vision.  The Shanghai International Energy Exchange, an arm of Shanghai Futures Exchange, was established to allow Chinese buyers to lock in oil prices and pay in local currency. Also, foreign traders will be allowed to invest in China’s commodities markets as the exchange is registered in Shanghai’s free trade zone.

Stefano de Stefano of Kerogen Ventures LLC, Houston, Texas, said China’s plan to push the Petroyuan could trigger the shift of other product payments to the yuan, including metals and mining raw materials. To him, this move by China will have implications on geo-politics, oil market gyrations, and new futures markets especially on the sub-Saharan African energy development.

Stefano said China with time may take over from the United States as the global leader for oil and gas. He said: “China’s new drive to “make the skies blue again” is recasting its role in energy. China’s economic and currency ambitions are reshaping oil markets. The status quo since 1973 is that oil and gas, other commodities, and black markets are all priced in dollars. Estimates of future pricing are based upon supply, demand and US Federal Policy.

“However, Yuan-denominated crude oil futures kicked off with a bang, surpassing Brent trading volume. China took the next major step in the challenging the Dollar’s supremacy as global reserve currency and is internationalizing the Yuan. China took the first steps to paying for crude oil imports in its own currency instead of U.S. dollars.  And interestingly, Russia, Angola, Saudi have begun payments in Yuan.” Will Nigeria look at that direction with the increasing bilateral trade relations? He noted that pricing crude futures in Yuan will give China more power over global oil/commodity prices, and will also increase the relative value of the Chinese Yuan as against US dollar and gold.

According to him, the move will also permit reduction in foreign exposure to US dollar holdings, lead to increased US interest rates, devalued dollar and balance of payments crisis and making Gold become the reference point for oil competitiveness. “The energy downturn, fracking, and China’s financial markets have created a revolution in the oil and gas industries. Chinese Yuan-denominated oil futures could result in higher interest,” Stefano said, noting opportunities for Africa to take advantage of these dislocations that abound.

He said if oil is only priced in US dollar that means we must only consider global oil supply and demand, US Federal Policy to arrive at oil prices estimates. It also means that Organisation of Petroleum Exporting Countries (OPEC) must act to ‘minimise oil output to maximise US dollar’ to ensure their US dollar purchasing power is protected over time, he added.

Another analyst said futures trading would wrest some control over pricing from the main international benchmarks, which are based on dollars. Denominating oil contracts in yuan would promote the use of China’s currency in global trade, one of the country’s key long-term goals. And China would benefit from having a benchmark that reflects the grades of oil that are mostly consumed by local refineries and differ from those underpinning western contracts. He noted that China led the first crude oil benchmark in Asia, which is important because that’s where oil consumption is growing the most. And it will be the first contract priced in Chinese currency, known as the renminbi or yuan. Currently, the main global benchmarks for crude oil are in New York and London — and priced in dollars.

“For the oil market, it shows how the centre of gravity is shifting to Asia. It means the U.S. is not front and centre in the oil market anymore,” said Matt Piotrowski of Securing America’s Future Energy, a nonprofit focused on U.S. energy security.

To the immediate past President of NAPE, Dr Andrew Ejayeriese, “Oil being priced in Chinese currency will not have any impact on the global oil prices, they will only do currency equivalence. You can actually price oil in Naira. When you have the dollar value, you can convert to naira. It doesn’t really make any difference. Chinese  do what they do because they are one of the biggest consumer of oil and gas in the world, so rather than go look for dollars to pay you, they pay the equivalent in their currency. Also they export products to all parts of the world and they have a huge population and they are taking advantage of these factors. So it doesn’t change anything if they buy and sell oil in their own currency. Although the Chinese stepped up petro-Yuan transactions in the last two years, it doesn’t change anything because the price of oil will still be competitive. If they (Chinese) decide to buy oil at a cheaper rate because the value of their currency is less than dollar, people will not sell to them, except if they will buy at a higher rate. China is a big economy and they want to maximise value from that. Remember that Nigeria has done a currency swap deal with China basically because a lot of people import from China. To make such imports, the importers have to first change their currencies to dollar and to Chinese currency. So why take that detour, if they can do the exchange directly with Chinese currency and remove that corridor and make the exchange easy.”

 

Need for increased exploration activities, investment

 

For the oil and gas industry players, the Federal Government needs to make provision in 2019 budget and subsequent years for offshore and onshore exploration activities to encourage new discoveries. According to them, Nigeria has huge reserves of oil and gas, which ought be exploited and the accruing revenues deployed to develop other sectors of the economy.

To the former President, Nigerian Association of Petroleum Explorationists (NAPE), who is also the Managing Director, Degeconek Nigeria Limited, Mr. Abiodun Adesanya, there was noticeable improvement in the revenue generation in 2018 occasioned by better oil price and less disruption in export volumes. “In 2019, we should work harder to sustain and improve on the modest gains of 2018 especially the production and export infrastructures. The Federal Government also needs to conduct a fresh licensing round.”

Adesanya urged the government to develop modular refineries to reduce importation of refined petroleum products. “The modular refinery concept is a good idea but its implementation will be difficult under the existing structure. How would the modular refineries resolve the challenges of the Niger Delta region and how will they be funded? How can the crude supply be guaranteed, in what currency will the crude be sold to the refineries given that products will be sold in Naira?

Immediate past Chairman, Society of Petroleum Engineers (SPE), Nigeria Council, Mr. Chikezie Nwosu, said: “Establishing fairly comfortable oil price should be of particular interest to the oil and gas industry in 2019 and beyond. He said the current uncertainty in global politics had effects on the global economy and that prediction of market trends was becoming increasingly difficult.”

According to him, “global political tensions add significant uncertainty to an already challenged oil and gas industry; demand versus supply economics. The tensions between the United States and Iran as well as the Saudi Arabian issues with the killing of the journalist, Jamal Khashoggi, and the withdrawal of Qatar from the Organisation of Petroleum Exporting Countries (OPEC). The trade tariff skirmishes between China and the USA, BREXIT and the sudden announcement of the total withdrawal of the USA from Syria, all added to the global tensions,” he said.

Predicating the budget, Nwosu said, will to a large extent depend on oil revenues, adding that an oil price of $60 per barrel seemed a bit optimistic. “A more realistic range will probably be between $40 and $45 per barrel, allowing for windfall receipts if higher, but also providing a hedge against lower oil prices. Oil production from the current data as at September stood between 2.03 million barrels per day and 2.3 million barrels per day, is possible. These projections are achievable, however, provided the 2019 elections are peaceful and the results do not aggravate the Niger Delta and host and impacted communities.

“It will also be good if all four key component bills of the Petroleum Industry Bill (PIB) are passed by the National Assembly and assented to by the Presidency early enough in the year before mid-year 2019.”

Nwosu said passage of the bills would bring the needed peace to the host and impacted communities as they become partners in the exploitation of oil and gas resources. According to him, the bill will also restructure the industry and the Nigerian National Petroleum Corporation (NNPC) to be more effective, with a world class governance structure. He said the bill would also attract the necessary direct investments both local and foreign. “Markets including the oil and gas industry do not like uncertainty and the PIB will go a long way to address the framework for doing business in the Nigerian oil and gas industry,” he said.

Nwosu said of particular importance was the full implementation of the 7Big Wins initiated by the Minister of State for Petroleum Resources, Dr. Emmanuel Ibe Kachikwu and supported by the Group Managing Director, NNPC, Dr Maikanti Baru, which addresses many policy challenges in the industry. He said unlocking the huge potential of the gas resources would also help in diversifying and growing the Nigerian economy through its impact on power, agriculture and other industry. He said integrated Oil and Gas Field Development Plans (FDPs) must be emphasised by the NNPC and some urban planning concepts must be encouraged. This, he said, will help leverage synergies of development by the various operators especially in offshore developments, and which will significantly lower unit technical and production costs. He said to encourage investments in exploration, it is important NNPC insists that exploration and appraisal plans are an integral part of all FDPs.

For the Chairman, Integrated Oil and Gas Limited, Mr. Emmanuel Ihenacho, “In the last 10 years, the demand for refined products had always been on the increase. Iheanacho said building a modular refinery of about 1,000 barrels costs over $1.2 billion. Building a modular refinery is not easy, apart from citing your refinery beside the sea, one can as well site it near a marginal oil field. Finance is the major reasons why most investors in the modular refineries abandoned it. No bank is ready to give loan to any investor in modular refineries that is why it is just only two out of 40 investors given licences were able to build. Government should engage the banks to provide the finance needed for building modular refineries,” he said.

In his views of Mr. Muda Yusuf, the Director-General, Lagos Chamber of Commerce and Industry, “the Federal Government needs to review its policy on refined products to encourage investors into the sector. It is a pity that after many years of oil discovery, the country is still importing its refined products for consumption. As long as we have the oil and gas sector linked to the government, private investors will continue to evade the sector.” He urged the government to overhaul the sector to encourage private investors to come in.

A former Chairman, Nigerian Council of Society of Petroleum Engineers, Dr Saka Matemilola, also urged the NNPC to repair the existing refineries to improve its production. Matemilola also urged Department of Petroleum Resources not to revoke the licences of investors who were unable to build modular refineries. According to him, withdrawing the licences will not solve the problems facing the sector. He said there was need to work with the licences owners to address the issue of sourcing for finance from the banks to build the refineries.

Kachikwu had said three out of the 40 planned modular refineries would come on stream by end of 2019. “Out of the 40 licences issued, only 10 have shown progress by submitting their programmes and putting something on the ground. By end of 2019, we are assured that three private modular refineries would come on stream,” he said.

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