Why Nigeria will struggle to meet OPEC’s production quota

Some oil majors are excluding Nigeria from their capital expenditure budgets for 2022, others are divesting out of onshore assets and local producers struggling to restart fields shut in last year during lockdowns, lack capacity to ramp up production, developments that question the country’s ability to meet its production targets next year.

Oil cartel, the Organization of the Petroleum Exporting Countries (OPEC), and its allies led by Russia agreed on Thursday to stick with its current plan to adjust crude output by an additional 400,000 barrels a day in January and raised Nigeria’s output from about 1.5 million barrels per day to 1.683mbpd beginning from January 2022.

Normally, rising oil prices and higher volumes should boost the economy and strengthen the local currency but Nigeria’s reality is nuanced. Production has fallen by over 700,000 bpd this year, as IOCs prioritize investments in other climes.

For instance, five Western majors such as British Petroleum, Chevron, Exxon Mobil, Shell, and Total Energies are set to raise their capital spending by at least $12 billion next year, as higher oil and natural gas prices allow investment to return to more sustainable levels.

These companies are comfortably ignoring Nigeria and moving forward with higher spending in upstream oil and gas in Libya’s Mabruk field, Payara and Yellowtail developments offshore Guyana, the recently sanctioned Equinor-operated Bacalhau scheme offshore Brazil, the US Permian Basin and multiple refining and chemical expansions in the US, UK and Singapore.

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Data gleaned from Wood Mackenzie’s latest report showed over the last decade the IOCs’ average capital expenditure per barrel of oil equivalent has fallen seven times more in Nigeria compared to that of the rest of their portfolio.

Wood Mackenzie’s data also showed in 2020 the average CAPEX per barrel of oil equivalent across the global portfolios was 51 percent of 2010 levels, whereas the equivalent metric for the Nigeria assets was 7.4percent.

“The significant drop in investment by these IOCs in Nigeria goes beyond capital discipline alone,” Simon Anderson, director performance improvement sub- Saharan Africa at Wood Mackenzie said in a note. “Some Nigeria assets may be under-invested, resulting in potential upside opportunities”.

Divestments by oil majors amid limited local capacity present another challenge.

“Despite the profitability of their Nigeria assets, the IOCs are under increased pressure to accelerate their energy transition and divest non-core assets,” Wood & Mackenzie said.

Some analysts say the recent quest by oil majors may have exposed the financial and technical capabilities of Nigeria’s domestic operators, who pump between 1,000 and 100,000 barrels each day.

“Many indigenous operators are sitting on significant resources, with opportunities to grow production with access to capital investment,” Wood & Mackenzie added.

For Timipre Sylva, Nigeria’s minister of State for Petroleum Resources, the country’s oil production struggles can only be attributed to technical problems from re-tapping reservoirs that had been shuttered to comply with the stringent OPEC+ cuts of the past 17 months.

Key Nigerian grade Forcados had been disrupted for almost a month until Shell lifted force majeure on loadings on September 10. Industry sources said the suspension of exports was due to an oil spill near the Forcados terminal.

Other Nigerian crudes such as Bonny Light, Escravos, and Qua Iboe have also faced production issues in recent months due to operational and technical reasons.

“Nigeria’s oil production is currently struggling at levels never seen before, but the regulators are ignoring the problem and disguising under OPEC’s quota,” Charles Akinbobola, energy analyst at Lagos-based Sofidam Capital, says.

Also, a new wave of security threats in Nigeria has emerged that could further dent Nigeria’s production.

“Lately there have been groups in communities in the Niger Delta, who while seeking for cash and attention, have been vandalizing oil pipelines,” a Nigeria-based official at a Western oil company said. “Disruption to operations of oil companies in the Niger Delta is rising by the day due to the activities of these vandals.”

A week ago, a militant group in the Niger Delta region code-named Bayan-Men blew up an oil facility producing around 5,000 bpd of condensates operated by the Nigerian Agip Oil Company, (NAOC) in Ogba-Egbema-Andoni local government area, Rivers State.

The angry militants, who destroyed oil well, OB5, (Obiavu-5) in the area, accused the oil firm of failing to deal directly with the host communities insisting that they were fighting for justice for their people.