Nigeria’s troubled oil export, which has been the cause of all the revenue shortfall challenges in recent times may receive strong boost from unfolding events and developments in the international oil market. Since the coming of this government, low oil production output and price have combined to almost cripple the economy as government revenue continue on a downward spiral leading to the highest rate of borrowing by any government in the country.

Oil price that had been largely lukewarm over most of the year, hovering just around the budget bench mark of $60 per barrel suddenly got respite last week following the unexpected attack on Saudi Aramco oil facility raising hope for Nigeria’s budget and economy. This also came in the wake of report by the National Bureau of Statistics, NBS, the U.S. has resumed oil import from the country after nearly 10 year hiatus.

Saudi Arabia, the OPEC’s largest exporter of crude oil came under attack from drones-propelled Ballistic missiles, a fortnight ago at two of its major oil facilities. The attack reportedly affected about 5 million barrels per day of crude oil production about half of its output. Saudi Arabia’s oil company Aramco said its refineries were badly hit by the drones causing massive fires.

Nigeria’s debt stock which was just N11 trillion in 2015 has jumped to N26 trillion by April 2019, with strong possibility of more borrowings to finance the 2019 budget, 68 percent of which has   been pushed forward to 2020.

Mrs. Zainab Ahmed, Finance minister while unfolding the Medium Term Expenditure Framework, MTEF, for 2020-2022 – a prudential requirement of the fiscal Responsibility Act, which is essentially a three year rolling plan from 2020 -2022 – indicated that the country is in deep fiscal crisis and government is virtually broke, and Nigerians are to expect harder times ahead.

The 2020 budget size of N9.78 trillion represents a reduction of N360 billion from the 2019 budget of N10.06. Also the critical index or bench mark of oil price was reduced to $55 per from the $60 for 2019. Capital vote has also been reduced from N3.18 trillion in 2019 to N2.06 trillion, a shortfall of N1.3 borrowing trillion, while N2 trillion is expected from

However, the real concern for most people is the allocation of N2.45 trillion for debt service for 2020, which raise a dilemma confronting the country whether to continue to borrow and how to service existing debt which is expected to consume 60 percent of annual revenue in debt service next year to avoid default and further complications with the debt management.

Whilst this is bad news on a global scale, Nigerian may inadvertently stand to benefit from it, albeit in the short term. Saudi Arabia claimed it was hit with a coordinated drone attack on Saturday taking out five million barrels half, about its output. Yemeni Houthis who have been at war with the Saudi Arabia, had claimed responsibility for the attack but the U.S. and Saudi authorities are putting the blame squarely on Iran. Iran has however, denied launching any attack but claims it is ready to defend itself should there be a reprisal attack.

Last week Iranian Foreign minister, Zarif threatened that any attack by either U.S. or Saudi Arabia will lead to an all out war in the region and no interest would be spared. This apparently was a response to the Saudi position which had identified the weapons to be Iranian made vowing to mete out appropriate retribution to the perpetrators of the attacks.

It is feared that any open armed confrontation in the region may bring the world to the 1973 situation as over 60 percent of global oil shipment passes through the Strait of Hamuz controlled by Iran which may see oil price rise to over $100 per barrel. This may be sweet music to Nigeria and other oil producers but a catastrophe for the world.

Nigeria can also benefit from a likely increase in its quota of crude oil sales. We currently export on average 1.6mbpd to 1.8mbpd. Nigeria can increase its revenue from this if the issue persists and oil prices continue to rise. Reports already suggest oil price could rise to as much as 19% due to this crisis and its ensuing escalations. The budget bench mark was 2.3 million per day.

Last week the National Economic Council, NEC, a body comprising the 36 state governors and chaired by the vice president, released a report on the oil sector which painted a dire situation. According to Governor Godwin Obaseki of Edo state, who read the report, Nigeria lost 22.3 million barrels of crude in the first half of the year worth about $1.6 billion, warning that if this is not check, the figure will reach $2.3 billion by year end.

In fact, Brent crude reached $71.95 up by $11.73after the attack but has moderated at just over $60 last week. However, Saudi oil production could be up and running by month end baring any further escalation. Also the U.S. also produces large quantities of oil and could bridge the supply gap. Ironically Nigerian and Iraq agreed to production cuts. This latest crisis may keep that decision pending until it is resolved.

Forex Pressure

There has been growing pressure on the CBN to consider a devaluation of the naira. Those in favour of devaluation often cite the drop in oil prices as a reason as well as the Real Effective Exchange Rate (REER) as well as the continuing depletion of the foreign reserves. The CBN responded with a series of securities sales at significantly higher prices, a policy aimed at sucking out demand from the market. Over $34 billion has gone into defending the naira in the past year.

With this crisis probably escalating over the next few days, oil prices may continue to rise impacting positively on Nigerian foreign exchange proceeds. The CBN will view this as another reason to continue its defence of the current exchange rate regime. Thus, for now, the pressure to devalue is off until things return to normal.

One potential downside in all this is Nigeria’s continued funding of fuel subsidy. If oil prices rise then Nigeria might have to pay higher for its fuel imports, offsetting whatever gains it hopes to get from the temporary rise in oil price. Reports suggest Nigeria spends about $5 billion on the importation of fuel.

But, it might not last long

The U.S. has already briefly overtaken Saudi as the world largest crude oil exporter. However, other OPEC producers with significant capacity to fill the gap, such as Iran, Iraq and Venezuela are all facing some challenges. Iran is under U.S. sanctions which are already biting hard as most IOCs can’t do business with the country; Iraq is still trying to rebuild its war damaged oil infrastructure, while Venezuela is in ruin from the effects of sanctions and lack of investment.

Nigeria earned N1.3 trillion ($4.5 billion) from crude oil sales in 2018 compared to N1.2trillion budgeted and N2 trillion ($5.5 billion) in 2017. So higher oil prices do favour Nigeria. Nigeria earned a combined in oil revenues in 2018 compared to in 2017. Oil was recently up 10 per cent, jumping from the roughly 8 per cent rise it had been trading at earlier in the London morning.

Prof. Aja Agwu, a research fellow at the Nigeria Institute of International Affairs, NIIA, however cautioned Nigerians not to put their hope on the developments in the Middle East warning that the crisis is not likely to go beyond the present stage, and the possibility of war is remote because of its dire consequences.

“Iran is not prepared for war; sanctions have weakened it considerably; neither is the U.S nor Saudi Arabia, which is already war weary. Trump cannot go to war because his reelection bid is shaky. Iran will only fight through proxies and perhaps brocade of the Strait of Hamuz. So, I don’t hat happening in the immediate course”.

He however, added that Nigerians should be unduly optimistic about the rise in oil price because it may change their economic fortunes given the conspiracy of the political elite against the people. “Even if oil price goes to $100 what difference will it make to the lives of the people”, he queried.

OPEC position

OPEC secretary general Dr. Mohammad Barkindo however sought to calm markets last week, praising the response of the Saudi authorities and arguing the situation has been “contained”. Speaking on Bloomberg television, Mr. Barkindo said there were no plans for an emergency OPEC meeting, insisting: “We do not have any panic button per se in OPEC at the moment.”

“We are pleased that the Saudi authorities and Aramco in particular have risen to the challenge. The way and manner in which they have handled this development has been commendable. They have ample supplies in inventories they are going to tap into. So by and large I think they have contained the situation so far but we are waiting for the regular updates that Aramco will be informing the market with. There is no need to panic at the moment.

“What we have seen in the markets today is an initial reaction from the trading community but going forward I think the further updates that will be coming from Saudi will calm the markets.”

Moody’s response

Moody’s Investor Service said in a note last week that; “While the drone attacks on key Saudi Arabian oil facilities [are] a credit negative and production disruption is significant, we do not expect this to leave a long-lasting impact on Saudi Aramco’s financial profile given its robust balance sheet and strong liquidity buffers,” said Rehan Akbar, a Moody’s vice president.

The state oil group, the world’s most profitable company, last week chose a range of international and local banks to handle its much anticipated initial public offering, which if successful would be one of the world’s largest. On oil prices, Mr Akbar said: This event however highlights the credit linkages the company has to Saudi Arabia both in terms of geographic concentration and more importantly exposure to geopolitical risk.

 

All eyes on the White House

Markets will be looking anxiously to the White House to hear what steps President Donald Trump plans to take in response to the attacks. Mr. Trump tweeted yesterday that the U.S was “locked and loaded” for potential reprisals once the identity of the “culprit” was verified by the Saudi authorities. Iran-backed Houthi militias in Yemen claimed responsibility for the attack, but Mike Pompeo, U.S. secretary of state, who visited Saudi Arabia last week, explicitly blamed Iran.

Higher oil prices may hit Asia, Africa

Research from Goldman Sachs illustrates the potential impact of higher oil prices on growth and inflation in Asia’s emerging economies, which include China, South Korea, Singapore and Thailand. It says that an oil price increase from $60 to $70 a barrel over a sustained period will push gross domestic product 1.1 percentage point lower; while it could be more for most African countries.

The bullish reaction in oil prices will likely be limited by Saudi Arabia’s vast quantities of crude in storage, estimated to equal roughly 26 days of current crude exports, a large portion of which is at the main export terminal Ras Tanura. The country also has strategic storage facilities in Rotterdam, Okinawa (Japan) and Sidi Kerir (Egypt).

“In a scenario where the damages result in a longer duration of the 5.7 million barrels per day production shut-in, say for 10 days or more, the situation for Saudi Arabian crude flows to the market will be critical, in our view, as there are limits globally to the volume of export replacement barrels.

Strategic Petroleum Reserves in the OECD countries would then be called upon. The U.S stands as one of the few countries that would be able to increase exports in the short term. We believe U.S crude exports could potentially be increased by about 1 million bpd, from 3 million to 4 million bpd, if prices allow for higher utilization of the current crude exports capacity.

 

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Abqaiq and Khurais facilities

Saturday’s attacks hit two key pieces of Aramco infrastructure: the Abqaiq oil processing facility and the Khurais oil field. Abqaiq is a crude processing facility with a capacity of 7m barrels a day. It is Aramco’s largest oil processing facility and the largest crude stabilisation plant.

The extent of its processing capacity makes it one of the group’s key assets. Located about 70km southwest of Aramco’s headquarters at Dhahran, Abqaiq receives sour crude from gas oil separation plants, blending and processing it into sweeter crude oil for transport to Ras Tanura and Jubail ports on the east coast, Yanbu on the west coast and the Bapco refinery in Bahrain. The main grades that it oversees are Arabian Extra Light, Arabian Light crude oils and Natural Gas Liquids.

The Khurais oil field has a production capacity of 1.5m barrels a day. It is an onshore field, based 180km east of Riyadh. Four oil processing trains each with a capacity of 300,000 bpd were reported to have been hit.

Saudi Arabia’s state energy behemoth has three strategic commercial oil storage facilities around the world, according to JPMorgan’s commodities analysts. This is an important factor to consider as analysts tabulate the potential effects to world oil supply caused by the attacks on the company’s facilities.

Aramco’s strategic facilities are located in Rotterdam (Netherlands), Okinawa (Japan), Sidi Kerir (Mediterranean coast of Egypt). Depending on the extent of the damage, the Saudis can release oil from their commercial storage sites abroad alongside domestic storage facilities. The capacity between the three is at least 12mn bbl based on available data. Total Saudi crude inventories current stand at 187.9mn bbl based on JODI data.

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