“Given Her Challenges, Nigeria Should Be Considered for Exemption from OPEC Production Cuts…”- Paul Michael Wihbey

Many operators who do business in Nigeria are sometimes concerned about the impact of Nigeria’s frequent default on OPEC production quotas on the general country risk outlook and the stability of the Nigerian economy.

In this email Q and A with Ikechi Ibeji, Paul Michael Wihbey, an international expert on the Geopolitics of Petroleum, puts Nigeria’s production quota challenges in perspective and allays fears of any adverse impact on the investment climate in Nigeria.

Dr Wihbey is Executive Director at the Institute on the Geopolitics of Energy and Strategic Resources, Washington DC, United States. He is also a Fellow and Visiting Professor at Emerald Energy Institute, University of Port Harcourt.

Before his current positions, Wihbey was President of GWEST (Global Water and Energy Strategy Team) LLC, Washington DC, where he advised the US Congress and countries in the Middle East, China, the far East and the Gulf of Guinea on issues relating to strategic resources. He is also a highly sought after international speaker, who has made high profile presentations in Lagos, Abuja, Abu Dhabi, Singapore, Shanghai, Beijing, Calgary, London, Geneva and several other locations around the world.

Wihbey also has a keen understanding of issues of petroleum geopolitics in the Gulf of Guinea and shares some insights here:

Is there a moral challenge in having a Nigerian OPEC Secretary-General, while his home country is a chronic defaulter on agreed cuts? 

PMW:
Anytime a Nigerian is elected or chosen to head a prestigious international organization, I believe that represents a win-win for both Nigeria and the given organization.  In the case of OPEC, structural changes in the global market have reflected on this venerable grouping with the 2017 creation of OPEC’s Joint Ministerial Monitoring Committee (JMMC) currently under the Co-Chairmanship of Prince Abdul Aziz Bin Salman, Saudi Arabia’s Minister of Energy, and Co-Chair Alexander Novak, Minister of Energy of the Russian Federation.  

The Committee is composed of three OPEC members: Venezuela, Algeria, Kuwait, and two OPEC+ members – Russia and Oman. This new coordinating body has likely reduced or lifted whatever moral dilemma the Secretary-General may have had in addressing conflicting claims between his home country and OPEC.

Given Nigeria’s huge dependence on oil revenues, the recent price crash, and the devastating impact of the coronavirus problem, is it realistic to expect Nigeria to meet the OPEC targets?

PMW:
In my opinion, I believe it is difficult, if not impossible to make the case that Nigeria must always meet its OPEC target under unexpected Black Swan events like the virus which in turn, has generated adverse economic conditions through no fault of the government itself or its regulatory agencies. Beyond that, Abuja has had to expand it’s military and security budgetary allocations to deal with expanding security threats. Much of the threats can be traced to the disastrous 2011 foreign intervention in Libya and the demise of Muammar Gaddafi. 

Again, Nigeria cannot be faulted for events outside its control, which have undermined its economic performance due to unanticipated revenue shortfalls and emergency expenditures.  This raises the question as to whether, given that OPEC has exempted Libya and Venezuela from quota compliance, Nigeria should also be considered for exemption. I think this a valid issue for discussion and debate. 

Indeed, Nigeria is by far the most populous country within the ranks of OPEC, exceeding the next most populated country, Iran by 100 million people. Yet, under the current quota requirements, Nigeria is asked to comply with a 1.4 mbd production ceiling as compared to a similar (1.25 mbd) ceiling for Angola, a country with a fifth of the population of Nigeria. Also, Nigeria has upstream contractual engagements that cannot be simply suspended in the wake of unforeseen developments, including new production units like the Egina deep-water field, which only started in 2019 with a capacity of 200,000 b/d.

As a consequence, it is hardly surprising that Nigeria over-produces given structural and market issues that necessitate such production. Nor do I believe that OPEC will seek to punish Nigeria by targeting market share takeaways through competitive crude discounts by Gulf OPEC members like Saudi Arabia. Such a move would be counter-productive and self-defeating. 

What are the real ramifications of Nigeria’s inability to meet the OPEC production cuts?

PMW:
As with my response to the previous question, I cannot envisage negative consequences to Nigerian overproduction, given that as recently as early 2015, Nigerian production was close to two million barrels per day. 
Asking a country like Nigeria to reduce its primary source of export earnings by 30 percent is an extraordinary financial and fiscal sacrifice that has not been fully understood nor appreciated, in my opinion.

Nor is Nigeria the exception to the rule. Iraq, chief among other OPEC overproducers, has been a chronic quota-buster as it struggles to overcome the economic devastation of years of war and civil strife. Thus, ramifications for Nigeria ought to be placed in the context of baseline requirements that each producing jurisdiction needs to sustain and grow its economy.

The other African major oil producers, especially Equatorial Guinea and Angola are facing similar challenges as Nigeria. What mechanisms should these countries be deploying to avoid vulnerability to oil price shocks? 

PMW:
There is no ‘One size fits all’ solution for each of these countries due to national demographics, economics, and political conditions, although in the case of Angola, it does have a built-in answer to price shocks, namely long-term market access to China, thanks to sustained Chinese investment in Angola’s energy and infrastructure sectors since the 1990s.  Angola is China’s largest overall African trade partner.

As for E.G., the country’s relatively small population and geographic size permit for cost efficiencies on a per capita basis not available to larger countries like Angola and Nigeria. Beyond that, E.G. has pursued policies intended to encourage FDI through regulatory reforms, improved governance standards, and expanding its downstream sector for both oil and natural gas. The latter commodity has received increasing attention from investors, producers, and government administrators, as the means to both diversify and expand the country’s energy sector.

Nigeria is in an entirely different category and requires a more comprehensive and integrated approach to address the impact of oil price shocks.  This was why the late Dr Emmanuel Egbogah founded University of Port Harcourt’s Emerald Energy Institute on Petroleum Economics & Strategic Studies, to be Africa’s foremost institutional authority and base of knowledge on these and related matters. In the context of the question, I believe Dr E well understood the deleterious effect of price shocks on Nigeria in particular and sought to mitigate those negative effects, especially as regards domestic currency depreciation through his leadership in the drive to pass the Petroleum Industry Bill. I believe that the key provisions of the PIB are sufficiently sound to the point that the proposed regulatory measures would indeed provide for the economic, market, and fiscal cushions needed to blunt the worst impact of shocks, including current demand destruction generated by the COVID pandemic.

 
With the Saudi Crown Prince reportedly calling President Buhari to complain about Nigeria’s non-compliance, can Nigeria avoid a showdown with Saudi Arabia and other major OPEC producers?

PMW:
Most certainly, there ought not to be any sort of confrontation between Saudi Arabia, as de facto leader of OPEC and any member of the organisation, including Nigeria. To do otherwise, that is to say, to apply tools of economic coercion would undermine a group that effectively functions through a consensus mechanism on objectives requiring appropriate or equitable economic and financial discipline and burden-sharing.

Since 2015-2016, when the US permitted the export of its crude oil to the global market, OPEC has had to deal with a new oil and gas order. I believe we are in a transition phase for the global hydrocarbons sector that is difficult, delicate, and fraught with new challenges that can only be properly addressed through prudent and wise choices, as opposed to hasty decisions driven by market and political assumptions that belong to another era.

Ikechi is a Guest Blogger for EnergyHub.

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