Stronger oil prices since the start of 2017 have been enabled by the joint output agreement between the Organization of Petroleum Exporting Countries (OPEC) and large non-OPEC nations such as Russia. Having been exempted from the deal during its first year as the country recuperated its oil production, Nigeria has been handed a joint quota of 2.8 million barrels per day (mmbd) with Libya, another country exempted through 2017. Considering the Federal Government’s 2018 Budget target of 2.3 mmbd, we assess how much crude oil the country can produce this year in light of the output constraint imposed by OPEC.
Based on the historical output, Nigeria can lay claim to at least 1.8 mmbd of the OPEC cap, leaving the remaining 1.0 mmbd to Libya. The OPEC cap excludes Nigeria’s condensate output. Meanwhile, the budget benchmark of 2.3 mmbd is inclusive of condensates. Therefore, to operate within the OPEC limit and still achieve its budget target, Nigeria would need to produce at least 0.5 mmbd of condensates.
How much condensate does Nigeria produce?
There is no consensus on how much condensates Nigeria produces. Direct estimates from the Nigerian National Petroleum Corporation (NNPC) and the JODI Oil Database for the 6-year pre-militancy period (2010-2015) peg average condensate production at 495 thousand barrels per day (kbpd). But using NNPC estimates of total oil production and OPEC estimates of Nigeria’s oil production in the same period, we can estimate average condensate production of 428 kbpd.
Condensates are gas hydrocarbons extracted in liquid form during the drilling phase. Some condensates are classified as ultra-light oil, though there is no standard international distinction between ordinary crude oil and crude condensates. Once the gas is liquefied at extraction, there is no clear way of distinguishing between condensate and regular light crude.
More recent figures are equally divergent. Using 2017 oil production estimates provided by the National Bureau of Statistics (average: 1.88 mmbd) and OPEC (average: 1.67 mmbd), condensates production lies close to 204 kbpd. This is despite comments by the Minister of State for Petroleum Resources suggesting condensate output was as high as 350 kbpd at the end of 2017.
We note that the opacity of the numbers is unsurprising given the multiplicity of production estimates in Nigeria. For example, 2017 data shows four different estimates of Nigeria’s crude oil production from the NBS, NNPC, OPEC (excl. condensates), and Ministry of Petroleum Resources (MPR).
All things considered, it is unclear how much Nigeria produces in condensates. The difference between Ministry of Petroleum Resources and OPEC estimates of Nigeria’s January oil production is 251 kbpd.
Deal or no deal?
On the same note, Nigeria’s production quota is only relevant for as long as the OPEC deal stands. Our initial concern was that the deal would be aborted during its June review given stronger-than-expected prices (average of $67/bbl up till the end of February vs. World Bank forecast of $56/bbl) and the desire of large producers such as Russia to bring recent production ventures onstream and protect market share. However, recent reports hint at the possibility of a lasting (and structured) output-regulating framework between OPEC and key non-OPEC countries to act as a more sustainable foil for the glut of U.S. oil. Whilst the likelihood of this remains low, the current deal looks odds-on to last through the year. The final decision would hinge as much on political expediencies at the time, particularly in terms of the Saudi Aramco listing and Russia’s socio-economic situation, as the pricing dynamics and outlook.
What does this mean for Nigeria’s economy?
It is important to note that this issue would be irrelevant if Nigeria is unable to sustain or increase its oil production. We are slightly bullish on this front as we foresee the Federal Government pulling out all the stops to ensure stability in the Niger Delta given its potentially severe impact on electoral success. With no significant unplanned disruptions expected this year, output pressure points would be field maintenance (majorly Q1) and funding gaps. We note that Nigeria’s production capacity has suffered from natural decline in recent times amid reduced investment in the sector. Our base expectation at present is for the OPEC deal to last through the year and Nigeria’s total crude production to average 2.05 mmbd – with condensate production within the 250-300 kbpd range.
Realised production volumes would affect government revenue performance which would, in turn, affect budget implementation. In addition, oil remains Nigeria’s largest source of foreign exchange so any shortfalls here would impact the economy. Should volumes fall below the budget benchmark, the differential between realised oil price and budget benchmark ($47/bbl) becomes more important.