May 10, 2023/United Capital
Nigeria’s crude output has remained sub-optimal, growing by a CAGR of -7.1% in the last five years (as of FY-2022). The Organisation of Petroleum Exporting Countries (OPEC), in its Apr-2023 Monthly Oil Market Report, revealed a reduction in the country’s crude oil output (excl. condensates) for Mar-2023, falling by 2.9% from 1.31mbpd to 1.27mbpd. This implies that Nigeria’s crude oil output is still 27.2% lower than OPEC’s assigned quota of 1.7mbpd. Nigeria’s average crude oil output for Q1-2023 printed at 1.27mbpd, 1.6% lower than the average production of 1.3mbpd in Q1-2023.
Expounding from a broader perspective, global crude oil production has seen a significant recovery in the aftermath of the coronavirus crisis, bouncing back above the 100.0mbpd mark to print at 100.01mbpd as of FY-2022 (up by 4.7% y/y compared to FY-2021’s print of 95.5mbpd). Despite the notable improvement seen in global oil demand, it has only grown CAGR of 0.1% in the last five years to print at 99.57mbpd as of FY-2022. This essentially brings to the fore the existing deficit in the global supply of crude oil. As a result, oil prices have improved, growing by a CAGR of 8.4% in the last five years, to print at an annual average of $99.0/bbl in FY-2022. However, the country has not been able to take advantage of the elevated oil prices, which has led to a series of downgrades by foreign rating agencies in the last five (5) years.
We are of the opinion that crude oil output in Nigeria will remain sub-optimal in the face of the prevailing inhibitions and setbacks in the broader economy. A steady improvement in the country’s oil output remains integral to a broad-based improvement of the nation’s revenue base (which accounts for over 80.0% of total government revenue), amid rising debt sustainability issues. Although the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) disclosed plans to revive shut-in oil wells to boost output by 900,00bpd, the FG will need to shore up capital investments in the oil sector, as most of the crude oil in Nigeria comes from numerous, small, producing fields, located in the swamps of the Niger Delta, Anambra State, Benue State, Trough, Chad Basin, and Benin. As the country’s revenue remains below par, the FG will be more inclined toward sourcing its finances from the local debt market, thus leaving pricing power in the hands of investors. On that note, we expect FG’s cost of borrowing in the local debt market to remain elevated, amid the prevailing status quo.
