Mele Kyari, Group Managing Director (GMD) of the Nigerian National Petroleum Corporation (NNPC) on Wednesday painted a gloomy picture of tougher times ahead for the Nigerian economy on the back of latest developments in the global oil market which have seen markets tumble amid fears of a potential global recession.
Speaking at the ongoing consultative roundtable with the Central Bank Governor, Godwin Emefiele themed ‘Going for Growth’ holding in Abuja, Kyari alluded to the ravaging impact of coronavirus and ongoing oil price war on both in oil prices and consumption.
The roundtable comes a few days after what has been acclaimed as black Monday’ when oil prices tool a sharp drop, in a way that has not been seen in decades.
In his short speech, Kyari noted that today, there are over 12 stranded LNG cargoes globally which has never happened because of the gross collapse in oil demand associated potentially and significantly with the coronavirus.
He said liquid crude is also badly hit, noting that “today, Nigeria has some 50 cargoes of crude that have not found landing.
“This means that the traders do not know where to take these projects to,” he said, quickly pointing out that other big oil jurisdictions like Saudi Arabia and Iraq are also affected.
“As at yesterday, Iraq dropped their prices by $5 and Saudi Arabia by $8 to some locations.
“So when your crude oil sells at $30 and you are dropping it by $8, this means that you are seeking at $22 in the market.
“That’s a huge problem and can be tolerated by some production environment like Saudi Arabia whose average production cost is about $4-$5 per barrel.
“This cannot happen in Nigeria,” Kyari stated.
Today, the best of our production is about $15-$17per barrel, so when in many jurisdictions, your cost of production is averagely $30 and Nigeria is one of them, and crude oil goes to $30-$32, you are already out of business.
“Beyond that also, there is competition, meaning people will naturally go for the cheaper products.
“That therefore depresses the possibility of coming out of the impact of the Coronavirus for a long time to come, at least 3months.
“So prepare for trouble for 3months, even if the price goes back to $58, you have to have a backlog of production to cushion the effect.
“In effect, we are going to have the impact of the low prices for a while to come.”
“Finally, nobody knows what will come, there are many forecasts, but what is rational to do is to assume certain basic fundamentals which is that the price will remain low which means we need to bring down cost ps and become more realistic about our estimates, the financial structure so that banks will know what they are funding, and then we can react effectively react to the turbulent oil market.
Kyari said oil affects everything because when it collapses, everything collapses, and the oil market collapses in two ways, one is process, which is what we are facing today.
“This is the only commodity that the beneficiaries will panic when the prices go up for so many reasons, like the ravaging coronavirus and weather issues that can cause demand suppression.
He also spoke about issues affecting the financial sector which ends to obvious collapse in consumption.
“What we know today is that the conservative of estimates is that we will have at least 100 million barrels of crude demand even by 2020, meaning that fossil fuel will remain significant contributor to the total energy mix in the nest 20-30 years to come and cannot be eliminated.
According to him, “what will not be there is inefficient producers, because as we speak today, we are getting production from the least of expected places, and nearly most countries are in oil producing territory.
“What it means is that for the oil market, the best of people who will remain are the ones who will produce oil at a cheapest cost.
“And until you do that, the oil market will run without you and your economy will go aground.
“But in our expectation, we believe that we can take production to 3m barrels per day and also raise our foreign reserves to $40bn in the next few years
He said much as these are very high, possible expectations, there is need to move quickly since the market operates in such a way that nobody knows what tomorrow will bring.
He said for instance, the assumption this year was $60 per barrel crude price on the average, but “now we are faced with a crash and potentially we have not seen the bottom which creates a circle of problem for the Nigerian economy which is difficult to manage.
“This simply implies a huge deficit for us and will radiate into all the sectors, including financial sector.”
Kyari also raised concerns on the inability of Nigeria’s financial sector to be able to fund big ticket transactions in the oil sector.
He said today, the oil and gas sector operates in a way that for instance the Dangote refinery which is about $12bn project “but no bank can fund despite the growth in the financial sector.
“We do not have the capacity to finance the oil and gas sector in Nigeria and if we don’t do this, coupled with the competing needs, resources, we would not be able to produce oil competitively.”