TIME FOR NIGERIA FIRST POLICY WITH OPEC

TIME FOR NIGERIA FIRST POLICY WITH OPEC

The much anticipated OPEC++ meeting takes place tomorrow, It is time for Nigeria to be bold and clear eyed in pursuing Nigeria’s best interests. However it remains unclear as to  what  position Nigeria have decided to adopt. We have heard a number of statements from the Minister of State for Petroleum Resources, Chief Timipre Silva, yet they seem vague and difficult to interpret. The policy is unclear, not so much as inarticulate but unarticulated. To start with Nigeria’s petroleum ministry has stated.

 “it is prepared to join the rest of the world in making the necessary sacrifices needed to stabilize the crude oil market; and to prevent what is likely to be a major global economic meltdown.”

 I hope I can be forgiven for being slightly discombobulated, the COVID-19 pandemic is the cause of the anticipated global meltdown, an event we have no control over at the momen. It is unclear why Nigeria should be considering any additional sacrifice to its welfare. The statement seems to say that Nigeria are prepared to cut production to re-inflate oil prices, in the absence of which there will be a major economic meltdown. That is clearly not the case for consumers of crude oil, as cheap energy prices will assist in restoring economic growth. Perhaps and hopefully the ministry is saying,  Nigeria is prepared to participate only if all other producers join in. The Ministry goes on to say

 “In our consultations with global industry stakeholders in the lead up to the OPEC+ meeting scheduled for Thursday, April 09, 2020, the Nigerian Government will take a position that is in the best interest of our short term and long-term economic forecast.

 

Yet again whilst I am at pains not to lampoon the ministry, the statement is a tautology. To the extent of what other possible position could the ministry take, it does not tell us anything. Is the ministry saying they have spoken to Russia or the US and the Saudis? The ministry further states...

 “It is well known that Nigeria has always collaborated with key OPEC members such as Saudi Arabia in maintaining a balanced position that has helped to make OPEC one of the most successful global institutions in recent history. Nigeria intends to maintain this team spirit even as it takes into account, the position of OPEC strategic allies, such as Russia and its allies.

 “As always, the driving force of our OPEC policy is first the stability of our national economy as well as the stability of the global economy, which is heavily dependent on OPEC and its strategic partners, popularly referred to as OPEC+.

 It is a fair assumption to conclude, after reading this portion of the ministry’s statement that Nigeria's policy position will be subjugated to support Saudi Arabia. The self-same Saudis that failed to consider Nigeria's economic position when it decided to flood an already oversupplied market with oil. In which way has the Saudi dominated OPEC maintained the stability of the Nigerian economy which has had to devalue its currency and has suffered a credit rating downgrade. It seems to me that the zeitgeist in international trade is currently all about putting your own nation first, that is Nigeria first. I have long argued that OPEC provides Nigeria with no tangible benefits but relegates it to the position of a vassal state whose self interest is subsumed by Middle East geopolitics and Saudi foreign policy objectives.

 So Nigeria's policy decision making must be dictated  solely by what would be  the very best possible outcome of the OPEC++ meeting for Nigeria. Frankly such an outcome would be that, whatever cuts were agreed upon by OPEC, Nigeria would be exempt from such cuts and the cuts agreed to, were such that they are sufficient to balance global supply and demand. This outcome is highly unlikely but Nigeria must make the case if there is no agreement or cuts are insufficient they  reserve the right to dissent from "the team". Cruicially Nigeria must insist that any OPEC agreement  must derive from common assent of all the members. That is to say Nigeria must have a voice.

That said  the recent optimism around the OPEC++ meeting in my opinion is unfounded. If the OPEC++ meeting is unable to eradicate 25 million barrels a day in production until COVID-19 abates and global demand growth re-emerges, it will have been a failure. Such a failure could trigger a total collapse in oil prices and the market would then be looking at sub $10 oil. But the meeting is not just about balancing  oil in the time of coronavirus. Both Russia and Saudi Arabia have strategic objectives. Both will deem the meeting a success if they can induce a consensus from US and global producers on sharing production curbs. However the Saudis are under enormous pressure from Congress to procure an unrealistic 10 MBD cut. The optics are  as bad as it gets, OPEC/OPEC+ cutting +10MBD to save shale and US energy independence?

 This is why the expectation around the meeting is unwarranted, despite the possible presence of American oil interests in the form of  the Texas Rail Road Commission, it will be nigh on impossible to obtain any form of buy-in from US producers for proration. The US oil industry is simply not structured in a way in which such an objective can be feasibly realised. Moreover Dmitry Peskov , Vladimir Putin’s Press Secretary has made it very clear, production declines from US Shale as companies reduce drilling cannot be viewed as  voluntary cuts. He went on to say “You compare total reduction in demand with cuts aimed at stabilizing the global markets. It’s like comparing apples and oranges. There is a difference,”. You will not get a  clearer insight to Russian thinking and their negotiating stance.

 Furthermore Saudi game theory seems to be  working, its quest for market share seems to be delivering progress. As for the Russians, they want US concessions around sanctions. For OPEC+ to make the cuts which are required to bring the market into equilibrium, it will need a recalcitrant US to shoulder the burden and I cannot see how that will happen.

 If  Nigeria are to support the Saudis they  must also insist on  a cap on how far OPEC members are allowed to discount their barrels in competing for market share. Low cost producers  exploit this  unfair commercial advantage and their proximity to markets to the detriment of Nigeria. Recently the Saudis were selling their flagship Arab Light into European refiners at unprecedented discounts closing the market to Nigerian grades.

It is a very different Nigeria to the one that  attended the last OPEC meeting. Since then there has been a 17% devaluation of the currency and a Fitch ratings downgrade. The slump in crude oil receipts has forced Nigeria to deconstruct its budget and deregulate the downstream. It is time for a "Nigeria First" approach which affords the country the gravitas to entice concessions or break away and form new alliances. The time for meekly aligning Nigeria with unreliable bedfellows has come to an end.

 

Femi Ogunkolati

London April 2020


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