Nigeria Content Online

Unrest across North Africa and the Middle East has
afforded Nigeria an outstanding opportunity to re-invigorate the
country’s oil sector and refresh its depleted currency reserve funds.

In May 2008, Nigeria’s foreign currency reserves
stood at US$62 billion but had dwindled to $40 billion by March 2010.
The rate of depletion has since slowed but has not yet shown a
sustained return to growth. But the current global situation combined
with a sustained reduced level of conflict in the Niger Delta plays
into Nigeria’s favour in terms of increased oil revenue. Libyan oil
production has halved from 1.6 million barrels per day (mbd) to as
little as 850,000 barrels per day as a direct result of the current
conflict. Libya’s 1.6mbd represents about 2.3 per cent of global crude
oil production, which rates the country as the fourth largest oil
producer in Africa.

Libya’s oil production can quickly be ramped back
up to 1.6mbd if conflict subsides and oil production and transport
facilities are not significantly damaged. However, with Muammar Gaddafi
ordering the sabotage of the country’s oil facilities, resumption of
production may be severely limited.

The anticipated reduction in production due to
political tensions in North Africa and the Middle East will mean that
available spare capacity may have to be brought online. The bulk of
that spare capacity lies with OPEC countries which have increased spare
capacity from 1.4mbd in 2008 to the current level of 5.2mbd. The
majority of that spare capacity or 3.5mbd is in Saudi Arabia which
could not be said to be immune to the current political instability
sweeping the Middle East. With an estimated 37 billion barrels of oil
reserves, Nigeria could continue production at the present level of
2.4mbd for around 42 years. Coupled with around 183 trillion cubic feet
of gas reserves (at January 2010) Nigeria has an impressive
resource-based potential but a reasonably near term horizon. In fact,
at the present rate of production and without any further major oil
discoveries, Nigeria would have less years of oil production ahead of
it than it has had of production since the first commercial production
of oil in 1956 at Oloibiri in present day Bayelsa State. At the current
rate of depletion and without major replacement through discovery, most
of the current population of Nigeria could live long enough to see the
end of oil as the country’s main income stream. If Nigeria’s oil
production reached the projected target of 4mbpd within the next couple
of years, then its current known reserves could be depleted within 25
years.

These sobering figures start one thinking and
inevitably asking, “So what’s the plan?” The long term question is:
“What are we doing to ensure Nigeria has a solid economic base when oil
reserves are finally run down?” The short term question is: “What are
we going to do with the additional revenue from increased production
and higher than budgeted oil prices?”

The amnesty in the Niger Delta has facilitated a
dramatic rise in oil production that was languishing around 1.35mbd in
the first quarter of 2010 to 2.35mbd in the first quarter of 2011.
Production has continued to rise by around 100,000 barrels per day each
month in 2011.

According to Minister of Petroleum Resources,
Diezani Alison-Madueke, with current oil production at 2.4mbd, Nigeria
now earns around N43.7 billion (US$282 million) per day from crude oil
sales based on the combined daily production figure of crude and
condensate.

These recent production figures all sound very
encouraging and a possible cause for celebration. However, one must
recall earlier years and soon realise Nigeria’s relatively recent
growth in oil production has not reached new heights but merely
returned to levels of the late 1960s and early 1970s. Many of the
intervening years saw much lower levels of production. Nigeria’s oil
production was 2.2mbd 10 years ago and briefly touched current levels
in 2004. In the euphoria of Shell achieving daily production of one
million barrels, the optimistic oil sector development strategy set a
target of 4 mbd to be achieved by 2010. The government bought into the
dream. The reality saw production reach only half the target level.

Nigeria is presented with a second chance. With
oil currently trading at over $100 a barrel on the back of North
African and Middle East unrest compared with the $65 anticipated in the
country’s 2011 budget, there is a clear opportunity to significantly
increase Nigeria’s revenue from crude oil. With the indications of
global economic recovery comes the prospect that demand for oil may
sustain higher oil prices. Many industry analysts expect oil to remain
above $100 a barrel for several months despite Barack Obama probably
opening access to US strategic reserves.

With this revenue windfall comes an opportunity to kick-start a
sovereign wealth fund in some form, whether it be the Nigeria
Infrastructure Fund, the Future Generations Fund and the Stabilization
Fund or something similar. Most importantly, the construction of a
sovereign wealth fund must ensure it can’t be tapped at the whim of
government to finance the government’s running costs or cover budget
mismanagement.