As oil prices skidded to $32.72 yesterday following the looming price war engendered by failure of Russia to co-operate with OPEC to restrict supply, Saudi Arabia is preparing for a worst-case scenario where oil prices drop to $12. Should prices drop that low, it would be $18 dollars below Nigeria’s production threshold of $30, engendering massive losses that may be a disincentive to continue production.
The development bodes danger for Nigeria. Mele Kyari, Group Managing Director (GMD) of the Nigerian National Petroleum Corporation (NNPC) told a CBN convened event, Going For Growth 2.0 two days ago, that Nigeria is among countries that produce crude oil at the cost of $30.00 per barrel. As of yesterday, the price of Brent crude on the international market averaged $32.72, 9 percent, lower than the previous day after President Donald Trump of the United States of America announced travel ban on European Union citizens amid scare of spreading coronavirid disease in the USA.
Presuming the worst-case scenario where oil prices fall below $20.00, it would make no economic sense to continue producing as Nigeria would be producing at a loss. That would put the country in a precarious economic position. Barely completing the first quarter of the 2020 fiscal year, Nigeria may be facing a wipe off of its N2.64 trillion budget from projected oil proceeds. Oil accounts for about 40 percent of government revenue, and more than 90 percent of export earnings.
But the situation may not be as dire as oil makes up 65%-70% of Saudi budget revenues. Lower prices as a result of higher global output would have a major impact on the kingdom’s budget and drag it deep into deficit territory.
Saudi Arabia is the world’s lowest-cost oil producer by far and technically it could continue to produce even if prices sank into single-digit territory. However, the country requires crude prices of at least $80 to balance its budget, according to the International Monetary Fund.
 A Reuters report says Saudi Arabia can’t raise its oil production to 12.3 million barrels a day (mbd) under any circumstances. Its claim of having a production capacity of 12.5 mbd is a myth. Furthermore, Saudi oil production is in decline having peaked at 9.65 mbd in 2005. Saudi Arabia can produce some 8.0-9.0 mbd with another 700,000 barrels a day (b/d) to 1.0 mbd coming from stored oil on tankers or underground. Making good its promise, Saudi Aramco said yesterday that it would increase oil production to 12.3 million barrels per day (mb/d) in April, after the Mar. 31 expiry of the current OPEC-plus production cuts.
That level of output is believed to be beyond what Aramco can produce on a sustainable basis. In other words, Saudi Arabia is going all-out to flood the market.
In a recent interview with Reuters News Agency, Saudi energy minister, Prince Abdulaziz bin Salman sounded adamant when he expressed lassitude in meeting with the Russians any time soon.
“I fail to see the wisdom for holding meetings in May-June that would only demonstrate our failure in attending to what we should have done in a crisis like this and taking the necessary measures.
According to Energy Intelligence, Saudi Arabia is conducting budgeting exercises to game out scenarios in which oil crashes to between $12 to $20 per barrel, and will even look at an extreme scenario in which oil falls below $10. Saudi Arabia’s threat triggered a 24% slump over the week.
Russia, on the other hand, says it can withstand the price war at $25 to $30 per barrel for 6 to 10 years. Neither side appears willing to budge.
Russia’s reason for refusing to cut global supplies is aimed at the US Shale, which Russia says has been the biggest beneficiary in all previous oil supply cuts.
With a breakeven price of $70 a barrel and a well depletion rate of 70%-90% after first year production, low oil prices would for sure hasten the demise of the US shale oil industry. Any loss of production could lead to a reduction in the glut in the market and therefore a rise in oil prices once the coronavirus outbreak is over.
The biggest loser in the current situation is the global economy and within the global economy, the two biggest losers are the US shale oil industry and Saudi Arabia. Nigeria, not a partaker of the oil war is bracing for whammy.
In a related development, Mallam Mele Kyari has expressed the NNPC’s readiness to strategically put in place measures that would alleviate the cost of crude oil production in Nigeria to create a market for the country’s crude and make Nigeria a choice destination for Foreign Direct Investment.
