Following the recent announcement by Nigeria’s Minister of Petroleum that tangible oil exports to the United States has ceased, some stakeholders are expressing concerns over the broad impact of this on the oil & gas industry and the Nigerian economy at large; given the size and position of US’ patronage of Nigerian oil.
As a background, this development can, at least in part, be attributed to the Shale Oil and Shale Gas revolution in the United States. New breakthroughs in technology – such as hydraulic fracturing and horizontal drilling – have enabled energy producers to tap previously inaccessible shale oil resources, which has led to a Shale boom in the country, thereby reducing its import and overall dependence on oil imports.
Shale oil is a relatively new type of crude oil, known also as kerogen oil or oil-shale oil. It is an ‘unconventional’ oil produced from oil shale rock fragments by pyrolysis, hydrogenation, or thermal dissolution. These processes convert the organic matter within the rock (kerogen) into synthetic oil and gas. The resulting oil can be used immediately as a fuel or upgraded to meet refinery feedstock specifications by adding hydrogen and removing impurities such as sulfur and nitrogen. The refined products can be used for the same purposes as those derived from crude oil. Global technically recoverable reserves of shale oil are estimated by the EIA at 345 billion barrels and 21% of these lies in the United States of America.
Over the past five years, U.S. oil production has soared, while oil imports, especially from OPEC members fell significantly. A development which, according to the Nigerian Minister of Petroleum Resources and her other OPEC counterparts, was of “grave concern”.
But then, as impactful as this development is, should it cause panic about the immediate, short, medium and long term economic potentials of Nigeria? One would argue not.
The loss of American patronage for Nigerian oil is not really the issue. In the short term, Nigeria will simply source new markets for its oil. There are promising new and existing markets to explore. (See table below for consumption pattern of some selected countries). Argentina recently ordered for a consignment of Nigerian Bonny Light. The sustained situation in the Middle East (with subsisting sanctions on Iran) will continue to turn India and other Asia patrons towards Nigeria.
However, the immediate worry to Nigeria, as well as other OPEC countries, would be drop in oil prices. Typically, the response would be a cut in production to shore up prices, but in the long run, drop in volumes, even at shored up prices, will still lead to reduced revenue and does not really assuage the concerns.
Given the present importance of this sector to the Nigerian economy, a broader value chain enhancement strategy would be required for the long term, and the country is already looking into this.
According to the Petroleum Minister “…Nigeria must adopt new strategies. We must change our ways and policies that we may hold dear which may cause us economic stress in the future. This market called shale oil and gas has resulted in Nigeria seeking new markets for its oil. Nigeria needs to be economically competitive. And from the end of the petroleum sector, Nigeria needs to be energy competitive…”
The question is: to what level would we explore ‘energy competitiveness’?
It is important to look into ways of facilitating “in-country energy value-add” as opposed to direct lifting of crude. This is why the passage of the Petroleum Industry Bill (PIB) would be crucial at this point.
In-country energy value-add starts from refining, gas utilization, and other spin-off sectors from oil & gas, such as petrochemicals. This is because, while the impacts of Shale Oil development can be mitigated in the short to medium term, there is a need to be aware of its long term implications.
Really, the emergence of Shale Oil should not be a thing of fear. It presents both strategic opportunities and challenges for the global oil and gas industry. According to PriceWaterHouseCoopers (PWC) in their 2013 Shale oil report, “Oil producers, for example, will have to carefully assess their current portfolios and planned projects against lower oil price scenarios. Lower than expected oil prices could also create long-term benefits for a wide range of businesses with products that use oil or oil-related products as inputs (e.g. petrochemicals and plastics, airlines, automotive manufacturers and heavy industry more generally).”
Nigeria could also look into its own Shale reserve exploration. According to BusinessDay (2013), research has shown that mid-cretaceous oil shale deposits exist in the Lokpanta area of the Abakaliki Anticlinorium, a depocentre in the Lower Benue trough of Nigeria. The reserves are estimated at 5.79 billion tonnes with a recoverable hydrocarbon reserve of about 1.7 billion barrels. If proven, this would make Nigeria the second African nation after Libya (with 26 billion barrels) to have Shale Oil reserves.
Above all, the evolution in the oil & gas industry ultimately calls for economic diversification. Once again, the Federal Government of Nigeria is on this trajectory with efforts aimed at diversifying the economy to reduce the dependence on oil.
This is perhaps the real comforting news. Already the rebased GDP shows reduced influence of oil & gas in the economy, although crude oil earning still contributes over 80% of Foreign Exchange earnings. As the National Industrialization Policy is being implemented, Nigeria will be able to focus on other key ways to position in the African market.