Oil hit its highest level of 2016 on Wednesday, driven by a falling dollar and evidence of declining U.S. supply, putting the price on course for its strongest monthly performance since last April.
The prospect of an agreement among the world’s largest exporters to limit production, which had provided the catalyst for a 55 percent rally since mid-February, evaporated almost two weeks ago when a meeting between OPEC members and their non-OPEC counterparts ended in stalemate.
Since then, Brent has hit its highest since November and, aided by further evidence of declining output anywhere from the U.S. shale basin to the North Sea, attracted fresh investment cash. [O/ICE] [CFTC/]
“There was definitely a bit of a turning point when we had the initial sell-off after the producer meeting,” CMC Markets strategist Jasper Lawler said.
“That got reversed and went on to show that (a production freeze) was a fairly small part of what had been supporting the price and really, it’s the supply outlook for the U.S. coupled with the dollar that is really driving returns.”
Brent crude futures LCOc1 were up 88 cents at $46.62 a barrel at 1135 GMT, having hit a 2016 high of $46.81, while U.S. crude futures CLc1 rose 80 cents to $44.84 a barrel.
Brent received extra support from news that Saudi Arabia and Kuwait appear no closer to restarting their jointly operated Khafji oilfield, which produced 280,000 to 300,000 barrels per day before environmental problems forced a closure in October 2014.
WTI was further bolstered after the American Petroleum Institute reported a draw of nearly 1.1 million barrels in U.S. crude inventories last week. Analysts had expected a 2.4-million-barrel build.
The dollar was down on the day, having fallen about 5 percent against a basket of currencies .DXY since the start of the year, even as U.S. interest rates are expected to rise.
The Federal Reserve’s policy-setting committee meets on Wednesday but is not expected to announce any change in rates, leaving traders to scour the post-meeting statement for any clues on the outlook.
A weaker dollar cuts the cost to non-U.S. investors of buying dollar-denominated assets such as oil futures.
Yet analysts were cautious about forecasting further gains in the near future.
“Despite speculative overheating, any news that could suggest a higher price is viewed as a good reason to buy …We meanwhile see worrying parallels to 2015, when oil prices rose sharply well into May before collapsing in the second half of the year,” Commerzbank analysts said in a note.
*Amanda Cooper & Henning Gloystein; editing – Dale Hudson & Jason Neely – Reuters
The Vice President of Nigeria, Mr. Yemi Osinbajo, on Monday, lamented that the country does not have sufficient gas to fire the country’s power plants to generate up to 7,000 megawatts (MW) of electricity.
Osinbajo, who was represented by his Senior Special Assistant (Power and Privatisation), Chiedu Ugbo, said: “In fact, it is an irony, that we do not have sufficient gas to fire our power plants up to 7,000MW, yet in energy industry circles, Nigeria is described as more of a gas territory than an oil territory.”
He pointed out that presently, the country has over 12,500MW of installed electricity generating capacity, consisting of gas thermal and hydropower plants, stating of that capacity, about 7,000MW is available to be generated if the required fuel is available.
He, however, disclosed that in spite of the available capacity, power plants in the country, over the last couple of weeks, distributed less than 4,000MW of electricity to consumers across the country.
Osinbajo blamed the development on inadequate investment on gas facilities,gas flaring, inadequate gas infrastructure and vandalism among others.
He said, “We have limited gas molecules to supply to the power plants. This is a result of many years of under-investment in gas gathering and processing for domestic consumption and also many years of gas flaring. Nigeria alone flares about half of the 40 billion cubic meters of associated gas estimated to be flared in Africa annually.
To address the situation, Osinbajo disclosed that the Federal Government is aware that there is no alternative to electric energy for energizing and powering Nigeria’s economic growth and development; hence it is determined to resolve the challenges to achieving sustainable energy supply in the country.
“We are working tirelessly towards resolving the gas-to-power challenge, ensuring that the needed investment will be made in gas gathering and processing for domestic consumption especially for power plants and at the same time working to ensure sustainability of supply of existing gas volumes,” he noted.
Also speaking, Iledare stated that he does not see the low oil price as a disaster for Nigeria, stating that it offers the country the opportunity to adopt fiscal responsibility practices and reduce fiscal irresponsibility.
He further stated the low oil price allows the country to take advantage of the situation to allow prices in the sector to be determined at current international market price, while he recommended a PMS’ price of N120 per litre, stating that the Federal Government had no business regulating the sector.
He said managing the petroleum sector has become elusive, adding that regulators should be autonomous and any regulation put forward should have the backing of the law.
He warned that it is fool-hardy for the country to perpetually develop oil and gas resources for cash, instead of for the basis of satisfying the country’s energy needs.
Source: Vanguard Newspaper
ALL societies normally strive for survival and growth. This is with a view to improving the life chances of their people, through the purposeful exploitation of their endowment. The ultimate goal is the creation of better access to means and standards of livelihood for the people, for whom these endowments exist. The orderliness and proper management of societal structures which will provide the enabling environment for the citizenry to engage in lawful economic activities is of utmost importance towards achieving these goals.
Towards this end, the government, whose duty it is, to protect the citizens and help harness societal resources for their benefit is expected to identify and continually update its knowledge about the needs and preference of the people. The aim of course, is to ensure the design and implementation of demand-driven policies and programmes, in consonance with the wishes of the people.
Unfortunately, Nigeria’s experience in the last 50 years is a mixed grill of more failures than successes. The last straw was the last six years (2009-2015) when bad behaviour at all levels, of both public and private sectors graduated from bribery, corruption and illegal enrichment to outright stealing. But to fashion a way forward out of the current economic crisis, it is important to take a retrospective look at where we are coming from. This throws up the fundamental questions: How did we get where we are now? What lessons, if any, have we learnt? And what are the chances that we will ensure that we utilize today’s opportunities to get us to the ‘promised land’?
The answers are not far-fetched. For instance, before independence in 1960 Nigerian economy was characterized by the dominance of exports and commercial activities. The industrial sector was virtually non-existent. Raw materials, comprising agricultural produce and minerals were exported to the industrialized nations. This continued into the pre-oil boom era (1960-1970) when agriculture contributed about 65 per cent of the GDP and represented almost 70 per cent of total exports. Indeed, agriculture provided the foreign exchange needed to import raw materials and capital goods. The peasant farmers produced enough to feed the entire nation.
It was during this period that the First National Plan (1962- 68) was put together. Its overriding objective and that of the subsequent ones-2nd, 3rd and 4th (1970-85) was to achieve a rapid increase in the standard of living of the average Nigerian and put Nigeria on the list of developed countries in the world. Specifically, the short-term plans were meant to increase income-per-capita, ensure more even distribution of income, reduce the level of unemployment and increase the supply of high level manpower. Others included the diversification of the economy, guarantee balanced development and the indigenization of economic activity.
Good enough, the oil boom era came. The discovery of oil in the mid-fifties however, created serious structural problems in the economy. In 1971, the share of agriculture to GDP was 48 per cent. But some six years later in 1977 it had declined by over 50 per cent to 21 per cent. The contribution of oil to the economy was 90 per cent of the GDP and 85 per cent of total exports. Sadly, by 1974 Nigeria had become a net importer of basic food items! Food production became a problem as rural-urban migration increased. On the flip side, foreign exchange was no longer a constraint to development. Government, therefore, got involved in virtually all aspects of the economy, including ownership and control of critical sectors such as petroleum, mining, banking, insurance, clearing and forwarding.
Before long, the era threw up its own challenges. Corruption, theft, real estate speculation, outright looting of government treasury and other fraudulent practices prevailed. Private accumulation of ill-gotten wealth intensified. The gap between the rich and the poor widened. The economy became heavily dependent on imports. It was, therefore, not too surprising that the private sector remained weak despite the oil boom. The economy registered negative growth between 1978 and 1986, except in 1979 and 1985. Inflation and unemployment rates escalated. Yet, the austerity measures adopted by the Obasanjo/Shagari regimes did not arrest the deepening economic crisis. External loans increased. Industrial capacity utilization declined from 74 % in 1981 to 31% in 1989. Manufacturing growth reduced from 15% in 1981 to 3% in 1989. It was so bad that restructuring the economy was inevitable.
Yet, the Structural Adjustment Programme (SAP) introduced in 1986, which emphasized privatization, reduced government expenditures, adoption of a realistic exchange rate policy, reliance on market forces, adoption of appropriate pricing policies for petroleum products and public enterprises did not meet its lofty objectives. The private sector that was meant to serve as an engine of growth was unable to respond adequately to achieve increased production, create employment and stabilize prices.
But instead of heaving a sigh of relief, Nigeria’s economic crisis worsened with the global financial meltdown of 2007-2008, the worst since the General Depression of the 1930s.The stock market crashed. The banking sector had 10 out of the 24 banks grappling with non-performing loans, poor corporate governance and weakness in capital adequacy and illiquidity. There was drastic decline in revenue receipts by the three tiers of government. Hope seems dimmed with the global crash of oil prices and Nigeria losing 40 per cent of oil revenue that used to come from the United States. Russia has kept going despite its internal crisis. Canada and Iraqi oil production and exports have risen.
The interplay of this scenario has led to 50 per cent fall in the value of our local currency, the Naira. Revenues from oil exports, non-oil exports and private remittances from abroad and foreign direct investment (FDI) fell. All be it, the current economic challenge is the last opportunity to get it right.
. An excerpt of a lecture delivered by Mr. Joshua Ajayi, the former MD of UAC, at Bells University, Ota COLAMS Annual Lecture
Since the start of 2016, oil prices have swung between $27 and $42 per barrel, about a quarter of the 2008 peak crude oil price of $145. On February 16, oil ministers from Saudi Arabia, Russia, Qatar, and Venezuela agreed to a tentative deal to freeze their production in an attempt to boost prices. This was a characteristic move. For decades, this is how the oil business has worked. Producers carefully control production to try to match supply to demand. But there’s a lag between these decisions and their effects, creating the boom and bust cycles so typical in the business.
In reaction to this freeze, oil prices not surprisingly jumped 5%. But the next day, they promptly fell back below $30. One week later, the oil minister of Iran, a country that had no intentions to join the freeze, and in fact still plans to double its oil production,called the freeze “a joke.”
Nobody really knows what oil prices will be in the future, but we think countries and companies should prepare for oil to hover around $50 per barrel for the foreseeable future. Historically this wouldn’t be shocking at all. In fact, today’s oil prices that we think of as low are actually near the real average price of a barrel of oil for the last 150 years: $35 (2014 US dollar reference year).
What is surprising though, is the fundamental shift we think is happening. The current low oil price environment is not an “oil bust” that will be followed by an “oil boom” in the near future. Instead, it looks as if we have entered a new normal of lower oil prices that will impact not just oil and gas producers but also every nation, company, and person depending on it.
This new normal is the result of the oil business being disrupted.
In the past, it was assumed that conventional oil reserves would be developed by national oil companies and major oil and gas companies to supply virtually all of the world’s oil demand. And it would take them as long as 5 to 10 years to explore, develop, and then bring production to market after investing billions of dollars into new fields. These are some of the basic assumptions behind the model that has guided the oil and gas industry for decades.
But during the past decade, American shale oil and gas producers pioneered a new business model that shattered the incumbents’ approach. U.S.-based shale oil producers have improved their drilling and fracturing technology, and they can ramp up production in an appraised field in as few as six months at a small fraction of the capital investment required by their conventional rivals. As a result, shale oil has soared from about 10% of total U.S. crude oil production to about 50%. That has enabled the U.S. oil industry as a whole to produce roughly 4 million more barrels of crude oil every day than it did in 2008, closing the gap between U.S. oil production and the world’s other two top producing countries, Russia and Saudi Arabia. In January this year, the U.S. lifted the 40-year-old ban on exporting American oil, and the maiden shipments are finding their way to global markets allowing U.S. oil producers to take advantage of markets that provide higher netbacks.
These “unconventional oil and gas producers” in the U.S. are acting as a quasi swing producer, the counterweight to traditional spare capacity held mostly by OPEC heavyweight Saudi Arabia. At the same time several other countries such as China and Argentina are beginning to develop their shale oil and gas resources by adopting the technology and business model as well as building an investment and supply chain ecosystem that supports this development. Saudi Arabia, with its excess capacity, used to be a swing producer that could bring production on- or offline to control market prices.
But now, that leverage is significantly reduced. If the price goes up, the disruptors can counteract the big producers’ decisions to cut production in a matter of months, rather than years. That’s why the big producers’ decision to freeze production in February — completely predictable according to the old industry business model — was problematic. If traditional producers freeze production and allow prices to go up, shale disruptors will become competitive and simply rush in to fill the void and eat up their market share.
So what could a decade of lower oil prices mean?
New challenges for producers
Depending on how nations react, a lower per-barrel oil price could result in a new balance of power in the oil industry. We recently conducted a study to test the impact of sustained $50 oil on oil-producing countries. The results showed that $50 oil puts some producing countries under considerable stress as they grapple with less oil revenue in their national budgets. Venezuela, Nigeria, Iraq, Iran, and Russia could be forced to address substantial budget deficits within the next five years.
Gulf Cooperation Council (GCC) producers such as Saudi Arabia, the United Arab Emirates, Kuwait, and Qatar have amassed considerable wealth during the past decade through cash reserves and sovereign wealth funds. But even these countries could come under stress in the next decade if they continue to follow their status quo.
As a result, some of those better-off-but-still-threatened nations are gearing up to make a break from their past practices. The U.S. shale revolution will be difficult to replicate, but traditional oil producers like Saudi Arabia are diversifying into shale-gas production and other forms of renewable energy so that they can diversify their energy mix and continue to export oil in spite of their soaring domestic demand for power.
Newcomers such as South Africa, China, and Argentina are also getting ready to attempt to develop their reserves in a bid for energy independence. Argentina, which is furthest along, holds about 801 trillion cubic feet of shale gas and 27 billion barrels of technically recoverable “tight” oil reserves. China holds an estimated 1,115 trillion cubic feet of shale gas and 32 billion barrels of oil equivalent. By comparison, the U.S. has 622 trillion cubic feet of shale gas and 78 billion barrels of “tight” oil, according to the U.S. Energy Information Administration.
National oil companies and major oil and gas firms are also starting to change their ways. To compete with shale drillers, conventional oil players are improving their field productivity by focusing their resources on more easily recoverable reserves while integrating their technology, operations and organizations more closely.
Incumbent companies and the nations behind them should expect a rebalance. Countries deeply dependent on traditional oil must diversify their economies, and many have started. Same with the large oil companies. For example, Shell’s acquisition of British Gas makes it hard to even consider Shell a classic incumbent oil company anymore. Their strategy has clearly shifted.
New gains for consumers
At the other end of the spectrum, net oil importing nations are benefiting from a significant boost to their fiscal strength and current account balance. India’s fiscal deficit has improved since the country saved nearly $70 billion on importing crude and other petroleum products in 2015. The government was able to reduce petroleum subsidies and increase its excise duty on petrol and diesel, and can now redeploy that $70 billion into productive efforts.
Energy-intensive industries ranging from farming to airlines are also profiting. Thanks largely to the decline in energy prices, the US airline industry is enjoying operating margins above 15%, according to a recent economic analysis that our firm conducted. That’s a strong margin for any industry, but a particularly big deal for airlines that have struggled in years past to turn a profit at all.
One other interesting issue is what consistently affordable oil means for renewable energy. Many national policies and growth projections on increasing the use of renewables were made under the assumption of very expensive, depleting oil reserves. While this changes the value proposition of renewables and countries may be tempted to reassess their strategies, two trends continue to favor renewables: first, the continuous technological advancement and cost reduction in renewable sources such as solar and onshore wind keeps those sources of energy competitive; second, the commitments of both developed and developing countries to cut CO2 emissions during the recent COP21 summit in Paris would require a balanced energy mix that includes renewables.
We have entered an era of more affordable oil that is likely to last for the foreseeable future. In fact, the disruptive force of unconventional oil and gas has caused the world to shed its concern about “peak oil.” The focus is no longer on running out of fossil fuel in the foreseeable future, but rather who will control its future and how and when will the world transition away from it. The impact of this disruptive force on the earnings of companies that produce oil, and those that consume it, is likely to be substantial and sustained. Leaders of not just businesses, but also countries, must act now to make the best of what will soon be considered the new ways of doing things.
The country has been losing an average of 3,630 mega watts (mw) of electricity due to gas, frequency, line limitations and water management constraints.
Indeed, the power generating capacity slide has in recent times become more pronouced. For instance, the country lost 3,136mw to these constraints on April 11, which increased to 3,497mw the next day, followed by 3,604mw; 4,222mw; 3,611mw; 3,613mw and 3630mw on April 17, 2016.
Worried by the unsavoury trend, the Vice President, Prof Yemi Osinbajo, has called for an expedited repair of the strategic Forcados pipeline to ameliorate the gas supply deficit to power plants in the country.
Speaking during his visit to the Forcados Terminal in Delta State, Osinbajo said President Muhammadu Buhari is concerned about the damage done to the terminal in February and asked him to visit and assess the situation which has been responsible for the recent drop in electricity supply in the country.
“The damage done to Forcados affects our oil earnings but also as important is the power aspect. Forcados is a major source of gas, about 40 per cent of our gas supply is affected leading to the problem of power supply in the country”, he added.
Osinbajo pointed out that few months ago, power supply in the country had peaked at an unprecedented 5000mw, but now has dropped significantly including instances of system collapses, showing that this is “a real problem.”
He said: “I came here on the instruction of the President who is concerned about the damage done to Forcados. I came here to see for myself and underscore the great implication for the nation’s economy. Many people don’t even know that power supply is hampered by what is going on here.”
Meanwhile, the Bureau of Public Enterprises (BPE) has attributed the current electricity challenges in the power sector to lack of over 40 years investment in the industry.
The Acting Director-General of BPE, Dr. Vincent Onome Akpotaire, said that the lack of investment in the sector in the past 40 years had now come to the fore with the privatization of the sector and that immediate solutions would not be achieved within two years of privatization.
He however said with the steps taken by the Federal Government so far to address the prevailing challenges there was a hope of efficient and effective power supply in the country.
Akpotaire maintained that continuous interactions coupled with the commitment of the power operators and the political will of the Federal Government were critical to resolving the emerging challenges in the sector.
The Acting BPE boss who stated this during an interactive session with the Chief Executive Officers (CEOs) of the 11 Power Distribution Companies (DISCOs) in Abuja recently, noted the challenges in the power sector but opined that with concerted efforts by all critical stakeholders in the sector, these were surmountable.
He called for an enhanced synergy between the Successor Companies (SCs) of the defunct Power Holding Company of Nigeria (PHCN) and the Bureau to boost efforts towards actualising the full objectives of the power sector privatisation.
While acknowledging that there were fundamental challenges within the sector, he stated that these were not insurmountable if given time; inter-agencies collaboration; and adequate investment.
He enjoined the SCs to improve on their efforts to honour the performance agreement in the power privatization, stressing that “I am optimistic that with the required synergy, periodic reviews with stakeholders and commitment to the performance agreement, the objectives for the nation’s power sector would be achieved.”
On the prayers sought by the SCs, the Acting Director informed them that the Bureau was not an approving agency but the Secretariat of the National Council on Privatisation (NCP). He said the essence of the interaction was to look at the contending issues with a view to escalating them to the NCP.
Speaking on behalf of the Successor Companies (SCs), the Managing Director of the Ibadan Electricity distribution Company (IBDEC), Mr. John Donnachie, acknowledged the Federal Government’s efforts at managing the issues militating against the sector.
He said that the DISCOs and GENCOs had benefited from such efforts through the National Integrated Power Project (NIPP), Niger Delta Power Holding Company (NDPHC), Nigerian Bulk Electricity Trading Plc. (NBET) and the Central Bank of Nigeria’s (CBN)’s N213 Billion intervention fund.
On the implementation of a cost reflective tariff, the MD. IBDEC said that it was a step in the right direction but that the deadline by the Federal Government to the DISCOs to meter 1million customers within a year was not realistic.
He added that the cap on the DISCOs’ Capital Expenditure (CAPEX) was a hindrance to meeting the deadline.
The IBDEC Chief Executive explained that metering was a capital intensive venture and a key component for implementing the new tariff which only massive investment in the sector would bring Nigeria closer to the Promised Land.