The federal government of Nigeria expects at least $2.8 billion in additional revenue from expected gains in oil prices after OPEC members agreed to cut crude production.
“This historic intervention when concluded will see crude oil prices rebound by at least $15 per barrel in the short term, thereby enhancing the prospect of exceeding Nigeria’s adjusted budget estimate that is currently rebased at $30 per barrel and crude oil production of 1.7 million barrels per day,” Timipre Sylva, the minister of state for petroleum resources, said in an emailed statement on Friday.
Nigeria has adjusted production plans from May to June to 1.4 million barrels per day, 1.5 million for the second half of the year and 1.6 million from the beginning of next year to April 2022, Sylva said. This is in addition to condensate production, which is exempt from OPEC limits.
Africa’s largest oil producer’s decision is part of the OPEC+ initiative to cut crude supply by 10 million barrels per day in May, another 8 million in the second half and then by 6 million barrels at the start of next year.
The government reversed its budget benchmark for crude production from $57 with a target of 2.1 million barrels per day as the collapse of demand due to the coronavirus pandemic and a price war between Saudi Arabia and Russia pushed crude prices to record lows.
“Nigeria cannot afford to cut output to the suggested levels for long, — how sincere the government is about such steep production cuts will be swiftly put to a test next week, when the revised 2020 budget is expected to be put to a vote in the National Assembly,” Teneo Intelligence vice president Malte Liewerscheidt said in a note late Friday.
Production at these levels triggered by militants attacks in 2016-17 resulted in shortfalls in government revenues and foreign exchange proceeds. This led to “the largest expansion in foreign borrowing in 20 years and the introduction of measures to ration access to foreign exchange that are still in place today,” Liewerscheidt said.
Nigeria’s oil production reached 2.3 million barrels of crude per day as of April 5 with an increase planned to 3 million, according to state-owned oil company group managing director Mele Kyari. Oil accounts for about half of government revenue and 90% of exports. Africa’s largest country started offering crude at an unusually low discount this month in an effort to undercut its rivals.
“It might not hurt the government too much to abide by the new OPEC target in the short term, however, this incentive will evaporate as soon as there is a slight uptick in global crude prices,” Liewerscheidt said.