In for Prolonged High Energy Prices

The world is in for a prolonged period of high oil, natural gas, and coal prices. Demand has picked, winter is around the corner, and countries around the world are racing to secure energy supplies except for producing nations now experiencing an orgy of relief from the COVID-19 economic complexity perhaps with exception only on Nigeria and Angola, which underinvestment and maintenance bottlenecks have kept supply underwhelming notwithstanding OPEC quota relaxations.

Particularly compounding the Nigerian situation is the fact that the country’s lack of new investments has resulted in reduced production, a development that has made it impossible for her to meet her OPEC allotted quota.

She had requested for a higher baseline in August but has been unable to meet the existing crude oil supply quota and in fact underperformed by 90,000 barrels per day (BPD) that month, about 2.8 million barrels, on the whole, that month alone, leaving its production of 1.43 million BPD one of the lowest in five years.  In the same month, Nigeria, which potentially has the capacity to produce two million BPD, other things being equal, slumped from its July figure of 1.520 million BPD as a sighted OPEC document showed.

This has prevailed since major oil firms as the Shell Petroleum Development Company, Chevron and Conoco indicated their intention to divest from the country by putting most of their oil assets on sale in a move to quit and reduce their footprint in the land/swamp terrain of the Niger Delta.

The takeover of a huge proportion of the assets by such indigenous firms as Oando in 2009, Seplat/FHN 2010/2011, AITEO/NEWCROSS/ EROTON 2015, West African E&P 2015, and HEIRS 2021 is yet to record any significant impact on Nigeria’s oil industry and has rather been on the slide, a development known to be significantly responsible for the country’s continued dismal earnings and poor revenues even in the face of the prevailing energy crunch induced higher oil prices.

But the global energy crunch is gaining momentum with each passing day and pricing fundamentals are pointing towards a much more prolonged period of high gas and coal prices as electricity generation becomes a prized concern across the Atlantic Basin and Asia. European gas futures have already moved beyond a crude oil equivalent of $200 per barrel, boosting gas-to-oil possibilities wherever they remain available. Coal too has received a massive boost as conducive gas-to-coal switching economics compel producers to produce more amid global supply tightness. Last week Friday’s trading session saw Brent futures traded around $82.5 per barrel whilst WTI was nearing the $79 per barrel mark. Brent crude futures briefly soared past the psychological $80.0/b mark on Tuesday, rising to an eye-watering $80.20/b before edging below that mark at the time of putting this piece together. Improved and resolute demand amid tight supply and depleted stockpiles continue to sustain the rally, which has seen Brent futures rise 50.7% YTD. Hurricanes Ida and Nicholas, which hit the US Gulf of Mexico in August and September, caused significant production and refining capacity disruptions in the US.

Oil’s current price strength is likely to continue in the short term, owing to factors such as strong winter consumption, improved travel demand, and broader speculation that the sector isn’t investing enough to close the demand gap amid a push for energy diversification and emission reduction. The persistent surge, however, has put enormous inflationary pressure on the global economy as other energy commodity prices are skyrocketing. For instance, European Natural Gas is at an all-time high of €71.7/MwH, having surged 274.9% YTD, with no sign of retreat in sight for now. Similarly, OPEC+ may have begun to ease its quotas, but supply would remain restricted notwithstanding the appeals on them by President Bidden top-up supplies.

An Anticipated Global Energy Crisis

Gas prices on the record-breaking rise in Europe at the moment are likely to continue in that stead for some time to come. The UK is faced with supply shortages of the range of the late 1970s winter of discontent. Chinese factories are shutting down over power shortages in a grim outlook.

 Gas prices had gone on the rise in Europe from September as the continent moved steadily into winter but discovered that they were not involved only and gas suddenly became important while after it was excluded from the list of low-carbon energy sources and EU’s green transition chief, Frans Timmermans, gave it no place in the transition. It’s obvious now that Timmermans and his fellow Brussels bureaucrats could not have been more wrong.

Europe has for years been putting out coal plants and replacing them with solar and wind farms, working to become the greenest continent on earth and possibly lead the energy transition, arguing that carbon dioxide emissions are the planet’s single major disheartening climate change inducing problem. This was as it also reduced investment in oil and gas production, but the experience now is a whole lesson on their low-carbon drive.

“It could get very ugly unless we act quickly to try to fill every inch of storage,” Marco Alvera, chief executive of Italian energy infrastructure company, Snam, told Bloomberg in September, stressing, “You can survive a week without electricity, but you can’t survive without gas.”

 The EU green transition plans and those of all others in the agenda with them give the impression that the only way to a cleaner energy future is by total electrification, believing strongly that it will be cheap and easy or in the now immortalized words of the UK’s Prime Minister, Boris Johnson, quoting the opposite of Kermit the Frog, “It is easy to be green,” insisting that it was possible for the UK to go 100 percent green (plus nuclear) by 2035.

The same for China’s ruling elite. They had probably also seen it as easy as they imposed stricter emission rules on industries and utilities. Further to that, they issued a “Whatever it takes” order to ensure that utilities would have enough fossil fuel supplies for the winter to avoid outages but it appeared it came too late as factories are closing shops and coal supply continues to remain tight and could remain so in the foreseeable future.

Years of low investment in coal, having now obviously become man’s grave mistake, have manifested and are polluting. It was, however, not unexpected, knowing that success is only a matter of time if you turn to demonize a commodity that has played an essential role in the progress of civilization for more than a century and turn to pour billions to completely demonize it and ensure that the demonization leads to its demise.

The global energy crunch is an unequivocal demonstration that wind and solar power are no match for coal, oil, or gas, realizing that they are weather dependent and cannot fully replace fossil fuels.

The Surging Oil Prices

Oil prices had risen early on Friday, October 15, 2021, leaving Brent to briefly top $85 a barrel as energy markets continue to tighten ahead of the winter.

The rally in energy commodities, the switch from gas to oil amid record-high natural gas prices, and the tight control oversupply from the OPEC+ group have continued to push oil prices higher.

The International Energy Agency (IEA) had on Thursday, October 14, 2021, stated in its monthly report that the energy crisis had spurred a switch to oil products from natural gas, stressing that the development could raise global oil demand by 500,000 barrels per day (BPD) Vis-a-Vis “normal conditions” or a market in which energy and power prices are not setting record highs.

With expectations of higher oil demand from the gas-to-oil switch, the IEA raised its demand forecast for both 2021 and 2022, predicating expected 2021 oil demand to grow by 5.5 million BPD from 2020 to revise up its growth forecast by 170,000 BPD from last month. It hopes to see demand rise by another 3.3 million BPD in 2021, an upward revision by 210,000 BPD compared to the October projection, just as it expects global oil demand in 2022 to reach 99.6 million BPD, a figure that would be “slightly above the pre-COVID levels.

OPEC+ from all indications is not immediately ready to increase supplies. Giving fresh impetus to oil bulls recently, Saudi Energy Minister, Prince Abdulaziz bin Salman, ruled out any possibility that the alliance would respond to the oil price rally by adding more supply than planned, given that an oversupply is expected on the market next year.

“We should look way beyond the tip of our noses. Because if you do, and take ’22 into account, you will end up by end of ’22 with a huge amount of overstocks,” Abdulaziz bin Salman said on Thursday.

Effect on Nigeria

The rise in oil prices seems to make no meaning to Nigeria for now but has rather turned into a double-edged sword for the country. While it appears to be receiving the much-needed USD inflows from the higher oil prices, it is incurring higher petroleum importation costs and by extension, landing costs and subsidy expenses.

The NNPC has recently postponed its previous plans to begin fuel subsidy elimination from 2021 to 2022 due to potential social agitation and inflationary impacts, making an increase in the already untenable subsidy costs unavoidable. It is expected that an increase in fuel subsidy payments will not always remain a dark point associated with higher oil prices but the erosion of potential gains in FX inflows for Nigeria until it addresses its level of fuel imports and local refining of petroleum products.

According to a Vanguard newspaper report, the Nigerian National Petroleum Corporation (NNPC) spent N175.32bn on petrol subsidy in July 2021, deductible from its remittance to the Federation Account Allocation Committee (FAAC) in September. The corporation also noted that a previous outstanding balance of N40bn was also be deducted to put the total deductions at N215.32bn. With no provision for petrol subsidy in the 2021 budget, the NNPC has taken to direct deduction from FAAC remittances, terming it ‘value shortfall’ in its books.

There had been attempts in the past to remove the fuel subsidy but a steep devaluation in the currency and an increase in crude prices in the international market, which meant an increase in the landing cost of petrol had continually halted the move and caused the continuation of the subsidy regime previously booked as under-recovery losses in the books of the NNPC.

The current increase in crude oil prices similarly implies an increase in the landing cost of PMS. A steep decline in global crude prices in 2020 triggered by the COVID-19 pandemic completely wiped out the subsidy by the significantly lower landing costs and permitted reduction in the pump price of petrol in mid-March and talks of possible deregulation. The PPPRA announced a reduction in ex-depot price to N113/liter and the official pump price to N125/liter. Between June and November 2020, the petrol price was revised four times, rising from N121.50-N123.50 per liter in June to N140.80-N143.80 in July, N148-N150 in August, N158-N162 in September, and N165-N170 in November. An attempt now to reverse the price to suit the current realities will be strongly resisted by the people, having been hard hit by two recessions and a pandemic in the last five years.

Group Managing Director (GMD) of Nigerian National Petroleum Corporation (NNPC), Mele Kyari, earlier this year, precisely in March, noted that the corporation could no longer bear the over N120billon monthly subsidy on Premium Motor Spirit (PMS) simply known as petrol, stating that the NNPC pays between N100 and N120 billion a month to keep the pump price at the current levels. He puts the landing cost then of the solely imported petrol by the NNPC with the fundamentals at N234/l and daily consumption at 60million liters even though it sells at N162/l to date.

The deregulation of the downstream oil sector remains politically sensitive as raising the pump price of petrol with the increasing oil price is a great challenge in a country as this in which subsidy on petrol prices is seen as the people’s only source of social security.