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Is the oil industry at verge of collapse?


With the ravaging coronavirus and the price war between Saudi Arabia and  Russia which have led to the dramatic decrease in demand worldwide, leading to a steep decline in prices, it is believed in some quarters that the industry may collapse anytime soon.

Many countries around the world including Nigeria have ordered their citizens to stay home in order to contain the spread of the virus. And airlines have dramatically cut back on flights as the number of passengers has also drastically reduced. Fewer cars on the road and planes in the sky means far less demand for oil.

Coupled with a dispute between Saudi Arabia and Russia that has resulted in an oil surplus, the price for crude as well as gasoline has plunged. The national average for gas in the U.S. is now below $2 a gallon.

Former Energy Secretary, Rick Perry said he believes that the oil industry could collapse because of the dramatic decrease in demand worldwide caused by the coronavirus outbreak and a steep decline in prices.

The current prices of Brent Crude in the mid-$20s are well below Saudi Arabia’s fiscal break-even price of $80 a barrel oil, below the break-evens of nearly all U.S. shale production, and below the Russian breakeven price, too.

Saudi Arabia’s crude supply rose on Wednesday to a record of more than 12 million barrels per day, two industry sources said, despite a plunge in demand triggered by the coronavirus outbreak and U.S. pressure on the kingdom to stop flooding the market.

A producer pact to rein in oil production expired on Tuesday, removing restrictions on output by members of the Organisation of the Petroleum Exporting Countries, as well as Russia and other producing nations.

Saudi Arabia had said that its oil exports would be about 10 million bpd, but it gave no indication of how much crude would go into storage.

One of the sources, speaking on condition of anonymity, said Aramco has increased its production to its maximum capacity of 12 million bpd.

Supply to the market, both domestically and for export, may differ from production depending on the volumes taken out of storage. Saudi Arabia has hundreds of millions of barrels of crude in storage inside the kingdom and abroad.

However oil prices spiked 25 percent weekend after President Trump tweeted that Saudi Arabia and Russia would cut production by 10 to 15 million barrels per day (mb/d), but there are a variety of reasons why a cut of this size faces steep odds, analysts said.

They said this should be prefaced with the fact that nobody knows what will happen and that the onset of a global pandemic means that all of the old rules are thrown out the window. Anything can happen in the context of the greatest public health and economic crisis in a century.

The crash in crude oil prices means volume is especially important for oil-dependent Nigeria, and as there will be no OPEC output limits to adhere to this month after, the country can pump at will.

The current drop in oil prices is hitting the country hard, making a big dent in government revenues and threatening the viability of upstream projects.

Experts are however, of the view that even if every country decides to produce at will it may not be able to produce beyond 2.3million barrels per day, giving the fact that the country has been too lackadaisical about exploration activities. To achieve this may take a few years.

They also said even at this volume of production she would have to sell her commodity at a highly discounted rate to be able to create market for it and the revenue from it may not make so much impact on the economy

According to Petroleum Economist, the country is bracing to take a big hit from the collapse in oil prices resulting from the end of the Opec+ agreement and the Covid-19 pandemic. She is particularly vulnerable as it has yet to fully recover from the previous crash in 2014. Nigeria’s 2020 budget is based on an anticipated oil price of $57/bl, but the decline in the price of the Brent benchmark crude has forced the government to revise this to $30/bl while maintaining proposed production volumes at 2.18mn bl/d, condensate inclusive.

Diran Fawibe, chairman and chief executive of IESL/Doris Joint Venture said presently Nigeria can hardly produce up to 2.6 million barrels per day which she did just a few times in the past. He, however, stated that if the country is able to improve national production through exploration she might be able to produce above two million barrels per day. This will, however, depend on market availability while the crude is also discounted.

Seye Fadunsi, a former executive director of Pillar Oil, said the country currently does not have the capacity to ramp up beyond 2 million barrels per day.

He said even if the Petroleum Industry Bill (PIB) is passed today and investors come into the industry for them to start drilling, development of fields and production it will take about two to three years to start seeing the result.

Abiodun Adesanya, managing director of Degeconek, said that without the price war between Saudi Arabia and Russia, Nigeria had never been able to sustain the 2.2 million quota allocation given to her by OPEC though it has always tried to move closer to it. This is because of constant infractions on the pipeline infrastructure.

Already, many oil servicing companies in the country have been out of jobs thereby reducing their staff strength because the big multinational oil companies are no longer operating, and even those that manage to operate, have been asked to lockdown, which is not in the interest of anybody but there must be a way of cutting the spread of COVID-19.

Meanwhile, President Donald Trump said he expects Saudi Arabia and Russia to cut oil production by about 10 million barrels after he spoke via phone with Crown Prince Mohammed Bin Salman on Thursday.

Trump didn’t specify in a tweet whether the production cut would be per day. He said Prince Mohammed had spoken to Russian President Vladimir Putin about their oil price war. “Could be as high as 15 million Barrels,” Trump added in a subsequent tweet.

“Good (GREAT) news for everyone!” he said.

But Putin spokesman, Dmitry Peskov, said the Russian president had not spoken to the Crown Prince. And Saudi Arabia didn’t confirm a production cut, instead calling for an “urgent meeting” of the Organisation of Petroleum Exporting Countries plus Russia and other unnamed countries, according to state-run media.

If Trump meant 10 million barrels per day, that would equal both Moscow and Riyadh curbing nearly 45percent of their production- an unprecedented move that triggered skepticism in markets.

Riyadh has until now made clear it’s ready to cut production provided that other big oil producers, including some that aren’t part of the OPEC+ group like the U.S., Canada and Brazil, also reduce their output. OPEC+ refers to a previous alliance between OPEC and Russia to set production levels.

Russia’s refusal in early March to cut production triggered the oil price war, with the kingdom responding by increasing its output to a record high, above 12 million barrels a day.

Despite the triumphant tone of Trump’s tweets, Saudi Arabia and Russia have yet to agree to the size of any production cut, according to an OPEC+ delegate familiar with the conversations. Any curbs will be conditional on every major oil producer also agreeing to reduce production, the delegate said on condition of anonymity, while discussing diplomatic conversations.

Saudi Arabia wants countries that aren’t part of the OPEC+ alliance to join in any future pro-rationing. Although Riyadh hasn’t drawn up a formal list, in the past OPEC+ had invited big American oil producers, Brazil and Canada to its meetings. Both Canada and Brazil have previously declined. OPEC had also invited the Texas Railroad Commission, which regulates the oil industry in the state, to participate in its meetings.

Trump is scheduled to speak with the leaders of U.S. oil producers and refiners. One industry leader said the president may have been motivated to remark on the surplus oil production because the U.S. is literally running out of physical space to store crude.

“I think something like this was inevitable because there is nowhere to put the oil,” said Dan Eberhart, a Trump donor and chief executive of drilling services company Canary Drilling Services. “I think this is out of necessity, not out of gamesmanship.”

 

Olusola Bello



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