Nigeria opened a new front in the oil price war between some of the world’s largest OPEC+ countries, offering to sell its crude in April at unusually large discounts in an effort to undercut its rivals. Even so, traders said the West African country may not have gone cheap enough.
Nigeria now the poverty capital of the world has no fiscal buffers after years of giving the people nearly free fuel and electricity and forex and now Africa’s most populous nation faces a double whammy of a wild spread of Coronavirus and inability it fund its 2020 budget.
Exports of Qua Iboe and Bonny Light crude — two banner Nigerian grades — will be sold in April for discounts of more than $3 a barrel to the international Dated Brent benchmark.
Even in the depths of the 2008-09 recession, neither grade was sold anywhere near as cheap, but a collapse in demand caused by the coronavirus — and a pricing war led by Saudi Arabia — has changed everything.
The new front in the price war is important because in previous battles for market share, such as in 1985-86 and 1998-99, it was West African oil producers who finally broke the market after discounting their crude.
West African crude competes directly with oil pumped in the North Sea, which is a benchmark for crude worldwide.
If Nigeria and other regional producers discount their crude significantly below North Sea Brent, it will force the Brent market to follow, piling downward pressure on prices.
Some of that was already in evidence on Monday with Forties crude trading at the lowest in 11 years on a price-discovery window organized by S&P Global Platts.
The Nigerian National Petroleum Corporation cut its April official selling prices for Bonny Light and Qua Iboe by $5 per barrel to dated Brent minus $3.29 and minus $3.10 per barrel, respectively, Reuters reported on Monday.
Brent crude, the international benchmark, has fallen by over 60 percent since the start of this year. It stood at $26.44 per barrel as of 7:40 pm on Monday.
May loading programs emerged with key grades seeing an increase over the previous month, Reuters reported on Monday.
Bonny Light and Forcados are both higher and due to load 245,000 barrels per day, Bonga 123,000 bpd and Qua Iboe 215,000 bpd.
There will also be two cargoes each of Usan and Yoho, five cargoes each of Brass River and Agbami, six of Egina and four Amenam, according to the report.
The Group Managing Director of the Nigerian National Petroleum Corporation, Mallam Mele Kyari, said recently that the country was already struggling to find buyers for its crude oil, saying over 50 cargoes were yet to be sold.
The unsold cargoes represented more than 70 percent of the country’s total oil exports and put the country in a very difficult spot, according to S&P Global Platts.
Kyari said Nigeria’s crude cargoes had been stranded due to the higher selling price compared with its fellow OPEC members such as Saudi Arabia and Iraq, which could afford to offer discounts of around $5 to $8 per barrel to buyers.
Oil crash forces Seplat, Shell to cut spending
In a related development, a major Nigerian independent oil and gas firm, Seplat Petroleum Development Company Plc, is looking to cut costs by at least 30 percent to counter a crash in crude prices, its Chief Financial Officer, Roger Brown, has said.
Royal Dutch Shell, a global oil giant with huge presence in Nigeria, said on Monday that it would lower its capital spending for this year to $20bn or less, compared with its previously planned level of around $25bn.
The company also said it would reduce its operating costs by $3bn to $4bn a year over the next 12 months compared to 2019, as well as achieving “material reductions” in working capital.
Reuters quoted Seplat’s COO as saying on Monday that the company’s cuts, which would ideally be higher in the short term, would see its drilling plans reduced to three wells from the 15-20 it had planned.
The oil price, which has been under pressure from the coronavirus pandemic and the price war between Saudi Arabia and Russia, plunged to a record low of $24 per barrel last week.
“We are cutting back on capital expenditure quite significantly and focusing on higher, more prolific oil wells,” Brown said.
Seplat had hedged 60 percent of its production at $45 per barrel through to the end of the third quarter. But Brown said the company needed to be prudent as oil prices could fall further.
“We don’t think we’ve hit the bottom of that yet,” he said of oil prices, adding, “It’s too early for us to call that.”
In the 2019 fiscal year, Seplat spent $125m on capital expenditures, including drilling nine development wells.