What will become of Nigeria as Iran re-enters the global oil scene
By December, Iran will be allowed to re-open its crude oil market to the world after it sealed a “historic nuclear deal” with world powers—the US, UK, France, China and Russia plus Germany—this week. The deal forces Iran to de-escalate uranium enrichment and in return, the sanctions imposed in 2012—which previously limited its oil exports, costing the country over $5 billion monthly—have now been lifted. For Nigeria, Africa’s biggest oil producer, this leaves it less than six months to develop a sustainable strategy that will help mitigate the impact of further oil price declines once Iranian supply hits the market.
Iran currently holds the fourth largest proven oil reserves in the world, estimated at 157.8 billion barrels. It accounts for roughly 10 percent of the world’s total proven petroleum reserves and 13 percent of OPEC reserves. This should be enough to meet the demands of China, the world’s largest importer of oil, for the next 40 years. Iran is also believed to have up to as 30 million barrels of oil stored in tankers, a quantity sufficient enough to immediately reignite lucrative contracts with previous trading partners like Europe and India, both of whom are now Nigeria’s top crude buyers.
The effect of such a scenario could prove devastating for Africa’s largest economy, for which oil contributes more than 75 percent of its annual revenue. Experts are predicting that Iran’s re-entry into global markets will tilt the global oil crisis from a price and production war towards the market war in which oil producing countries struggle to shore up off-takers. Should this happen, Nigeria may lose some of its key markets, including those closer to home like South Africa, which remains a key business partner of Iran.
This week, Ventures Africa had a chat with Ugodre Obi-Chukwu, a Nigerian business analyst and the founder of financial news platform Nairametrics, on why Nigeria should worry about the latest developments within the global oil landscape.
Iran’s new deal means it will be allowed to sell it’s oil to the world again. Why should Nigeria be worried?
Nigeria should be worried for many reasons. First is Iran’s close proximity to India which ironically is currently Nigeria’s biggest buyer of crude. The risk is that India may consider it more economical to patronize Iran than buy from Nigeria.
Another reason is the quantity of oil Iran will pump into the market. Iran currently has the fourth largest crude oil reserves in the world. It also has the capabilities to produce about 6 million barrels of crude a day. Pumping this into an already glutted market could like send crude prices lower. This will further trim Nigeria’s already thin revenue.
Many have predicted that Nigeria would lose key markets like Europe and Asia should Iran re-enter the market. How devastating will it be for the Nigerian economy?
As mentioned, Iran is closely located to the likes of India and other Asian countries. The competition among OPEC countries for the Asian market will increase portending a very bearish outlook for Nigeria. This looks doomed for a market share that will shrink considerably.
President Buhari has indicated that he intends to retain fuel subsidy despite the threat of a greater cash crunch. Do you think this is a good move during this period?
Most economists suggest that he removes fuel subsidy. However, this may have a counter effect on the economy. Removing fuel subsidy increases inflation and reduces the disposable income of consumers. This makes it harder for businesses to sell products and offer services, and this could eventually send the economy into recession. I believe this is not a good move at this time–it is a wrong pill for the right disease.
How can Nigeria effectively shield itself from the impending impact of an increase in oil supply?
The immediate option will be to quickly secure long term contracts with countries that need its crude. Lock them into medium to long term contracts that will secure future income streams. On the long term, Nigeria has no choice but to diversify from oil. This is the hardest part but requires strong will from the government.
Natural gas has proven a useful commodity in generating revenue. Should Nigeria turn to gas for its next cash cow?
I’m not sure it is the next cash cow especially with the way the gas market is currently structured. However, the government needs to create the right incentives to enable gas manufacturers supply the hugely needed gas required to increase power generation. This will provide a major economic boost for the production sector of the economic.
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