Nigeria and Her
Membership of OPEC
By Mobolaji E. Aluko (2004)
INTRODUCTION
For
the first time in under a year, the international price of
crude oil hit over $36 per barrel recently, representing about
57 percent increase above the $23 a barrel official selling
price adopted for Nigeria's oil for the 2004 budget now under
consideration by our National Assembly.
That
should be good news for an oil-producing country such as Nigeria.
But
should Nigeria be in favor of ever-rising oil prices? As a
related question, should Nigeria continue to be a signatory
to the 11-member oil cartel OPEC (Organization of Petroleum
Exporting Countries http://www.opec.org/ ) or not? Would we
in the short run or ultimately lose or gain from such a dramatic
move as leaving OPEC?
These are serious questions ALWAYS begging for answers periodically.
Nigeria being both a major consumer and a major mono-cultural
producer nation of oil, as well as a member of OPEC, makes
the situation fairly COMPLEX , thereby not lending itself
to easy, facile analysis. Just as a human life not examined
is not worth living, if Nigeria's situation and membership
of various international bodies are not periodically examined
to see whether they continue to serve our national interest
or not, that would amount to an undermining of our very national
sovereignty.
A
LITTLE BIT OF HISTORY
On a historical note, OPEC was founded in September 1960 by
Venezuela (as lead instigator), Kuwait, Saudi Arabia, Iran
and Iraq. Of the additional six countries in OPEC today [Qatar
(joined in 1961), Libya (1962), Indonesia (1962), United Arab
Emirate (1967), Algeria (1969) and Nigeria (1971)], Nigeria
was the last to join in July 1971 during the Gowon military
regime. Ecuador and Gabon joined afterwards in 1973 and 1975
respectively, but pulled out effective December 31 1992 and
January 1, 1995 respectively.
Maybe
Ecuador (with a current 2004 production rate of about 420,000
barrels of crude per day) and Gabon (roughly 300,000 barrels
per day), admittedly small players in the big oil field, knew
something that Nigeria did not know?
In 1960 when OPEC was formed, the daily crude oil production
rates for Venezuela, Kuwait, Saudi Arabia, Iran and Iraq were
2.85, 1.69, 1.31, 1.07, and 0.97 million barrels per day respectively,
with Nigerias production (at that time non-OPEC) being
0.02 million barrels per day; see http://www.eia.doe.gov/emeu/aer/pdf/pages/sec11_11.pdf.
At that time, the present 11 OPEC countries produced 41.4%
of the daily world crude oil production of 21 million barrels
per day. In 1971 when Nigeria joined, those daily production
numbers were 3.55, 3.20, 4.77, 4.54, 1.69 and 1.53 million
barrels per day for Venezuela, Kuwait, Saudi Arabia, Iran,
Iraq and Nigeria respectively, with OPEC countries producing
52% of the worlds production of about 48.52 million
barrels per day. Today, those daily production numbers are
2.43, 1.75, 7.09, 3.25, 2.13 and 1.80 million barrels per
day for each of the countries respectively, with OPEC currently
supplying about 15% of the worlds natural gas, about
41% of worlds oil output (back to its percentage in
1960), and 55% of the oil traded internationally, and possessing
78% of the world's oil total proven crude oil reserves. In
general, nine of its members feature in the top 12 of net
crude oil exporters.
NIGERIAS MEMBERSHIP OF OPEC FAIR DEAL OR NOT?
Let us first deal with our membership of OPEC, and the relationship
of quotas to the POPULATION and OIL RESERVES of the various
countries.
If
we were to do a correlation (or factor) analysis among all
the OPEC countries with QUOTA as dependent variable and current
POPULATION and OIL RESERVES independent factors, we will find
that the current quotas of Nigeria and those of the other
OPEC countries need considerable tweaking. Although these
quotas are technically voluntary and arrived at
reportedly by consensus, with the OPEC members
reserving the right to their sovereignties, peer pressure
seems to make them to work hard to stick within these quotas,
and feel guilty when they are breached (as often
they are, but generally within a 10-20% over-quota.)
If,
as it seems to be, keeping the international price of crude
oil as up as possible as well as a stable supply
of the commodity are the most important issues for OPEC, then
that depends mostly on the TOTAL PRODUCTION of oil put out
by that group.
Today, the total quota for all the 11 OPEC countries is 24.5
million barrels per day, meaning that all things being equal,
this should be 2.23 million barrels per day per OPEC country.
So except for historical and deep political reasons, why Saudi
Arabia with a population 22 million (about 4% of OPEC total
population) has a quota of 7.093 million barrels per day (almost
30% of the total crude oil quota), while Nigeria with a population
of 133 million (25% of OPEC total, that is according to OPEC
data!) has a quota of 2.018 million barrels (8.2% of total
quota) per day remains to be explained. Even UAE with a population
of just over 3 million people (0.5% of OPEC total population)
has a higher quota (2.138 million or 8.7% of total quota)
than Nigeria!
Saudi
Arabia is thus in a strong political position to use its commanding
oil presence to create a glut and/or scarcity all by itself
and as it pleases. It has used changes in its production or
its threat to get much of its way within OPEC. For example,
its daily production has been as high as between 8
10 million barrels per day in the time frames 1974
1981 and 19912001, and as low as for example
a sudden drop to 7 million barrels per day in
1975, or in the range 3.4 6.5 million barrels per day
in 1982-1990.
Certainly,
a more EQUITABLE re-distribution (while keeping the total
output quota fixed) based on some rational metrics can be
done AMONG the nations without dis-equilibrating the international
oil market. The new quotas would be subject to the ability
of countries to produce their assigned amounts. If they cannot,
then they can assign their own QUOTAS to other OPEC (and even
non-OPEC) nations as they see fit until they can redeem those
quotas.
Here is what I mean. Assuming that we keep to a total quota
of 24.5 million barrels per day, then based on population
alone, Nigeria should have a quota of 6.2 barrels per day
(three times its current quota) and Saudi Arabia 1.02 barrels
per day (one-seventh its current quota). Based on proven reserves,
Nigeria should have 910,000 barrels per day (under half of
its current quota) and Saudi Arabia should have 7.6 barrels
per day (just a little over its current quota). Similar calculations
can be done for each of the other nine countries. If these
two variables are the most important proven reserves
ranking correlate much better with the current quota than
population - then the true quota should lie somewhere in between
the figures given, consistent, for example, with the estimated
years to exhaustion of current proven reserves of each countrys
energy strategy. Countries that cannot or do not wish to produce
as calculated can then horse-trade their un-fulfillable quotas
away to more able countries.
There
would also be a time limit: the agreed re-negotiated quotas
would be in effect for 5 years at a time, and would not be
adjusted up or down by more than (say) 10% at any given time.
Finally,
there is another issue not much talked about with respect
to OPEC: the existence of another parallel 10-nation organization
called OAPEC (Organization of Arab Petroleum Exporting Countries.
http://www.oapecorg.org/ ). Formed by Kuwait, Libya and Saudi
Arabia on January 9, 1968, it now also has seven more members:
Algeria (1970), Bahrain (1970), Qatar (1970), United Arab
Emirates (1970), Iraq (1972), Syria (1972), and Egypt (1973).
Tunisia joined in 1982 but pulled out in 1986. So eight of
the eleven members of OPEC are also members of OAPEC, and
one wonders whether the agenda of the Vienna/Austria-based
OPEC is actually set or not in the Safat/Kuwait-based OAPEC.
In
any case, let us take a look at Figure 1 showing price trends
mapped against some major events in the Middle East and the
world. The first decade plus of OPEC (1960-1973) actually
saw a consistent fall in the real (inflation-adjusted) price
of oil. Then, an upsurge in oil prices followed the Yom Kippur
War which started October 5, 1973 and triggered an Arab/OPEC
oil boycott/threat of drastic reduction by 5% per month in
oil production (but not inventory) until Israel withdrew
from occupied territory. The embargo against the US
and Netherlands itself began 16 October, 1973 and ended 18
March 1974, but the cutbacks ended in November 1973 (no cutback
in December following Saudi Arabias reneging) for a
total of about 340 billion barrels. Next, we had the 1979
Iranian Revolution (started January/February 1979), the Iran-Iraq
war (22 September 1980 20 August 1988), the Gulf War
(16 January 28 February 1991), 9/11 (September 11,
2001 demolition of New York World Trade Center twin towers,
and attack on the Pentagon by Al-Qaeda operatives)].
Figure
1 and Nigerias own oil production and net export patterns
[Figures 2 and 3 respectively] show that the application of
the laws of supply and demand brought about by regional crises
have dictated the cost of crude oil more than any concerted
effort by OPEC (except in 1973). Not shown is the effect of
the continuing US invasion of Iraq that began 19 March 2003,
further disrupting oil shipments from Iraq. Even the most
recent jump to over $36 per barrel was a result of a serious
explosion at a refinery in Skikda, Algeria on January 19,
2004, killing at least 20 people.
Whatever
be the case, I believe that Nigeria should be in the forefront
of demanding a more imaginative re-negotiation of OPEC terms
- or else it re-consider its membership. This is an opportunity
that we should have seized when Nigeria own Alhaji Dr. Rilwanu
Lukman (and until recently President Obasanjos Special
Advisor on Petroleum) was Secretary-General of OPEC from January
1, 1995 until December 3, 2000.
I
am for membership of OPEC. In fact I am for any solidarity
agreement among so-called Third World or developing
countries as a counterfoil to the reflexively exploitative
tendencies of Western powers - but not at any price. OPECs
present price band mechanism which stipulates that a 10-consecutive-trading-days
sustenance of oil basket price above $28 per barrel will trigger
a 500,000 barrels per day increase in OPEC total quota, and
a reduction by 500,000 barrels per day (0.5 million barrels)
if the basket price falls below $22 for 10 days is rather
anemic. At a total baseline quota of 24.5 million barrels
per day, that is an adjustment of 2% for 11 countries
or an average of 0.18% per country. For Nigeria, that would
translate to an adjustment of about 3,600 barrels of crude
per day far less than what is lost by official and
unofficial leakage every day in the Niger-Delta!
NIGERIA
AS SIMULTANEOUS PRODUCER/CONSUMER NATION OF CRUDE OIL
All
nations require energy (for heating and cooling, transportation,
running of machinery etc.) and refined/petrochemical products
(refined products such as kerosene, gasoline, diesel, liquefied
petroleum gas (LPG), naphtha, gas-oil, fuel oil and asphalt
- see Figure 4; petrochemicals such as plastics, fertilizers,
synthetic fibers and rubbers, detergents, etc.). Crude oil
is an essential input raw material for both needs, with natural
gas as alternative or supplementary. Nigeria is blessed with
both, and is in fact considered a gas province with an oil
rim: reserves of about 31.5 billion barrels for crude and
124 Trillion cubic feet (Tcf) for natural gas. [In energy
terms, one barrel of oil is roughly equal to 6,000 cubic feet
of natural gas; or 1 billion barrels of oil is roughly 6 Tcf
of natural gas; more like 5.66 5.75 actually, depending
on the heating value of the gas].
With
respect to being both a producer nation (of a raw material:
crude oil) and a consumer nation (of refined products), we
in Nigeria have ONLY OURSELVES to blame for problems associated
with that. Unfortunately, not only have we been flaring our
gas all of these years (current government policy agreed with
the oil companies operating in Nigeria is to reduce this to
zero by 2008), but our refineries have not been working as
they should due to technical incompetence, sabotage or both,
neither have we devoted enough resources to the large-scale
development of our petrochemical industry. Furthermore, internally-deployed
crude oil is ALSO counted as part of OPEC quota, as OPEC limits
not just the quantity of crude oil that each country offers
on the international market, but the total production rate
by each country. That unwelcome situation was compounded further
recently when condensates (such as Nigerias Oso condensate)
began to be considered as part of the total quota.
Nigeria
should work hard to change these two particular stipulations
within OPEC.
Only Indonesia has a refining capacity that comes close to
its production rate (94%), followed by Algeria (63%) and Kuwait
(51.5%). Nigerias figure? 24.7% at refining capacity
or more realistically more like 10% since we are hardly
more than 40% operational with respect to refining.
It
is simple logic to understand that no matter the international
price of our own crude oil, provided we depend to a large
extent on imported refined oil, we will continue to pay a
higher price for that than if the needed crude had been refined
within our country. In fact, according to figures by OPEC
released on its website, in absolving itself of being responsible
for high cost of refined products, it stated that between
the years 1996 and 2000, the OPEC countries received $850
million revenue from sale of crude, cost of finding, producing
and transporting the oil not included. On the other hand,
the G7 countries (USA, UK, Canada, France, Germany, Italy
and Japan) received $1.3 trillion outright from oil taxation.
OPECs Secretary-Generals have stated repeatedly over
the years that high gasoline prices are due to taxation by
Western countries and speculation by their markets.
The
current situation of percentage accrual back to OPEC countries
is at least better than in the 1960s, when the price of oil
was about $1 - 3 per barrel, the netback value from this barrel
in the final consumer market was roughly $30, which was shared
in the order: major oil companies (42%), governments of importing
countries through profits and direct taxation (52%); and producer
countries received just 6% in the form of royalties.
The solution to the price spiral for refined products for
Nigeria is simple. Nigeria has enough crude oil to serve our
refined products needs. Therefore we should not only get those
refineries that we have to work by hook or by crook, but also
streamline and speed up the licensing process for those possible
eighteen new private ones (four belonging to companies floated
by Rivers, Akwa-Ibom, Ondo and Lagos states are reportedly
in an advanced state) that might wish to join the refining
fray: no ands, ifs or buts. That is the true deregulation,
as different from the hackneyed mantra of privatization that
we read from government in which investors are literally being
begged to kindly buy the refineries off government hands.
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