Africa Economic Analysis - Nigeria and Her Membership of OPEC

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.

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.

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 Nigeria’s 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 world’s 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 world’s natural gas, about 41% of world’s 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 (See Table 1, for example, for the year 2001).

Our analysis here is based on inspection of Tables 2 and 3 below, which give relevant data to all the eleven OPEC countries, as well as Figures 1-4.

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 (see Table 2), 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 1991–2001, 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 by using Table 2: 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 – Table 3 shows that 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 country’s 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 Arabia’s 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 Nigeria’s 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 Obasanjo’s 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. OPEC’s 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!

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 Nigeria’s Oso condensate) began to be considered as part of the total quota.

Nigeria should work hard to change these two particular stipulations within OPEC.

As we can see from Table 2, only Indonesia has a refining capacity that comes close to its production rate (94%), followed by Algeria (63%) and Kuwait (51.5%). Nigeria’s 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. OPEC’s 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: Table 2 shows that 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.

Looking at Tables 2 and 3, Nigeria ranks highest in contribution of petroleum products to country exports, and third highest in terms of its contribution to the GDP. Despite loud government commitments to reduce this dependence on oil, its annual budgets, inscrutably always denominated in the foreign currency of dollars rather than in the local currency of Naira, with oil as the major “financier”, have reflected an increasing dependence on oil, not less. In fact, oil has reduced Nigeria to a trading company - Nigeria Oil & Gas, PLC - with the president as CEO, the state governors as non-performing members of the board of directors, and citizens as grumbling shareholders to whom “dividends” are reluctantly declared periodically.

This should not be. A return to agriculture with a good associated road and rail transportation network; a comprehensive energy policy with renewable and non-renewable sources in the mix, and stable electricity as a critical factor; a viable iron-and-steel industry with intermediate tool-and-die facilities; the promotion of small- and medium scale enterprises; and a more-than-nodding acknowledgement of information technology (including re-training of personnel and the use of free/open source software) are absolutely essential to our rapid national development .

There is no arena more glaring in disclosing the lack-luster performance and sometimes downright fraudulence of our Nigeria’s leadership over the years than in the management of our country’s oil wealth.

Nigeria under colonial Britain discovered crude oil in 1959, and did not really become an oil country to be reckoned with until about 1970 when it produced for the first time on average more than 1 million barrels of crude per day, up from about 0.02 million barrels per day in 1960. By that time, Nigeria had found itself under military rule since January 1966 after six years of flag independence from Britain in October 1960. Nigeria then joined OPEC in July 1971 (daily production average of 1.53 million barrels per day in 1971) not long after the 1967-1970 Biafra-Nigeria civil war.

Looking at Figure 1, the Arab boycott and its attendant oil price increase in 1973 suddenly made Nigeria to be awash in so much oil money that General Yakubu Gowon (1 August 1966 – 29 July 1975) once declared in a Caribbean country that money was not Nigeria’s problem but how to spend it – and promptly paid the salary of all the civil servants of that country for that year during his visit. International oil prices rose through the regimes of Generals Murtala Mohammed (29 July 1975 – 13 February 1976) and Olusegun Obasanjo (13 February 1976 – 1 October 1979), and hit its peak during the civilian regime of Alhaji Shehu Shagari (1 October 1979 to 31 December 1983), when Nigeria really reached its depth of financial profligacy, resulting in the clogging of our seaports by mainly useless imports due to corrupt “contractocracy”.

During Shagari’s rule, Nigeria’s oil production fell precipitously from 2.30 million barrels per day in 1979 (the highest ever) to 1.24 million barrels per day in 1983, the lowest since Nigeria joined OPEC in 1971 (when daily production was 1.53 million barrels per day). Although as evident from Figure 1, oil prices were highest in history during the Shagari regime, unfortunately they also fell dramatically during that same period, precipitating a crisis that led to his deposition by General Muhammadu Buhari [31 December 1983 – 27 August 1985], who in turn was deposed by General Ibrahim Badamosi Babangida [27 August 1985 – 26 August 1993]. During his rule, IBB reaped an “oil windfall” of about US$12.2 billion during the Gulf War crisis that still causes ripples because it has been unaccounted for as disclosed by an adverse Okigbo report of 1994 that has now gone “missing” from official records. The oil prices never really recovered in a stable fashion under the reigns of Chief Ernest Sonekan (26 August 1993 – 17 November 17 1993), Abacha (17 November 1993 – 8 June 1998), or Abdusalami Abubakar (8 June 1998 – 29 May, 1999), but under former General but now Chief Olusegun Obasanjo (29 May 1999 to date; re-elected for second four-year term beginning May 29 2003), it has recovered somewhat as a result of a series of OPEC cuts, 9/11, the Iraq crisis and other contemporary circumstances.

By convoluting Figures 1 and 3, we would discover that it is not far-fetched that Nigeria must have earned up to $340 billion in all of our more than forty-four years of discovering oil. Yet, in all of these leadership changes, an oil wealth that should have been parlayed into substantial and sustained economic development has instead resulted in very costly internecine strife (for example in the Niger-Delta), a 70%-dollar-a-day citizenry, and in many instances a culture of official corruption within a distorted economy.

Without a successful policy of adding value to our crude oil, and rapid weaning away from our monoculture, our country will continue to face the paradox of “oil, oil everywhere, but occasionally no single drop of petrol to put in our gas tanks!”

That is absolutely untenable, and the skeptical cynic would be excused if he or she asked what assurance there was that the additional money that might be obtained from an upward revision of our quota for oil by OPEC would be wisely spent..

This essay is not an argument for Nigeria to leave OPEC. Rather, it is a call that an imaginative and strategic re-thinking in this crucial sector as absolutely necessary in our country – and that OPEC might just be the first forum for us to begin to demonstrate that new paradigm.

Dr. Mobolaji E. Aluko, is professor and immediate past Chair of Chemical Engineering at Howard University, Washington, DC, USA. He is President/CEO of Alondex Applied Technologies, LLC, an innovative solutions company.

The Wisdom in Remaining with OPEC: A Rejoinder to David Iheanacho’s Commentary

Top World Oil Net Exporters, 2001 (from US Department of Energy)
	Country	Net Exports (million barrels per day)
1)	Saudi Arabia*	7.38
2)	Russia	4.76
3)	Norway	3.22
4)	Iran*	2.74
5)	Venezuela*	2.60
6)	United Arab Emirates*	2.09
7)	Nigeria*	2.00
8)	Iraq*	2.00
9)	Kuwait*	1.80
10)	Mexico	1.65
11)	Libya*	1.24
12)	Algeria*	1.24

http://www.investopedia.com/features/industryhandbook/oil_services.asp

* OPEC Members. Not listed that did not make the Top Twelve in 2001 are

Indonesia and Qatar.

(2) Ecuador, which became a Full Member in 1973, had its membership suspended at its own request, with effect from 31 December 1992. Gabon, which became a Full Member in 1975, terminated its membership with effect from 1 January 1995.

(4) Post-Saddam Iraq has continuing United States’ “military take-over” issues

TABLE 3.1: Rank Ordering OPEC Information of Member Countries

TABLE 3.2: Ranking of Reserves Exhaustion for OPEC Members

FIGURE 1: Crude Oil Prices Graph [http://www.wtrg.com/prices.htm]

Figure 2: Oil Production Rate of Nigeria 1980 – 2002

http://www.eia.doe.gov/emeu/cabs/images/ngia_prd.gif

Figure 3: Nigeria’s Net Oil Exports 1980 - 2002

Figure 4: Refining Crude Oil

For each 42 gallons of oil that go to a refinery, roughly 44 gallons of final product are produced, of which gasoline and kerosene is about 35 gallons.

Nigeria and Her Membership of OPEC

By Mobolaji E. Aluko

Copyright Africa Economic Analysis 2005