Nigerian Crude Oil Industry Faces Setback as Cheaper Alternative Emerges

Recent reports from S&P Global Commodity Insights have revealed that the Nigerian crude oil industry is facing a significant setback due to the emergence of a cheaper alternative. Blending two crude types, namely WTI Midland from the United States and heavy Brazilian grades, has resulted in the production of a more affordable Nigerian crude substitute. This development has led to a decline in demand for traditional Nigerian crude grades in Europe, posing a fresh set of challenges for the country's struggling oil sector.

According to S&P, the blending of WTI Midland and heavy Brazilian grades to create a Nigerian crude lookalike has been ongoing for several weeks. This new blend offers a cheaper alternative, undercutting the prices of Nigerian crude and reducing buying interest for Nigerian cargoes in Europe. Established Nigerian grades such as Bonga, Forcados, and Escravos are now facing a considerable struggle in the market.

Compounding Nigeria's Challenges

This latest development adds to the existing challenges faced by Nigeria's oil industry, which has already been grappling with issues such as underproduction and crude oil theft. Reports from the Nigerian National Petroleum Company Limited (NNPCL) indicate that the country lost up to 700,000 barrels per day to crude oil theft in December 2022. Moreover, the Nigerian Extractives Industries Transparency Initiative (NEITI) highlighted that between 2009 and 2020, Nigeria experienced crude oil losses amounting to 619.7 million barrels, valued at $46.16 billion or N16.25 trillion. These losses represent more than 140 thousand barrels per day.

Impact on Revenue

The blending of WTI Midland and heavy Brazilian grades poses an additional threat to Nigeria's crude oil production revenues. Traders have encountered difficulties in offloading Nigerian crude cargoes in recent months. This trend is not limited to Nigeria alone, as buyers in India and China have shifted their focus to more heavily discounted Urals crude, while European refiners are actively seeking alternative sources of crude oil. As a result, Nigeria's flagship crude grade, Bonny Light, has experienced a significant decline, trading at a 50% discount to Dated Brent on June 6. Although the discount has narrowed slightly, it has remained consistent throughout April, May, and into June.

The Blending Process

European refineries are blending the two crude grades to produce a mixture that possesses the low sulfur quality of Nigerian grades while incorporating enough heavy Brazilian content to prevent an excess of naphtha production. This process ensures that the resulting crude maintains the desirable characteristics of Nigerian crude but at a lower cost, making it an attractive option for buyers seeking affordability.

Broader Challenges in the Oil Sector

The emergence of this cheap lookalike crude oil is just the latest blow to Nigeria's oil sector, which has been plagued by declining production in recent years. Factors such as security concerns, underinvestment, and technical issues at aging wells have all contributed to the industry's decline. Additionally, African crudes, including Nigerian grades, have faced increasing competition from cheap Russian barrels, with Western countries imposing price caps on Russian oil following the conflict in Ukraine. Indian and Chinese refineries have particularly turned to Russia's Urals grade, further challenging Nigeria's position in the market.

Nigeria's crude oil industry is currently navigating a turbulent period, marked by the emergence of a cheaper Nigerian crude substitute produced through the blending of WTI Midland and heavy Brazilian grades. The reduced demand for traditional Nigerian crude grades in Europe poses a new set of challenges for the country, which is already grappling with underproduction and crude oil theft. As the industry adapts to these changing dynamics, Nigeria will need to explore strategies to enhance competitiveness and ensure the sustainability of its oil sector in the face of evolving market conditions.