Nigeria’s oil market battles internal challenges like oil theft and external shocks like geopolitical conflict (See Figure 1). Scholars like Angela Capolongo and Michael Kühl called this "the butterfly effect in geopolitical conflict". According to them, what happens on one side of the globe, even the seizure of a single commercial ship can directly impact other economies due to the world's interconnectedness. While these shocks are not exclusive to Nigeria, Nigeria's heavy reliance on oil leads to economic impasses that query the country's economic future. 

Nigeria is currently at a crossroads, juggling the consequences of conflicts between Russia, Ukraine and the Middle East. In the mix, external non-geopolitical tensions also exist. The Organization of the Petroleum Exporting Countries (OPEC) member countries have continued to exert pressure to alter output quotas. Tensions are also exacerbated by the competition between OPEC and non-OPEC nations for market access and share. As a result, this insight interrogates the impact of geopolitical crises, such as the Russia-Ukraine War and events in the Middle East, on Nigeria's oil market. It further assesses the implications of OPEC's oil production cuts and offers strategic recommendations to protect Nigeria from the challenges arising from these developments.

The Russia-Ukraine Debacle

Russia's invasion of Ukraine in February 2022 compelled the European Union to look for alternative energy sources, triggering global volatility in crude oil prices. This resulted in greater demand for Nigeria's oil and the possibility for revenue growth. Still, Nigeria is not profiting from the economic boom driven by this demand. There are multiple causes for this, but some of them include a lack of refining capacity and limits created by oil theft. As a significant importer of refined petroleum products, Nigeria is negatively impacted by the global oil price surge. With oil prices recording a meteoric rise, Nigeria is bound to import refined products at much higher prices. This, among several factors, accounts for the increase in the price of petroleum products alongside the soaring crude oil price. For example, diesel prices in Nigeria have jumped from approximately 288 to over 1,000 Naira per litre.

India, a significant customer of Nigerian crude, has switched to cheaper Russian oil, cutting its imports from Nigeria. This move has reduced Nigeria's access to the global oil market, resulting in a decline in demand from the previously reliable Asian market. To demonstrate the magnitude of this shift, Nigeria's crude shipments to India fell from over 250,000 barrels per day (bpd) six months before Russia invaded Ukraine to 194,000 bpd six months after the invasion. These losses are exacerbated by high inflation rates and rising food import prices that wipe out the bonus earnings from rising global oil prices. Amid the Russian-Ukraine War, the ongoing Middle East Conflict magnifies the global events that impact Nigeria's oil market.

Middle East Strife

The expanding conflict scene in the Middle East is unsettling for oil markets. The prevalent conflicts in the region include the Syrian Civil War, the Yemen Conflict, the Turkey-Kurdish Conflict, and the Israeli-Palestinian Conflict. Amid these, the Israeli-Palestinian conflict is rapidly evolving and expanding the scope of conflict in the region. Recently, Hezbollah, an Iran-backed Shia militia, interfered in Israel's invasion and occupation of Gaza, provoking an ongoing cycle of retaliations. An essential occurrence is Israel’s attack that culminated in the explosion of thousands of handheld pagers and walkie-talkies used by Hezbollah to communicate. Even worse, Hezbollah's leader, Hassan Nasrallah, was killed in an air strike. In response, Iran has launched hundreds of missiles into Israel, with Israel pledging to react. 

For one, there are growing fears that Israel will target Iranian oil infrastructure, potentially resulting in reprisal. Sadly, this may include assets that convert Iranian crude into petroleum products. One key Iranian oil asset is the century-old Abadan refinery, which supplies 13% of the local market's petrol. To deal a severe blow, Israel could target the oil terminals on Kharg Island in the Persian Gulf, from which nine-tenths of all barrels of Iranian crude are exported, or even the oil fields themselves. If Israel chooses to strike exclusively military targets, such as missile launch facilities,  then geopolitical factors that drive up oil prices may be halted. Whatever happens, counterretaliations may hit Iran's Petro-industrial complex, which is the regime's lifeline. 

Reports suggest that vessels change their routes due to the turmoil, raising shipping costs and subsequently affecting prices. Ultimately, this may result in an increased revision of fuel landing costs and fuel prices in Nigeria. Notably, this will also increase export revenues. However, oil prices continue to grow, with Brent reaching almost $80 per barrel. For context, Brent crude futures rose by $1.09 (1.4%) to $79.14 a barrel. Meanwhile, US West Texas Intermediate (WTI) oil futures rose $1.15 (or 55%) to $75.53 per barrel.

OPEC+ Supply Cuts

OPEC+, which consists of the Organisation of Petroleum Exporting Countries and its allies, is prepared to hike production before the end of 2024. The goal is to progressively phase out the voluntary production restrictions of 2.2 million bpd, with a gradual return starting from 180,000 bpd commencing in December. Reports suggest that this decision was reached in early September, before Iran launched a missile attack on Israel, raising the prospect of production and supply interruptions in the oil-rich Middle East. 

Nigeria depends mainly on oil revenue. The current OPEC cuts present a window for Nigeria to meet its long-standing production target. OPEC's return to increased production will result in reduced prices, shortfalls, and low revenue for oil-dependent countries such as Nigeria. The extended output decrease emphasises the necessity of strategic planning and diversification initiatives to lessen the impact on Nigeria's economy. For instance, to support the economy, gas projects must be accelerated. 

Strategies to Insulate Nigeria 

Powering Up Modular Refineries: Nigeria has 25 licensed modular refineries, five of which are operational and producing diesel, kerosene, black oil, and naphtha. These refineries are designed to lessen dependence on imported refined petroleum products and alleviate product shortages. They require less capital investment than traditional facilities and can process 200,000 barrels of crude daily. 

Recently, international financiers who planned to construct about 20 modular refineries in Nigeria have withheld their resources because of the lack of assurances for crude oil supply. Specifically, Nigeria's crude oil producers, primarily foreign oil firms, have not assured potential investors that crude will be provided to modular refineries when the facilities are ready to produce refined petroleum products.

The government claims it cannot guarantee crude oil supplies because it believes modular refiners will provide feedstock for sale and will not build refineries. However, this allegation is ambiguous because financiers request a Conditional Term Sheet or Heads of Terms rather than crude supplies to invest. This is to guarantee that feedstock is supplied to the refinery after completion. The Nigerian Upstream Petroleum Regulatory Commission must beckon international oil corporations to offer these guarantees to stem this tide.

Accelerate the Energy Transition: Nigeria's dependence on oil and gas revenue has led to its vulnerability to international crude oil market shocks. Endless calls have been made to diversify the economy. Nigeria must invest in agriculture, manufacturing, renewable energy, and technology. Yet, significant diversification remains elusive. Under the International Energy Agency (IEA), the world oil demand is expected to drop by 1.6% by 2030 and 39.5% by 2050 relative to 2021. The road and transport sub-sector will also drop by 6.7% and 57.3%, respectively, over the same timeline. Global oil supply, on the other hand, is expected to be sustained till 2030 but will drop by 38.8% by 2050. Conventional crude oil production, however, is likely to fall by 5.5% by 2030 and 48.8% by 2050.

These external shocks affect supply chains and modify demand patterns, especially as critical markets such as India shift to cheaper alternatives. The unpredictability of global oil prices exacerbates Nigeria's economic weaknesses, highlighting the urgent need for strategic diversification. There is a need for a drastic shift from current dependencies. Nigeria should prioritise building modular refineries and accelerate its transition to renewable energy sources. This combined approach will improve local refining capabilities while reducing reliance on imported petroleum products. To achieve this, the government must adjust its policies and programs to encourage investment in alternative energy and refining infrastructure.

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