The current crisis between Russia and Ukraine is set to have a debilitating effect on the nation’s oil and gas industry with analysts predicting that should the tension not doused, oil price could hit $150 per barrel.
The implication of rising oil prices, according to industry observers, will lead to an increase in the already N3 trillion budget of fuel subsidy in 2022 while many oil and gas projects that depend largely on iron and steel imports from Ukraine and Russia may suffer delay.
Measures forcing Russia to supply less crude or natural gas would have “substantial implications” on oil prices and Nigeria’s economy, said Sue Trinh of Manulife Investment Management.
Already, the invasion of Ukraine by Russia has distorted global financial and energy markets causing oil prices to soar above $100 per barrel, the highest since 2014.
Nigeria’s receipt from oil accounts for about 90 per cent of its earnings, hence a distortion in the global oil market affects the country.
Last week, amid heightened tensions between the two countries, the international oil benchmark, Brent crude, rose to $103.43 per barrel
Brent crude, against which Nigeria’s oil is priced, hit a fresh eight-year high of $103.43 per barrel as of 4:39pm Nigerian time, last Thursday as Russian forces made their way into Ukraine in a show of force not seen in Europe since World War II in a multi-pronged attack.
The $103.43 per barrel oil price, traded above $40, a figure which is higher than the Federal Government’s oil benchmark price of $62 per barrel for the 2022 budget and oil production of 1.88 million barrels per day.
Regrettably, most of the gains recorded during a higher oil price regime are frittered away through refined fuel importation as Nigeria imports 100 per cent of its petroleum products needs due to the dysfunctional state of its four refineries located in Port Harcourt, Warri and Kaduna. Crude oil prices were on the rise on Thursday morning as Russia engaged in a “special military operation” in Ukraine. The price of Brent crude oil is now well over $105 per barrel for the first time since July 2014.
According to the United Nations COMTRADE, Nigeria imports from Ukraine was $156 million in 2020 as Ukraine’s major exports to Nigeria were iron and steel at $125million, sugars and sugar confectionery at $8.1million and pharmaceutical products at $7.6million.
On the other hand, mutual diplomatic relations have been in existence between Russia and Nigeria since the 1960s. In September 2021, the Russian government said its trade volume with Nigeria stood at $600million because Russia is also an oil producing nation.
Following the battle between both countries, a publication by MMS Plus said there are reports of merchant shipping vessels in the region damaged by shelling and projectiles. At least, three vessels have been affected by gunfire in the Black Sea area off the coast of Odessa and Yuzhny. Commercial vessels have been asked not to enter the Sea of Azov as access is denied by Russian military forces. Two Russian commercial cargo ships were hit by Ukranian missiles in the Sea of Azov.
Multiple international container lines such as MSC, Maersk and CMA CGM have released operational updates announcing suspensions of vessel calls to Ukraine until further notice.
The Republic of Marshall Islands (RMI) has issued a Ship Security Advisory admonishing commercial vessels to avoid any transit or operation within the EEZ of Ukraine or Russia within the Black Sea.
“Access to the Sea of Azov through the Kerch Strait is currently blocked by Russian forces. All Ukrainian ports have been closed by the Ukrainian military. If a vessel is located at a Ukrainian port, plans to depart should be arranged as soon as safely possible. Access to the northwest Black Sea, north of 45° 21′ is restricted by the Russian Navy.”
“Vessels must ensure the automatic identification system (AIS) is always transmitting (except when the master believes that continuing to operate AIS might compromise the safety or security of the ship or when a security incident is imminent), consistent with provisions of the International Convention for the Safety of Life at Sea (SOLAS) and monitor VHF Channel 16. Any vessels challenged by Russian military vessels should comply fully with instructions. Armed security personnel are not to be embarked while operating in the Black Sea,” it said.
It further included a report of a Marshall Islands registered bulk carrier suffering significant damage to the deck and bridge area whilst drifting approximately 50 nautical miles (nm) South of Odessa. Pending further investigation, the damage is initially thought to be caused by a projectile.
Commenting on the development, Partner, Bloomfield Law Practice, Dr. Ayodele Oni, said global oil prices could rise as high as $150 a barrel if the tension between Russia and Ukraine worsens, and this will have huge economic implications for Nigeria, Africa’s biggest oil-producing country as we should generate much more income from our oil than the benchmark in the budget
‘‘We are already surpassing the budgetary figures. The problem is whether the importation of finished products could erode the additional profitability as cost of bringing in finished products like PMS too would rise.
With the likely increase in the prices of refined petroleum products, subsidy and cost of subsidy may also increase- a negative implication for Nigeria,’’.
Oni pointed out that the crisis could equally signal delay cost overruns for the Nigerian Liquefied Natural Gas(NLNG) Train 7 as the country imports most of its iron and steel from Ukraine.
Former Director General of the Lagos Chamber of Commerce and Industry (LCCI), Dr.Muda Yusuf, observed that a lot of Nigeria’s steel products come from Ukraine and Russia, saying the war is going to affect our trade with these nations.
‘‘More importantly, this crisis has led to an increase in crude oil price. Nigeria should be smiling at this increase but the nation isn’t refining locally, so our import bill on petroleum imports will increase. The nation’s bill for fuel subsidy will also increase. If this war prolongs, the problems will lead to fiscal deficits and eventually lead to more borrowing as the debt profile will increase. We can also expect inflation because the increase in energy price, aviation fuel, diesel and Premium Motor Spirit (PMS) will be higher.”
Nigeria can always buy oil and steel from other nations but Russia is a major oil producer in the world. Oil is a global commodity and any disruption affects the world,’’.