Volume 05 Issue 07 (2017) July 2017

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International Journal Advances in Social Science and Humanities

Available Online at: www.ijassh.com

RESEARCH ARTICLE

Impact of Shale Oil Development on Crude Oil Exports in Nigeria

Lawal Esther Omotola*

1

, Adelore, Similoluwa Gloria

2

Department of Economics, Babcock University. Graduate of Economics, Babcock University.

*Corresponding Author:Lawal Esther Omotola

Abstract

This paper examined the impact of shale oil development on crude oil export in Nigeria for the period of 2015. Total crude oil import was used to capture Nigeria crude oil export during the periods 2007-2015. The vector error correction model was used to analyze the time series data. The result indicated a long run relationship between the variables, the proportion of shale oil production in US total crude oil import were both positively related to Nigerian crude oil export. The study therefore recommends that Nigeria should diversify the economy and focus more on domestic manufacturing enterprises, agricultural sector and the mining sector which will help her be less import dependent if she wants to survive.

Keywords: Shale Oil, Crude Oil and Vector Error Correction Model.

Introduction

In the world today, there have been new discoveries and developments in the global energy market which has changed the game in the market for oil. The United States is a leading part of this change in the global market. Over the last five years, shale oil production has soared, while oil imports from OPEC members especially Nigeria, fell significantly.

A development which, according to the Nigerian Minister of Petroleum Resources and her other OPEC colleges, was of “grave concern”.

Nigeria has been a crucial oil supplier to the United States but in recent years the total volume of imports from Nigeria has fallen. The United States typically imported between 9% and 11% of its crude oil from Nigeria before 2012. The United States imported an average of 57,000 b/d of crude oil from Nigeria in 2015 which is more than 90% drop from the average volume imported in 2010. Nigeria fell from being the 5th

largest foreign oil supplier to the United States in 2011 to the 11th in 2015 accounting

for less than 1% of the United States’ crude oil imports [1].

In June 2014, according to VOX media, the purchase of a barrel of the Nigerian Brent oil was about $110 but now has seriously plunked down. By early 2015 it dropped to $60, by the middle of 2016 it cost about $33 to buy a barrel of oil- a level not seen since 2004, though very recently in 2016 the prices of the Nigerian Brent oil hits $50 for the very first time in 2016. The Country is having a hard time seeking its crude oil with the boom of the United States’ shale oil, which is a country that Nigeria sold 60 percent of its crude oil until the mid-2014. From about 60 percent of Nigeria’s 2 million barrels per day of exports, the United States bought about just 60,000 (bpd) on average for the first three months of 2015. As United State withdrew from buying Nigerian oil, Nigerian crude sellers began seeking other buyers in Uruguayan and Chinese markets, in shift completion with other OPEC nations.

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by a thousand Barrels per day, Nigeria exported 1,324 barrels of crude oil. The crude oil export in Nigeria increased at a very high rate moving to about 2,069 thousand barrels of oil per day in the year 2000, but in the 2008 her crude oil export fell back to 1,932 thousand barrels per day, this was because of the oil price spike and certain roles played by spectators in decreasing the production of oil in the country.

Fortunately, Nigeria’s oil exports picked up the next year (2009) to 2,115 thousand barrels per day. In 2011, crude oil exports went up again to 2400.6 thousand barrels per day but after this increase a decline set in and her exports moved from 2400.6 in 2011 to 2,132 thousand barrels per day in 2015, and one of the major reasons for this decline is the development of shale oil and gas in the United States which is what this paper seeks to study [2].

The nation as a result of this has been very unstable. Nigeria over the last two quarters because of the inability of the government to control or maintain the impact the shale oil development in the United State made has had negative growth rate: the Nigerian Economy shrunk at 2.1% in the second quarter and at 0.4% in the first quarter of 2016, which insinuates an “Economic Recession”[3].

The nation has being characterized by very high inflation rate (17.6%) which is the highest since 2005, high unemployment rate (13.3%), an exchange rate of about 500 naira to $1 black market prices, external debt of $1162 million as at June this year, all these have caused very low standard of living of her citizens with increased mortality rates, crime rate, poverty rate, unemployment etc. [3]

In view of these, it is expedient that we i) establish empirically the relative impact of Shale oil development and the Nigerian Crude oil export. and ii) determine what proportion shale oil accounts for in United States Crude oil imports from Nigerian crude oil exports in the long run

Literature Review

Empirical works aiming at testing the relationship between US shale oil production and crude oil export include the study of

Lemons who analyzed the development in shale oil and its potential impact on OPEC and it member countries. It was concluded that shale oil has the potential to detrimentally alter OPEC market shares particularly in Asia and thus, marginalize the power of OPEC, “oil weapon” [4, 5]. Kilian, [6] examines how the shale oil revolution has shaped the evolution of U.S crude oil and gasoline prices. It discusses the persistent wedge between the global crude oil prices in the past few years and the U.S crude oil prices. It also examined the role shale oil in causing the decline of oil prices in 2014. It explained why the shale oil revolution unlike the shale gas revolution is unlikely to stimulate a boom in oil-intensive manufacturing industries and finally explores the implications of the shale oil revolution for the U.S. economy.

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fracturing fluid, improper handling of waste and the migration of natural gas into water wells. The paper proposes a strategy for regulating water contamination from fracturing. Some rules where adopted for determination of causation by the authors. For issues that are already well understood, they relied on best practices regulations. For issues that are unique to fracturing and are not yet well understood, they relied on liability rules- and specifically, a hybrid of negligence per se, res ipsaloquitar and a regulatory compliance defense-to motivate industry to take precautions, develop risk-reducing innovations and cooperate in the development of best practices regulations. To facilitate more accurate determinations of causation, they recommended information-forcing rules. To ensure that the regulatory regime draws on existing regulatory expertise and is both dynamic and tailored to local conditions, they recommended keeping the regulatory center of gravity in the states, instead of fashioning a new federal regime.

Ikedi and Adewole [9] did a descriptive analysis on the effects of North American Oil and Gas Developments on the Nigerian Economy. The rise in unconventional oil and gas production in North America has changed the dynamics of crude oil trade between Nigeria and the United States of America. Hence, Nigeria which once counted on U.S.A as a major destination for crude exports has been forced to explore other trade destinations.

The discovery and exploration of Shale oil and gas puts Nigeria’s economy at serious risk as Nigeria is currently unable to finance its expenditure as well as accumulate its foreign reserves. Shale has also caused an increase in crude supply in the international market, leading to a decrease in the price of both gas and crude oil, which leads to a sharp decrease in revenue of oil producing nations including Nigeria.

The paper uses descriptive analysis to examine the effect of North American oil and gas on the Nigerian economy. It was seen that developments in the exploration of unconventional oil and gas in U.S.A have had a negative impact on the Nigerian economy. It has resulted in a shift in Nigerian crude oil and gas exports from

North America to Europe and Asia. It has also resulted in a drop in government revenue, employment (especially in the oil and gas industry), and a depreciation of the Naira (Nigeria’s currency). Despite the unpleasant effects of unconventional oil and gas production in North America on the Nigerian economy, it presents an opportunity for policy makers in Nigeria to diversify the economy from its over-reliance on oil and gas, pass credible reforms in the oil and gas industry as well as open the economy to trade in other sectors and with other countries

Obiakor and Ezeonyejiaku, [10] the dependence on OPEC’s crude oil is slipping as the U.S and Canada unlock unconventional oil supplies from deep underground shale deposits with new drilling techniques- the fracking or hydraulic fracturing. The shale boom is on course to make the U.S the world’s largest oil producer by 2012. The Nigerian economy with 80% dependency on crude is going to bear the drastic burden. Demand for the Nigerian oil declining with sizable impact on the economy that solely depends on the mono-product. To contain this impact the Agricultural production remains a vital sector to take the hold. The paper explores the agricultural transformation and its subsequent contribution to the Gross Domestic Product (GDP), as an alternative to developing and sustaining the economy while describing the U.S shale oil boom. Ogunyiola [11] The paper analyzed shale oil development in the United States and its implications for the Nigerian economy. The analyses show that recent shifts in global energy market are characterized firstly by advancement in technology (horizontal drilling and hydraulic fracking) as a result of rising global crude oil price making shale production cheaper to explore and second, increase demand from Asia.

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engineering diversification of the economy from over dependence on oil revenue to reduce macroeconomic instability.

Eravwoke, Alobari and Ukavwe [12] this study examines crude oil export and its impact in a developing country: A case of Nigeria. The ultimate objectives of the study centered on an empirical investigation of crude oil export and it impact on growth of the Nigerian economy.

In order to achieve these objectives, the study used ordinary least squares regression method, Augmented Dickey Fuller unit root, co-integration test and the short run dynamics.

Data was collected mainly from secondary sources, such as central bank of Nigeria bulletin, Bureau of statistics, Journals and Textbook. The unit root text revealed that crude oil export, gross domestic product and investment were stationary at levels but exchange rate of the Nigerian economy became stationary after taking the first difference.

The short run result showed that there is a significant relationship between crude oil exports of the Nigeria economy. The study recommends that caution should be placed on macroeconomic policy to boost manufactured export of other commodities via investment.

Nwadiubu and Onwuka, [13] examined the possible implications of alternative energy on the Nigeria Economy and tactical options open to the country to insulate the economy from a backlash that will result into a world without fossil fuels. It was discovered that in Nigeria Oil accounts for majority of the country’s exports, more than 90 percent, it also contributes 25 percent of the Nation’s Gross Domestic Product (GDP) and 80 percent of the government total revenue. Due to this, any volatility in the price or the quantity of oil usually has grave effects on the economy and the government’s fiscal operations. The greater concern today is the efforts of developed countries as U.S and China to move or sway their economies from oil dependence to other sources of energy. Therefore, the authors recommend that the country should begin to explore natural endowments that have great export

potentials. The country should also re-invest in agriculture very heavily and finally

Nigeria should begin to save more aggressively a large chunk of the earnings from oil exports for the future generation.

Methodology

This study made use of secondary data from the Energy Information Administration and Nigerian National Petroleum Corporation Annual Statistical Bulletin. The model used a time series data that covered Nigerian Crude oil Export, the proportion of shale oil production on US total crude oil import and the proportion of US import of crude oil from Nigeria in US crude oil import in Nigeria which covers the period 2007-2015 (36 quarters). The Vector Error Correction model was used in estimating the parameters in the study.

Model Specification

The general econometrics model that describes the relationship between the variables is specified as:

∆𝑁𝐶𝐸 = 𝛽0+ 𝛽1∆𝑋1 +

𝜇…………...………..………...(1)

∆𝑋1 = 𝛽0+ 𝛽1∆𝑋2 +

𝜇...(2) Where,

X1= US crude oil import from Nigeria US total inport of crude oil

X2=US total inport of crude oilUS shale oil production

NCE= Nigerian crude oil exports β1> 0, β2> 0.

The VECM model specifications of the long run relationship is stated as

∆𝑁𝐶𝐸𝑡 = ∝

+ ∑𝑘 𝛾𝑖

𝑖=1 ∆𝑁𝐶𝐸𝑡−𝑖 + ∑𝑚𝑗=0𝜑𝑗∆𝑋1𝑡−𝑗+

𝛿∆𝑋2𝑡−1+ 𝜇... (3)

Where, 𝛿𝑡−1is the disequilibria term, which captures the adjustment towards the long-run equilibrium.

Data Analysis and Discussion

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Table1: Tabular representation of Descriptive statistics.

∆NCE X2 X2

Mean -0.082652 -0.078213 0.105804

Median 0 -0.036318 0.08169

Maximum 0.739315 0.055841 1

Minimum -2.968217 -0.474283 0

Std. Dev. 0.567157 0.110091 0.164612

Skewness -4.102452 -1.770814 5.055458

Kurtosis 21.83265 6.699656 28.07569

Jarque-Bera 580.2353 36.06704 1005.154

Probability 0 0 0

Sum -2.727501 -2.581032 3.491528

Sum Sq. Dev. 10.29333 0.387841 0.867111

Observations 33 33 33

Source: Authors Computation Using E-Views 9 (2017)

According to the table 4.1 above all the series display a high level of consistency because their mean and median values are within maximum and minimum values of the series. The data for NCE and X1 are negatively skewed meaning that the mean > median > mode while X2 is positively skewed which implies that mean< median < mode.

The standard deviation shows the variability or spread in the data. The kurtosis of all the series of the distribution are greater than 3 meaning it is leptokurtic and it is a peaked curve. Also from the Jarque-Bera probability value all the series are not normally distributed.

Unit root Tests

Table 2: Stationarity Test Results

Variables t-statistics @ 5% difference (prob.) ADF Test at first Equation Specification integration Order of

∆NCE -8.722542 0.000 Intercept I(1)

X1 -6.462633 0.000 Intercept I(1)

X2 -7.783488 0.0000 Intercept I(1)

Source: Authors computation using E-views 9 (2017)

From Augmented Dickey Fuller result above, all the variables are stationary at first difference at 5% significant level. The null hypothesis for ADF is that an

observable time series is non-stationary (i.e. has unit root):

Cointegration Test

Johanson Cointegration Test Table 3: Representation of Johansen result based on trace statistics

Hypothesized Trace 0.05

No. of CE(s) Eigenvalue Statistic Critical Value Prob.**

None * 0.960195 118.0510 29.79707 0.0000

At most 1 * 0.342894 18.11413 15.49471 0.0197

At most 2 * 0.151612 5.096934 3.841466 0.0240

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Johansen Co-integration test based on trace statistics critical value and 0.05 critical value.

Decision Rule

H0 = There is no long-run relationship

between Shale oil production and Nigerian crude oil export

H1 = There is long-run relationship between

Shale oil production and Nigerian crude oil export

The table above represents Johansen co-integration test based on trace statistics and the result denotes there co-integration equations. Based on the rule if the trace statistics critical value is greater than the

0.05 critical value the null hypothesis should be rejected. From the table above, at None, trace statistics is 118.0510 and the 0.05 critical value is 29.79707, this implies that the null hypothesis should be rejected while the alternative hypothesis accepted indicating that there is a long run relationship at None.

In the same way, at At most 1 and 2, trace statistics critical values are 18.11413 and 5.096934 respectively and at 0.05 critical value 15.49471 and 3.841466, which implies that the alternative hypothesis should be accepted indicating again a long-run relationship at At most 1 and 2.

Table 4: Tabular Representation of Johnasen Co-integration test based on Eigenvalue.

Hypothesized Max-Eigen 0.05

No. of CE(s) Eigenvalue Statistic Critical Value Prob.**

None * 0.960195 99.93689 21.13162 0.0001

At most 1 0.342894 13.01719 14.2646 0.078

At most 2 * 0.151612 5.096934 3.841466 0.024

Source: Authors Computation Using E-Views 9 (2017)

Decision Rule

H0= There is no long-run relationship

between Shale oil production and Nigerian crude oil export

H1= There is long-run relationship between

Shale oil production and Nigerian crude oil export

The table above represents Johansen co-integration test based on Max-Eigen statistics and the result denotes one co-integration equations.

At 5% significance level, Johansen co-integration equation based on trace and Max-Eigen value indicate co-integration equation, therefore the null hypothesis is rejected and the alternative hypothesis is accepted. This implies that there is a long run relationship between Shale oil production and Nigerian crude oil export. Vector Error Correction Model

Vector Error Correction Model is carried out after the application of Vector Auto-regressive model (VAR) which is done to integrate the multi-variate time series.

Table 5: Tabular representation of the parameter to determine the short run relationship of the variables.

Error Correction: D(∆NCE) D(X1) D(X2)

CointEq1 -0.629985 0.100656 -0.007658

-0.29122 -0.03794 -0.00645

-2.16330 2.65269 -1.18808

Source: Authors Computation Using E-Views 9 (2017) From the table the coefficient of variable X1

(0.100656) states a positive relationship exists between Nigerian crude oil export and the proportion of US import of crude oil from Nigeria in US crude oil import. This implies

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0.007658) states a negative relationship between the proportion of US shale oil production from Nigeria in US crude oil import. This therefore implies that in the

short run a unit increase in the proportion of US shale oil production from Nigeria in US crude oil import will lead to a 0.76% decrease in Nigerian crude oil export.

Table 6: Tabular representation of the Vector Error Correction Model results in the Long run.

Variable Co-efficient Standard Error T-statistics

∆NCE 1.00000

X1 -3.236338 2.14755 -1.50699

X2 3.677266 6.23855 0.58944

Source: Authors Computation Using E-Views 9 (2017)

The estimated long run model is shown below:

∆NCE= -3.236338X1+3.677266X2 R-squared: 0.40

Adj R-squared: 0.21 F- statistics: 2.114

The long run relationship is shown above. The first number is the coefficients of the variables and this is followed by standard error and t statistics respectively. From the table, contrary to the results of the short run, the coefficient of variable X1 (-3.236338) states a negative relationship exists between Nigerian crude oil export and the proportion of US import of crude oil from Nigeria in US crude oil import.

This implies that in the short run a unit increase in the proportion of US import of crude oil from Nigeria in US crude oil import will result in a 323.6% decrease in Nigerian crude oil export. While the coefficient of variable X2 (3.677266) states a positive relationship between the proportion of US shale oil production from Nigeria in US crude oil import. This therefore implies that in the long run a unit increase in the

proportion of US shale oil production from Nigeria in US crude oil import will lead to a 367.7% increase in Nigerian crude oil export. Conclusions and Recommendations The relationship between shale oil production in US and the Nigerian crude oil export is positive based on our findings. This result is contrary to other authors, news report and other evidences which state that the development of shale oil in the United States is surely a danger to the Nigerian economy. Based on our findings, an increase in the production of shale oil will invariable lead to an increase in Nigerian crude oil export. This can only be true if the prices of crude oil are more attractive to other refiners by reducing production costs resulting in a decrease in oil price.

Since The US is fast becoming oil independent owing to their shale oil development with consequent slow withdrawal from the external OPEC market. The Nigerian government should be more concerned about the development of other sectors such as the agricultural sector, manufacturing sector and mining sector in order to build strong export for international competition.

References

1. Energy Information Administration (2011) Review of

Emerging Resources: US Shale Gas

andShaleOilPlays.Retrieved18August,2016,from:https ://www.eia.gov/analysis/studies/usshalegas/pdf/usshale plays.pdf

2. IndexMundi (2016) Nigeria Crude Oil Exports per

year. Retrieved From

http://www.indexmundi.com/energy/?country=ng& product=oil&graph=exports

3. TradingEconomics(2016)Nigeria,EconomicIndicators;R etrievedfrom:http://www.tradingeconomics.com/nigeria /indicators.

4. OPEC Annual Statistical Bulleting (2016) World crude

oil exports by country.Retrieved

from:http://www.opec.org.

5. Lemons K, Lemons K (2014) The Shale Revolution and OPEC : Potential Economic Implications of Shale Oil for OPEC and Member Countries.The Larrie and Bobbi Weil undergraduate Research Award Documents.Paper 5.

6. Kilian L (2016) the Impact of the Shale Oil Revolution on U.S. Oil and Gasoline Prices. Review of Environmental Economics and Policy,10(2):185–205. 7. Manescu C, Nuno G (2015) Working Paper Series.ECB

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8. Merrill BTW, Schizer DM, Bernstein A, Bradford T, Cinelli A, Davies C,Trice D (2013) The Shale Oil and Gas Revolution, Hydraulic Fracturing, and Water Contamination : A Regulatory Strategy.

9. Ikedi C, Adewole A (2016) Effects of the North American Oil & Gas Developments OnThe Nigerian Economy”.Online Conference Proceedings of the 34th United States Association For Energy Economics (Usaee)/Iaee North American Conference.

10. Obiakor MO, Ezeonyejiaku CD (2014) Shale Oil And Gas Revolution: Why Nigeria Must Transform And Sustain The Agro Economy. Applied Economics and Business Review,1 (4): 99.

11. Ogunyiola AJ (2016) An Analysis of Shale Oil Development and Its Implications for OPEC Exporting Nations : Evidence from Nigeria. Retrieved from https://Doi.Org/10.13140/Rg.2.1.1375.8481

12. Eravwoke KEE, Abolari C, Ukavwe A (2014) Crude Oil Export and Its Impact In Developing Countries : A Case Of Nigeria. Global Educational Research Journal: 2(6):80-92.

13. Nwadiubu A, Io O, Econ SJ, Manag B, Nwadiubu A, Onwuka IO (2014) Alternative Energy Sources – Implication for the Nigerian Economy.Scholars

Journal of Economics, Business and

Figure

Table 3: Representation of Johansen result based on trace statistics

Table 3.

Representation of Johansen result based on trace statistics . View in document p.5
Table 4: Tabular Representation of Johnasen Co-integration test based on Eigenvalue. Hypothesized  Max-Eigen 0.05

Table 4.

Tabular Representation of Johnasen Co integration test based on Eigenvalue Hypothesized Max Eigen 0 05 . View in document p.6
Table 5:  Tabular representation of the parameter to determine the short run relationship of the variables

Table 5.

Tabular representation of the parameter to determine the short run relationship of the variables. View in document p.6
Table 6: Tabular representation of the Vector Error Correction Model results in the Long run

Table 6.

Tabular representation of the Vector Error Correction Model results in the Long run. View in document p.7