Senegal has officially commenced production at its first offshore oil project. This development not only marks a significant milestone for Senegal but also has potential implications for Nigeria’s oil exports.
The Australian group Woodside Energy announced on Tuesday that oil extraction has started at the Sangomar oil fields, a project expected to produce 100,000 barrels of oil per day.
“This is a historic day for Senegal and for Woodside,” stated Meg O’Neill, Woodside Energy’s Chief Executive, in a press release. The vessel extracting the oil is moored about 100 kilometers (60 miles) offshore at the Sangomar oil fields.
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This project is expected to generate billions of dollars in revenue for Senegal and potentially transform its economy.
Shifting The Dynamics in West African Oil Trade
However, initiating oil production in Senegal means that Nigeria has lost one of its crude oil trade partners. Historically, Senegal has relied on imports from Nigeria to meet its energy needs. In 2023, Nigeria’s exports to Senegal were valued at US$904.93 million, with mineral fuels, oils, and distillation products accounting for $846.50 million of that total, according to the United Nations COMTRADE database on international trade. However, with the start of its own oil production, Senegal will increasingly rely on domestically produced oil, reducing its dependence on Nigerian imports.
Analysts note that this development could compound the challenges facing Nigeria’s oil industry, which is already grappling with declining revenues. The decrease in demand from Senegal is expected to add pressure on Nigeria to find alternative markets for its crude oil, amidst an already competitive global oil market.
In April, Bloomberg reported that Nigeria was struggling to find buyers for its crude oil due to a shortfall in demand from Europe. According to four traders specializing in the West African market, cited by the report, about 20 to 25 shipments of Nigerian crude for April loading sought buyers for weeks.
Nigeria’s economy heavily relies on oil exports, and any demand reduction has significant implications. The loss of Senegal as a buyer means reduced export volumes, which directly affects Nigeria’s oil revenue. This comes at a time when Nigeria is facing numerous economic headwinds, including fluctuating oil prices and production shortfalls.
Nigeria’s oil revenue has been on a downward trend, contributing to the nation’s fiscal deficits. In recent years, the country’s oil production has struggled to meet targets due to various operational issues, and global oil prices have been volatile. The Organisation of Petroleum Exporting Countries (OPEC) says Nigeria’s average daily crude oil production dropped to 1.25 million barrels per day (mbpd) in May, falling short of its 1.5mbpd 2024 quota. The current output figure represents a 2.34 percent decline from the 1.28mbpd recorded in April.
However, the government has been making fruitless efforts to boost oil production – aiming at issues such as vandalism, and oil theft, hindering oil output. On May 20, Mele Kyari, group chief executive officer (GCEO) of the Nigerian National Petroleum Company (NNPC) Limited, said Nigeria has the potential to produce two million barrels per day.
In recent years, Nigeria has seen its debt profile balloon, with approximately 96 percent of its revenue going towards servicing this debt. The government has been forced to borrow extensively to cover budget shortfalls, partly due to lower-than-expected oil revenues.
Against the backdrop of the loss of a key market like Senegal, some analysts believe the additional reduction in demand could further strain the already tight fiscal space that has forced the government into borrowing.
Senegal’s new government, under President Bassirou Diomaye Faye, has been keen on reviewing and renegotiating oil and gas contracts with foreign companies to ensure that the country benefits more significantly from its natural resources.
“The exploitation of our natural resources, which according to the constitution belong to the people, will receive particular attention from my government,” Faye declared in his first address to the nation in April.
Prime Minister Ousmane Sonko reaffirmed this commitment, stating, “We will face multinationals… We’re the ones who promised you we’d renegotiate the contracts, and we’re going to do it.”
This proactive approach aims to ensure that a larger share of the profits from oil and gas production remains within Senegal, boosting its economy and improving public welfare.