Optimal Allocation of Future Oil Production under Uncertainty: Lessons from Nigeria for Emerging Oil Producing Countries

Abstract

Under the uncertainties presented by future upstream oil production, increasing domestic demand for petroleum products, volatile energy prices, a build-out of domestic refining capacity, and a global energy transition underway, this paper seeks an optimal allocation of Nigeria's projected oil production under scenarios representing possible versions of the future. Using the Reference Energy System developed by Gbakon et al. (2021) for crude oil utilization through a network of possible end-uses, the framework is tested under different scenarios. Furthermore, the framework is coupled to a Monte Carlo formulation of the problem, which allows greater flexibility in addressing questions of the likelihood of attaining desirable policy outcomes such as petroleum product self-sufficiency. Within this solution structure, a family of curves is generated, which represents the spread of outcomes. Scenario analysis, for example, shows that under 'Energy Transition' scenario, oil export ratio declines from 43% in 2025 to 6% in 2040. Whereas, under the 'Business-as-Usual' scenario, the oil export ratio declines from 37% in 2025 to 0% in 2034, with clear consequences for foreign exchange earnings. While under the ‘Stated Policy' scenario oil export ratio declines from 60% in 2025 to 54% in 2040. Implications for net system benefits and the respective drivers are further interrogated.