While oil exports contribute more than 90% of Nigeria's foreign exchange revenues, it is not clear that the allocation of more oil to export than to domestic utilization has been optimal. The country increased its refining capacity from 160 Mbpd in 1979 to 445 Mbpd in 1989, while in the same decade, oil exports as a percentage of production increased rapidly from 76% to 89%. By 2009, 99% of Nigeria's production went to export at the expense of domestic refining capacity utilization, which plummeted to 7% with the consequence that >80% of domestic consumption of refined petroleum products was imported. This paper examines the end-use of Nigeria's oil production. It proposes a framework within which the crude oil produced in Nigeria can be optimally delivered to maximize net income. A mathematical model for optimal allocation of crude oil, based on a transshipment framework, is espoused and applied to maximize net income, subjects to certain plausible constraints. The constraints identified total domestic refining capacity, offshore refining capacity, upstream oil production, and domestic refined petroleum product demand. The results indicate that the optimal product import&swapped/demand ratio ought to have ranged from 78% (2010) to 100% (2016) instead of the actual 76% (2010) to 87% (2016). Additionally, the optimum import&swapped/demand ratio could have resulted in more product imports than the actual in 2015, 2016 and 2017. However, the model results suggest that from 2018 to 2020, actual petroleum product imports have been consistent with the optimized import&swapped/demand ratio.

This paper reviews oil (and gas) supply forecasting models and subsequently espouses atypical modeling approaches for the optimal allocation of crude oil production. This paper becomes imperative within the context of the global energy transition and the future of the oil and gas industry in Africa in general and Nigeria, in particular. A categorization framework has been utilized to classify oil supply forecasting models based on regional focus, modelling techniques, and outcomes. The log – log functional form is adopted in this paper to forecast oil production in Nigeria and subsequently optimize its allocation. A review of literature indicates that oil (and gas) supply forecasting has a long history and in recent times, there has been the tendency to rely on models that integrate engineering with economics. The models used to project oil and gas production to meet climate goals have now inputted environmental targets. This review of oil production forecast models is carried out against the backdrop of the need to optimally allocate Nigeria's future oil production to diverse uses. This will have impact on expected oil export earnings, domestic fuels’ imports, and the potential for petroleum products’ export earnings.

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.

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