Emmanuel Addeh looks at the major factors likely to shape Nigeria’s oil and gas industry this year
2020 was a tumultuous year for the oil and gas industry. Though characterised by highs and lows, with the disastrous impact of the COVID-19 pandemic, the industry witnessed arguably the most traumatic occurrences in history last year.
It did not just keep many oil and gas-based companies at the risk of folding up, it set so many oil-dependent nations, Nigeria inclusive, on the edge, prompting the loss of revenue by as much as 60 per cent for the country at a point.
If anything, experts predict that 2021, though with a more positive outlook, may follow in the same direction as last year until, the deadly coronavirus is effectively brought under control.
Global oil demand fell by 25 per cent in April when the world began to face the reality of the virus, but it has rebounded sharply since then, cutting its losses to just 8 per cent.
However, looking ahead, 2021 oil demand is expected to recover strongly but remains lower than it was at pre–COVID-19 levels—about 4 per cent lower in the base case, and about 7 per cent lower, according to Rystad Energy’s second-wave scenario.
Added to that, 2020 experienced massive layoffs and heightened cyclicality in employment, with an average layoff of about 14 per cent of permanent employees in 2020. But S&P predicts that 70 per cent of jobs lost during the pandemic may not come back by the end of 2021.
So, what are the key factors that may likely affect the oil and gas industry, which essentially is a global market, controlled by the vicissitudes of actions or inactions of global players and of course acts of God.
Although the market has largely rebounded, the thing for industry right now is not the low crude prices, but the decline in demand for refined products.
Demand has largely fallen because of lockdowns that have led to restriction, for example on flights, land travel and even reduction in manufacturing capacity of many industries.
Some experts predict that by the second quarter of 2021, the industry should be back to $60 a barrel, while natural gas will follow suit as well, but the fact is that how fast the vaccine gets delivered to the countries of the world and taken by their people, will play a huge role in returning normalcy to the market.
Because of the lack of demand for refined products, crude oil refineries are being shut down in parts of the world, thereby reducing demand for Nigeria’s oil. Energy prices will continue to benefit from demand-side optimism as the world continues to embrace the vaccines from Pfizer-BioNTech and other several jabs that have now been approved for use.
OPEC Production Cuts
Nigeria, one of the 14 countries in sub-Saharan Africa producing crude oil, has not been spared the impact of the global decision to reduce oil output. , which accounts for most of its annual foreign exchange earnings.
In April, members of the Organisation of Petroleum Exporting Countries (OPEC), along with its non-OPEC members called OPEC+ agreed on the Declaration of Cooperation (DoC) document which essentially saw the cartel reduce daily supply to stabilise the market.
While Nigeria was targeting 3 million barrels per day at the time and had already exceeded 2 million barrels, the OPEC decision meant that the country had to roll back its progress in terms of its daily production which fell to as low as 1.4 million or thereabout at some point.
While the record production cut is a way of balancing the mismatch between supply and demand in global oil prices due to the coronavirus pandemic, Nigeria has borne part of the brunt, having to shut down some of its oil wells to comply with the OPEC quota.
The situation has been further exacerbated for countries like Nigeria almost solely dependent on crude oil and have largely ignored the World Bank and the IMF advice to oil producing nations to diversify their economies.
The country’s crude and condensate production slumped to around 1.79 million b/d last year from 2.04 million b/d in 2019, according to S&P Global Platts estimates.
This was the lowest output since 2016 when Niger Delta militants repeatedly attacked key oil infrastructure pushing the country’s production to as low as 1.4 million-1.5 million b/d at points that year.
President Muhammadu Buhari recently admitted that the country has been suffering heavily following a sharp drop in output and depressed global oil prices.
“We are being squeezed to produce at 1.5 million b/d against a capacity to produce 2.3 million b/d… now the oil industry is in turmoil,” Buhari said.
Under the latest OPEC+ deal, Nigeria has committed to keeping its crude output at 1.52 million b/d for January, 313,000 b/d below its baseline under the deal of 1.829 million b/d.
Platts Analytics expects Nigerian crude production to grow from 1.4 million b/d in December to over 1.7 million b/d in April, and then holding at around 1.9 million b/d in the second half of the year.
Renewed Focus on Renewables
The oil and gas industry faces opposition and huge threats from a public greatly concerned with the environmental impact of fossil fuels and investors, who are shy of putting their monies in oil and gas.
From hydrogen to solar energy, there’s a real global energy transition, putting the future of oil and gas companies and oil-dependent countries increasingly in question.
Nigeria’s challenge and that of the oil and gas industry in the country, is therefore, to engage and adapt to a changing policy and investment landscape. There is a gradual shift from policies that have supported oil and gas production to policies that instead are starting to disincentivise fossil fuels, while many governments are encouraging the use of substitute technology and fuel, especially renewable energy.
However, the Group Managing Director of the Nigerian National Petroleum Corporation, Mele Kyari, has a different view. According to him, fossil fuel will remain relevant in the global energy mix for decades to come contrary to assumptions in some quarters, even beyond 2040.
Added to that, Kyari believes that Nigeria’s crude oil grades are rich with high global demand.
But despite his optimism, there’s a surging growth for renewable energy, with growth very likely continue into 2021, fuelled in part by last year’s major turning points.
China, one of Nigeria’s biggest customers has now committed to reaching carbon neutrality by 2060, putting the world’s biggest market for solar and wind power on the path to ramp up installations as it begins its next five-year plan.
Although no longer a major consumer of Nigeria’s crude, in the United States, solar energy industries are making a kill with the addition of 19 gigawatts of total solar power, about 15 gigawatts higher than the total that Nigeria has ever wheeled. About 40 per cent of the electricity in the first half of 2020 in the European Union came from renewable sources, compared with 34 per cent from plants burning fossil fuels, according to environmental group, Ember.
Passage of PIB
Many Nigerians and expatriates believe the Petroleum Industry Bill (PIB) which has finally left the President’s desk and is currently at the National Assembly, when passed will be a game changer for the industry. The lawmakers have set between now and June to pass the bill into law.
The PIB is meant to completely overhaul the Nigerian oil industry and provide new fiscal incentives to producers, but it has been in the works for more than a decade. It will lay the framework to commercialise the operations of the NNPC , using the NLNG model and taking off government’s huge influence, thereby enabling external funding.
Furthermore, the bill includes, initiatives to amend oil and gas royalties, aiming to make the sector more attractive to investment, changes to certain key petroleum sector regulatory bodies, environmental and social components and initiatives to promote gas monetisation.
When passed, it is expected to bring together all legal instruments: the Oil Exploration Licence; the Oil Prospecting Licence; and the Oil Mining Lease etc. under one framework.
It will equally allow for clear separation of powers between industry bodies, statutory funding, operational autonomy, senate approval of senior managerial appointments and dismissals, and insulation from political influence as well as assuage the feelings of the people of the Niger Delta, who have felt short-changed by successive governments as well as the oil companies.
If the National Assembly eventually passes the bill and it is finally assented to by President Muhammadu Buhari, the oil and gas industry will experience a new lease of life.
On this, the Minister of State for Petroleum Resources, Mr. Timipre Sylva, adds that it will include low tax provisions to sustain stable investments in the country’s oil sector.
“We are not unmindful that the industry players are of the view that the current level of taxation on onshore and shallow water operations is excessive and therefore the proposed PIB should include a significant lowering of these taxes for new investments and for existing operations.
“As a government, we have identified major constraints that have delayed recent projects from reaching financial close or caused projects to be delayed and/or abandoned altogether. The PIB before Nigeria’s legislative arm that we propose will, I believe, provide this new framework.”
The proposed PIB framework shall be based on core principles of clarity, dynamism, neutrality, open access and fiscal rules of general application, he said.
Relationship with China
The ability of Nigeria to maintain good relations with China will further determine how the oil, gas and indeed the entire energy sector will fare this year as the country remains Nigeria’s biggest customer. China is also funding a number of the gas projects currently going on within the country, mostly through the China-Exim bank. So, literally speaking, when China sneezes, Nigeria catches cold.
On a brighter note, Asia’s oil demand, including India’s, another big consumer of Nigerian crude, continues to look strong. While oil demand in Europe and the United States continues to disappoint, refiners in Asia are racing to procure crude from around the world, giving the oil market some hope that at least in one region, demand is strengthening.
China’s oil binge is expected to extend beyond 2021 although it is reported that the country stockpiled oil this year when prices were cheap, offering an extra bit of demand to the market. It is further estimated that China’s private refiners will stockpile an additional 100 million barrels in 2021, boosting Nigeria’s chances of being able to sell some of its products despite being dumped earlier by Europe and America.
Place of Gas
In 2020, the federal government declared that year as “The Year of Gas”. This year, the government will continue to push for more production and utilisation of its abundant gas resources, with over 200 million TCF already proven.
On steps being taken to boost the gas market in the country, Kyari stated that several projects that are critical to the delivery of gas hitherto delayed are now being completed.
He said: “We have several projects spanning 10 years. Many of them were hugely delayed for various reasons, sometimes for financial constraints that government faces over time, and also sometimes probably out of a sheer lack of will to deliver on those projects, and there are a number of them.
“There’s a major trunk, Nigeria’s gas pipeline spanning all the way from the east, specifically from around Port Harcourt, all the way across the country into Abuja, all the way to Kano.
“Then also, you have another line that links the east to the west, through what we call the Escravos – Lagos pipeline segment, and then the OB – OB 3 pipeline. The connection of these three means that you can take gas from anywhere in the country, and also deliver to the key consumption point.”