Connect with us

Oil & Energy

How The Oil And Gas Sector Fared In 2020

Published

on

The oil and gas sector in Nigeria faced massive economic turbulence both globally and locally in the year just gone by, 2020. At the beginning of the year, there were high expectations for the oil and gas sector in Nigeria, and then, the COVID-19 pandemic happened and EndSARS protests followed, leaving in their wake, a rippling effect on the developments in this sector and created a need to scale down initial projections, following the impact of the Covid 19 pandemic, resulting in a  sharp decline in crude oil demand and prices.
Nigeria, an oil-dependent economy, is highly vulnerable to the impact of these external and internal shocks due to the country’s increased dependency on global economies for fiscal revenues, foreign exchange inflows, fiscal deficit funding and capital flows required to sustain the country’s economic activities.
Major factors driving the market were the investments in the upstream and downstream sectors of the oil and gas industry, which provided a significant portion of government revenue and foreign exchange earnings.  Production, however,  had been hampered in Nigeria in the past few years, due to the attack on oil and gas infrastructure by militants. The Covid-19 situation, however dealt a lethal blow to the country’s upstream oil and gas sector, as was evident in the reduction of the budget benchmark price of crude oil.
The resulting decline in crude oil prices had compelled the Government of Nigeria to reconsider the key budget assumptions for the 2020 budget, which was signed into law in January 2020. The budget had assumed an average benchmark crude oil price of US$57 per barrel (/bbl), while in April 2020, the Ministry of Finance and Budget Office revised this price to US$30/bbl1.
However, in recognition of the continued decline of oil prices and the continued effect of the pandemic in the global oil industry, the Minister of Finance, announced a further revision of this budget benchmark price to US$20/bbl, in May 2020.
Nigeria was obligated to accept cuts to planned production volume, as a result of the historic agreement by the Organization of Petroleum Exporting Countries (OPEC) and its allies (OPEC+) to cut crude oil output as part of its efforts to tackle the global oil crisis.
As part of this agreement, Nigeria agreed to cut its production to 1.412mb/d, 1.495mb/d and 1.579mb/d for the respective periods of May-June 2020, July-December 2020 and January 2021-April 2022. However, this does not cover the production of condensate, which is exempted from the OPEC curtailment, and which Nigeria utilizes to shore up its production capacity by about 360,000 to 460,000 barrels per day.
The sector also experienced a decrease in global and local demand for crude oil.
The United States (US) was a major purchaser of Nigerian crude oil, which  contributed about 40% to 50% of Nigeria’s exports. However, over the years, the demand for crude oil from the US declined gradually. This was initially attributable to the boom of Shale oil in the US and then, the COVID-19 pandemic compounded it.
During the first half of the year, the US had slashed its imports to 9.37 million barrels, which was about 11.67 million barrels lower than the country’s purchase in the first five months in 2019.
As the country’s major export destinations battle the pandemic with enforced lockdowns and reduced economic activities, Nigeria had to slash her official selling price for its crude oil, offering discounts of up to $5/bbl in order to remain competitive in the crude oil market.
It was reported also that there were about 15 to 20 million barrels of unsold Nigerian crude in April 2020, which was about 25% of the country’s total obid rounds
The lockdown necessitated by the pandemic was also a depressing factor that militated against global oil activities. The lockdown was enforced by many countries in the world to mitigate the spread of the COVID-19 virus, leading to the closure of airports. This crippled the airline industry and consequently  resulted in the drastic reduction in the demand for jet oil both locally and internationally.
The Oilfield servicing companies were also hit as a result of the COVID-19 pandemic.
Following the significant reduction in exploration activities by oil exploration companies,  due to the collapse of crude oil demand and prices, there was also a reduction in the need for oilfield services and this brought about deferral or outright cancellation of drilling contracts, leading to significant losses for many drilling companies and jobs.
This decline is also evidenced by the country’s rig count, an important business indicator for the services industry, witnessing a rapid decline from a high of 23 rigs in February 2020 to a low of 6 rigs in July, reflecting the reality of the oil servicing subsector.
As at September, 2020, the serving subsector began to pick up by the rise of the rig count to 10 rigs as lockdown restrictions eased off, resumption of international flight operations in many parts of the world and a relatively steady crude oil price.
Foreign direct investment in the Nigerian oil and gas industry was also on a steady decline, in 2020 with the total capital inflow received in Q2 being $6.55 million (compared to $10.09 million received in Q1 2020). This amounts to 0.51% of the total foreign investments into the Nigerian economy received in the second quarter with the highest being from capital importation by shares with 35.88%.
Regrettably, despite the obvious opportunities in the oil and gas sector and the fact that the Nigerian  economy is dependent on this sector, there seems to be hesitation by foreign investors to direct their investments into this sector. While the decline in 2020 could easily be attributed to the global economic challenges due to the  COVID-19 crisis, industry stakeholders have continued to blame the lack of competitive regulatory and fiscal reforms as the reason for declining foreign investments.
It is, therefore, believed that the passage of the Petroleum Industry Bill(PIB) currently with the National Assembly, would herald a turning point for the outlook of foreign investment in the industry.
Oil theft was also one of the major issues that militated against the oil gas sector in Nigeria, which resulted in unprecedented losses to operating companies in the country.
Oil theft  is the illegal appropriation of crude or refined oil products from the pipelines of multinational oil companies.
Oftentimes, it is carried out  by collaborations between security forces, militia organizations, the local population, and oil company employees who use a variety of methods to steal oil from the multinational oil corporations that are stationed within the communities.
Currently, the Nigeria oil and gas sector is driven by five to six top players, accounting for the majority of the share,  including Nigerian National Petroleum Corporation (NNPC), Royal Dutch Shell PLC, Total Exploration and Producing , Chevron Corporation, and Exxon Mobil Corporation.
Due to the lack of federal oversight and a large network of corruption, oil theft is primarily orchestrated by a number of players who use methods to perform oil bunkering and steal thousands of barrels of oil per day from established oil pipelines and also during the transportation of the crude oil product to the oil shipping terminals for export. The Muhammadu Buhari-led  administration in attempt to reduce corruption in the country targeted suspected facilitators of oil theft through the  prosecution of the leader of a local militia group, Mr.  Government Ekpemuopolo for his role in the practice of oil theft in the Niger Delta region, was counter-productive and led to an increase in violence within the country, giving rise to the creation of the Niger Delta Avengers militant organisation. The group proceeded to sabotage multinational oil corporation pipelines.
Additionally, the oil spilled from these sabotage operations and the illegal refinery practices, popularly known as Kpofire, committed by the local population have also led to the severe pollution of the environment.
The year, 2020,for the oil and gas sector was also characterised by numerous pump price increases and reductions
The year opened with a pump price of N145.37, by April, it was reduced to N130.84. It was futher reduced to N129.65 in May, N128.88 in June and increased again to N143.63 in July, N148.78, in August, N161.06,  in September, N145.94 and N163 in December.
Also plaguing the industry’s growth in the year under review, were lack of infrastructure, uncertainties in regulations, poor power supply and security concerns, which led the country to under-utilize its refining capacities, thereby pushing the country to become a net importer of refined petroleum products.
However, Nigeria hopes to alter refined products’ supply dynamics with the the coming on stream of Dangote Refinery, where it has grossly refused to salvage the nation’s ailing four refineries.
The Nigerian Government announced plans to conduct oil licensing rounds in mid-2020 for both offshore and onshore blocks with the objective of achieving its 3.0mb/d output target by 2023. The last oil licensing bid round was held in 2007, about 13 years ago
However, due to the instability of oil prices and collapse in global demand due to the COVID-19 pandemic, the Government announced, on May 5, 2020, that it would not hold oil bidding rounds for the country’s major oilfields until crude oil prices recoverd.
Nonetheless, the Government went ahead to implement its plans to conduct marginal oilfields bidding rounds this year, which President Buhari had earlier approved for the Minister of State for Petroleum Resources to schedule a bid round for marginal fields in the second quarter of 2020.
A total of 56 marginal fields would be up for auction, including 45 fields that have already been earmarked by the Department of Petroleum Resources (DPR) as well as the 11 fields that the DPR recently revoked the operators’ licences, due to non-performance. The Government claims that the marginal oilfields, which were expected to be taken up by indigenous producers, were less impacted by low crude oil prices.
However,  investors could not be assured if the Government would be able to command significant value for these fields, as they may struggle to raise adequate financing to support participation in a bid round in the midst of global economic crisis and looming local economic recession.
As a survival strategy for the oil and gas sector in Nigeria, the Department of Petroleum Resources, DPR recently unveiled a survival and success plan for the industry in the post COVID-19 pandemic period. The agency observed the importance of strategic repositioning and business optimisation in ensuring that the industry comes out of the current market crisis unscathed.
The policy focuses on four key areas, which include:
i. cost control and management with the realignment of cost of production per barrel as well as corporate, business and financial stewardship;
ii. portfolio rationalization and asset optimization using project screening and maturation; and contract renegotiation;
iii. strategic repositioning and business optimization; and
iv. strategic partnership; contracting models; service provider open access; and shared risks and returns.
Also,  gas production has become a major focus for the oil and gas companies, in response to strong investment in gas-to-power projects, across the region, this would help utilise flared gas and grow the sector.
Nigeria’s offshore oil and gas industry undoubtedly experienced expansion , thereby, opening up more market opportunities. The growth of the offshore exploration and production activities was mainly driven by the efforts of governments in their states, such as providing key incentives and supporting policies to unlock the investment opportunity, as well as a growing list of international oil and gas companies interested in exploring alternative fields to replace the maturing offshore producing sites. Here in Rivers State, the the state government established a harmonised tax regime and policies that promote the ease of doing business in Rivers State.
The industry adversely impacted by many issues  and these issues were magnified by the economic crisis resulting from the COVID-19 pandemic.
Hopefully, the fortunes of the industry would improve especially with the on-going marginal field bidding process and the expected passage of the PIB in due course, which by the way has a scheduled public hearing on January 28, 2021. It is important for all the stakeholders to come together and formulate coherent policies and take steps that would help the industry stay afloat, above current challenges of the industry which have grown in leaps and bounds.

 

By: Tonye Nria-Dappa

Continue Reading

Oil & Energy

FG Woos IOCs On Energy Growth

Published

on

The Federal Government has expressed optimism in attracting more investments by International Oil Companies (IOCs) into Nigeria to foster growth and sustainability in the energy sector.
This is as some IOCs, particularly Shell and TotalEnergies, had announced plans to divest some of their assets from the country.
Recall that Shell in January, 2024 had said it would sell the Shell Petroleum Development Company of Nigeria Limited (SPDC) to Renaissance.
According to the Minister of State for Petroleum Resources (Oil), Heineken Lokpobiri, increasing investments by IOCs as well as boosting crude production to enhancing Nigeria’s position as a leading player in the global energy market, are the key objectives of the Government.
Lokpobiri emphasized the Ministry’s willingness to collaborate with State Governments, particularly Bayelsa State, in advancing energy sector transformation efforts.
The Minister, who stressed the importance of cooperation in achieving shared goals said, “we are open to partnerships with Bayelsa State Government for mutual progress”.
In response to Governor Douye Diri’s appeal for Ministry intervention in restoring the Atala Oil Field belonging to Bayelsa State, the Minister assured prompt attention to the matter.
He said, “We will look into the issue promptly and ensure fairness and equity in addressing state concerns”.
Lokpobiri explained that the Bayelsa State Governor, Douyi Diri’s visit reaffirmed the commitment of both the Federal and State Government’s readiness to work together towards a sustainable, inclusive, and prosperous energy future for Nigeria.
While speaking, Governor Diri commended the Minister for his remarkable performance in revitalisng the nation’s energy sector.

Continue Reading

Oil & Energy

Your Investment Is Safe, FG Tells Investors In Gas

Published

on

The Federal Government has assured investors in the nation’s gas sector of the security and safety of their investments.
Minister of State for Petroleum Resources (Gas), Ekperikpe Ekpo,  gave the assurance while hosting top officials of Shanghai Huayi Energy Chemical Company Group of China (HUAYI) and China Road and Bridge Corporation, who are strategic investors in Brass Methanol and Gas Hub Project in Bayelsa State.
The Minister in a statement stressed that Nigeria was open for investments and investors, insisting that present and prospective foreign investors have no need to entertain fear on the safety of their investment.
Describing the Brass project as one critical project of the President Bola Tinubu-led administration, Ekpo said.
“The Federal Government is committed to developing Nigeria’s gas reserves through projects such as the Brass Methanol project, which presents an opportunity for the diversification of Nigeria’s economy.
“It is for this and other reasons that the project has been accorded the significant concessions (or support) that it enjoys from the government.
“Let me, therefore, assure you of the strong commitment of our government to the security and safety of yours and other investments as we have continually done for similar Chinese investments in Nigeria through the years”, he added.
Ekpo further tasked investors and contractors working on the project to double their efforts, saying, “I want to see this project running for the good of Nigeria and its investors”.
Earlier in his speech, Leader of the Chinese delegation, Mr Zheng Bi Jun, said the visit to the country was to carry out feasibility studies for investments in methanol projects.
On his part, the Managing Director of Brass Fertiliser and Petrochemical Ltd, Mr Ben Okoye, expressed optimism in partnering with genuine investors on the project.

Continue Reading

Oil & Energy

Oil Prices Record Second Monthly Gain

Published

on

Crude oil prices recently logged their second monthly gain in a row as OPEC+ extended their supply curb deal until the end of Q2 2024.
The gains have been considerable, with WTI adding about $7 per barrel over the month of February.
Yet a lot of analysts remain bearish about the commodity’s prospects. In fact, they believe that there is enough oil supply globally to keep Brent around $81 this year and WTI at some $76.50, according to a Reuters poll.
Yet, like last year in U.S. shale showed, there is always the possibility of a major surprise.
According to the respondents in that poll, what’s keeping prices tame is, first, the fact that the Red Sea crisis has not yet affected oil shipments in the region, thanks to alternative routes.
The second reason cited by the analysts is OPEC+ spare capacity, which has increased, thanks to the cuts.
“Spare capacity has reached a multi-year high, which will keep overall market sentiment under pressure over the coming months”, senior analyst, Florian Grunberger, told Reuters.
The perception of ample spare capacity is definitely one factor keeping traders and analysts bearish as they assume this capacity would be put into operation as soon as the market needs it. This may well be an incorrect assumption.
Saudi Arabia and OPEC have given multiple signs that they would only release more production if prices are to their liking, and if cuts are getting extended, then current prices are not to OPEC’s liking yet.
There is more, too. The Saudis, which are cutting the most and have the greatest spare capacity at around 3 million barrels daily right now, are acutely aware that the moment they release additional supply, prices will plunge.
Therefore, the chance of Saudi cuts being reversed anytime soon is pretty slim.
Then there is the U.S. oil production factor. Last year, analysts expected modest output additions from the shale patch because the rig count remained consistently lower than what it was during the strongest shale boom years.
That assumption proved wrong as drillers made substantial gains in well productivity that pushed total production to yet another record.
Perhaps a bit oddly, analysts are once again making a bold assumption for this year: that the productivity gains will continue at the same rate this year as well.
The Energy Information Administration disagrees. In its latest Short-Term Energy Outlook, the authority estimated that U.S. oil output had reached a record high of 13.3 million barrels daily that in January fell to 12.6 million bpd due to harsh winter weather.
For the rest of the year, however, the EIA has forecast a production level remaining around the December record, which will only be broken in February 2025.
Oil demand, meanwhile, will be growing. Wood Mackenzie recently predicted 2024 demand growth at 1.9 million barrels daily.
OPEC sees this year’s demand growth at 2.25 million barrels daily. The IEA is, as usual, the most modest in its expectations, seeing 2024 demand for oil grow by 1.2 million bpd.
With OPEC+ keeping a lid on production and U.S. production remaining largely flat on 2023, if the EIA is correct, a tightening of the supply situation is only a matter of time. Indeed, some are predicting that already.
Natural resource-focused investors Goehring and Rozencwajg recently released their latest market outlook, in which they warned that the oil market may already be in a structural deficit, to manifest later this year.
They also noted a change in the methodology that the EIA uses to estimate oil production, which may well have led to a serious overestimation of production growth.
The discrepancy between actual and reported production, Goehring and Rozencwajg said, could be so significant that the EIA may be estimating growth where there’s a production decline.
So, on the one hand, some pretty important assumptions are being made about demand, namely, that it will grow more slowly this year than it did last year.
This assumption is based on another one, by the way, and this is the assumption that EV sales will rise as strongly as they did last year, when they failed to make a dent in oil demand growth, and kill some oil demand.
On the other hand, there is the assumption that U.S. drillers will keep drilling like they did last year. What would motivate such a development is unclear, besides the expectation that Europe will take in even more U.S. crude this year than it already is.
This is a much safer assumption than the one about demand, by the way. And yet, there are indications from the U.S. oil industry that there will be no pumping at will this year. There will be more production discipline.
Predicting oil prices accurately, even over the shortest of periods, is as safe as flipping a coin. With the number of variables at play at any moment, accurate predictions are usually little more than a fluke, especially when perceptions play such an outsized role in price movements.
One thing is for sure, though. There may be surprises this year in oil.

lrina Slav
Slav writes for Oilprice.com.

Continue Reading

Trending