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
BUA Group, A’Ibom Sign MoU For Refinery’s Access Road
Bua Group has signed a memorandum of understanding, (MoU), with Akwa Ibom State Government, and the host communities in Ibeno Local Government Area, for the construction of access road to the proposed Bua Refinery and Petrochemical plant site in Ibeno, last week.
Akwa Ibom State Commissioner for Power and Petroleum Development, Dr. John Etim, who presided over the signing of the MoU, applauded BUA for their commitment to the project, prompt documentation and the preparation of the site towards the construction of the refinery.
Etim said that the refinery project will bridge the gap between host communities and Akwa Ibom State, thereby bringing about more developments in the oil and gas sector of the State.
The Commissioner called on all parties concerned to be committed to the terms of agreement and to ensure that peace dominates their relationship, while appealing to the host communities to protect the facilities which is now in their custody
“The refinery and petrochemical project is in line with the Governor’s vision to industrialise the State, develop local capacity in key industries where value can be added and raw materials sourced locally.”
Speaking shortly after the MoU signing, the Chairman of Ibeno local government, Williams Mkpa, expressed delight over the development, describing it as a giant stride in the industrialisation vision of the Akwa Ibom State Government.
The paramount ruler of the area, Owong Effiong Archianga, assured the company of his people’s unalloyed support and cooperation to see to the actualisation of the project.
CSO Urges Oil Communities To Challenge PIA In Court
A Civil Society Organisation, Policy Alert, has faulted President Muhammadu Buhari’s signing of the Petroleum Industry Act 2021, urging communities to test the provisions of the Act before the courts.
President Buhari had signed the erstwhile Petroleum Industry Bill, PIB, into law last Monday amidst protests from community groups and many other stakeholders that the Bill do not adequately cover the rights and interests of the host communities.
In a statement signed by its Communications and Stakeholders Engagement Officer, Mrs. Nneka Luke-Ndumere, Policy Alert, which is working for economic and ecological justice, described the presidential assent to the PIB as “grossly insensitive and problematic.
“It is sad that the bill has been assented to in the most controversial manner despite its many obvious flaws and its rejection by many stakeholders,” the statement read.
It added: “For example, the controversial provision for a direct payment of 30 percent profit oil and profit gas to the Frontier Exploration Fund potentially shortchanges the oil producing states and local governments of some of its thirteen percent derivation as it bypasses the requirement in section 162 (2) of the 1999 Constitution (as amended) which provides that all revenues be channeled through the federation account.
“This is most unfair, viewed against the ceding of only three percent of previous years’ operating expenses to the Host Communities Development Trust Fund and the punitive provision to charge costs of any damage to facilities against the community’s Fund, among other obnoxious provisions.
“That Mr. President has gone ahead to give assent to these vexing provisions only reinforces the politics of exclusion and expropriation that has for long characterised the relationship between the Nigerian state and the oil producing communities.
“We are also concerned that the host communities’ component of the legislation flies in the face of one of its stated objectives to address tensions between host communities and companies as it has all the ingredients for escalating rather than abating such conflicts.
“At a time when fossil fuel investments are being deprioritised elsewhere as a result of the global energy transition, it is unfortunate that this Act failed to provide a bridge between the current era of fossil fuel dependency and the low-carbon energy future that Nigeria aspires to within the framework of government’s much vaunted commitments under the Paris Agreement.”
The statement also said: “Granted, the new legal framework introduces some predictability and clarity to the governance and fiscal arrangements in the oil and gas industry. We are also not oblivious to certain clauses that respond to some of our earlier demands, such as those providing that the Board of Trustees of the Host Communities Development Trust will now be determined in consultation with the host communities, with membership drawn from community members. But that is just as far as it goes.
“As a tool for improved benefit sharing to host communities, the Act falls flat on its face. It actually ridicules the exertions of the host communities and advocacy groups that have clamoured over the years for a law that yields some space for participation, direct socio-economic benefits and environmental remediation for oil-rich communities.
“The theatre of action will now have to move to the communities and the courts of law. As implementation of the Act gets underway over the next 12 months, we urge host communities and civil society groups to begin to seek interpretation of some of its more controversial provisions before the courts.”
Kyari Tasks Greenfield Refinery On Fuel Importation
The Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Mallam Mele Kyari, has charged members of the Board of the NNPC Greenfield Refinery Limited (NGRL), to explore all available options to bring an end to the current challenge of petroleum products importation.
Mallam Kyari gave the charge Thursday while inaugurating the Board of the newly incorporated subsidiary of the Corporation, NNPC Greenfield Refinery Limited (NGRL), at the NNPC Towers, Abuja.
The NNPC Greenfield Refinery Limited is a subsidiary of the Corporation set up in December 2020 with a mandate to oversee the establishment and operation of new refineries.
The GMD, who is also the Chairman of the NGRL Board, challenged members of the Board to focus on profitability in order to remain afloat and avoid liquidation.
“As a business, this is a big opportunity for us and this company’s balance sheet must change positively. Going forward, with the Petroleum Industry Act (PIA), I can tell you that if you continue to post negative for three years, you are out. So, there is really no excuse”, Mallam Kyari stated.
He urged the Board and Management Team of the new company to set up a proper structure with the required skills, technology and financing to drive the company’s operations, adding that he was optimistic that the company would be able to achieve its mandate.
“Our company must grow and we can’t do well except we are able to process our production whether it is the liquid or gas. If we don’t monetise it then we have done nothing. This is really a new chapter and we are committed to making it work,” he said.
The NNPC helmsman stated that all the Corporation’s initiatives in the areas of new refineries, condensate refineries and equity acquisition in credible private refineries were geared towards ensuring energy security for the country.
In his remarks, the Alternate Chairman of the Board and Group Executive Director, Refinery and Petrochemicals, Engr. Mustapha Yakubu, declared that the operations of the company would be guided by the principles of cost effectiveness in line with the new Petroleum Industry Act (PIA), noting that profitability would be the key focus.
Speaking in similar vein, the Group General Manager, Greenfield Refineries and Project Division (GRPD) and Managing Director of the NGRL, Engr. Bege Talson, disclosed that the Division was working with third party investors to establish greenfield, modular and condensate refineries with a combined capacity of 250,000barrels per stream day (bpsd).
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