How The Oil And Gas Sector Fared In 2020

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