Nigeria’s oil and gas sector seems to be looking bright with more oil fields being considered for offering in 2021, even as fiscal policy direction will further spur the needed activities spearheaded by oil majors. CHIKA IZUORA writes.
Nigeria’s oil and gas industry appear to be expanding, albeit not so fast opening more market opportunities.
Growth in the industry is largely driven by government efforts, but many challenges have been identified to have hindered expansion.
Of course, lack of infrastructure, uncertainties in regulation and security concerns have led to Nigeria to underutilise its refining capacity turning the country into net importer of refined products.
But by 2021, hope is in the horizon as government is on the edge of altering refined products, supply dynamics with the help of upcoming private refineries and would become regional refining hub.
Again, given Nigeria’s huge gas reserves and its advantages as a clean fuel, gas has already witnessed massive surge in domestic consumption.
The coming year is predicated to witness massive gas production and utilisation as the country is moving away from oil and exploring different ways to replace the oil consumption with gas in power and in transportation sector.
The shift to gas is supported by the fact that major oil reserves are likely to dry up in coming decades.
Hence the oil market is considered to be one of the most vulnerable markets where natural gas has the highest potential to penetrate.
Essentially, gas production has become a major focus for oil and gas companies in response to strong investment in gas to power projects.
Undoubtedly all of the politics and strategy involved in oil prices will continue to affect Nigeria.
The new cuts now set Nigeria’s daily production to an average of 1.4 million barrels per day; 300,000 barrels less than the 1.7 million barrels in the adjusted 2020 budget, signalling leaner days ahead.
Already, Nigeria is stuck with unwanted cargoes of crude oil and liquefied natural gas (LNG), as coronavirus takes its toll on the country’s biggest buyers.
Though, coronavirus will leave the stage, but a larger threat to the oil industry awaits.
The use of renewables is rising fast and is gradually eating away the demand for oil. Soon the game will change and Nigeria should keep its eyes open. With new innovations, old industries die. Nigeria desperately needs to build an economy that is resilient to the volatility of oil and gas markets.
NEW OIL FIELDS FOR OFFER
The Nigerian National Petroleum Corporation(NNPC) has said, the federal government would conduct a new oilfield licensing rounds next year, after the country delayed earlier exercise due to COVID-19 that led to crash in oil prices.
Group managing director of the corporation, Mele Kyari told an online chat hosted by the Society of Petroleum Engineers International that the current price rebound should enable “some kind of licensing” next year, which he said could include ultra deepwater fields.
Nigeria, this year, launched its first marginal oifield licensing round in roughly two decades, fields it said were likely to be developed by local companies and were less reliant on limited international funding.
Some of those have been awarded, but the government has yet to announce a full list of winners.
While Nigeria’s oil output is limited by a supply cut deal between the Organization of the Petroleum Exporting Countries and other producing nations, led by Russia, Kyari said that by 2022 demand will recover and there will be a need for more output.
He repeated the government’s ambitious target of 3 million barrels per day (bpd) of oil production by 2023.
President Muhammadu Buhari seems to be responding to the reality on ground as he announced on October 8 in his 2021 budget proposal to the National Assembly of a lower output target and expected oil price benchmark for 2021, as the country braces for reduced revenues from its key industry.
Buhari said that following the crash in global oil prices earlier in 2020 as the coronavirus pandemic spread around the world, the Nigerian economy which is already projected to contract in the third quarter could fall into its second recession in four years.
ACHIEVING FISCAL POLICY REGIME
President Buhari used the budget presentation to urge lawmakers to pass the landmark oil reform legislation, the Petroleum Industry Bill (PIB), into law to stimulate much needed investment in the Nigerian oil industry.
“The enactment of this Bill will boost confidence and attract further investments into our oil and gas sector, as well as increase revenues,” the president said.
Buhari on September 29 submitted to parliament the reworked draft of the PIB for consideration by lawmakers.
The Bill provides that the NNPC be replaced with a new limited liability company to be named Nigerian National Petroleum Company Limited; the creation of an upstream regulatory commission; and the establishment of a midstream and downstream regulatory authority.
The NNPC currently manages the Nigerian government’s interest in joint ventures with foreign partners including Shell, ExxonMobil, Chevron, Eni and Total. They account for 90 per cent of Nigeria’s over 1.8 million b/d oil output.
The introduction of the programme in 2009 helped rein in militant activity that caused extensive damage to Nigeria’s oil infrastructure between 2006 and 2009 and expected to help support growth in 2021.
ADDRESSING THE PIB
Since 2008, there has been an effort in Nigeria to introduce a new Petroleum Industry Bill (PIB) to replace the existing collection of 16 laws and regulations. The Joint PIB was submitted in March 2020 and updated in September 2020, and the Federal Government of Nigeria (FGN) and the National Assembly (NASS) aim to pass the bill in the first quarter of 2021.
The PIB covers 4 key areas: Governance, Administration, Host Communities, and Fiscals.
The oil & gas industry (Industry) is the main pillar of Nigeria’s economy. The Industry contributed 65% of all revenues for the Government of Nigeria and 88% of Nigeria’s foreign exchange as of 2018. Several enabled projects created job opportunities for over 600,000 Nigerians in the last decade, improving the conditions of many people. The Industry has shaped Nigeria into the largest oil producer in Africa and the 5th largest LNG producer in the world.
The desire is that the Nigerian oil and gas industry grows, however, growth requires capital and capital goes where it is competitive and investor confidence resides.
2020 and the COVID-19 pandemic demonstrated this impact where commodity pricing for oil & gas will remain lower for longer due to global supply and demand competition. Over the past several years, a shrinking oil & gas demand is now being further exacerbated by a larger pool of supply made possible through the technology boom.
Analysts believe that the right PIB will provide an opportunity to position Nigeria to attract capital by addressing two principles. The first is keeping total government take (i.e. tax, royalty, and NNPC’s share of deep-water profit oil) at globally-competitive rates; and the second is reducing the cost-of-doing-business in Nigeria.
However, industry watchers maintain that the current 2020 draft PIB does not improve the investment environment for new project FIDs to be taken. As it is currently, Government take on Nigeria’s pre-final investment decision Joint Venture (JV) oil projects is among the highest in the world. Also according to analysts, the PIB terms for Deepwater could lead to Nigeria foregoing over 30% of its production potential in 2030.
Moreover, multiple issues along the gas value chain need to be addressed to maximize gas potential (e.gs. competitive gas terms, resolution of gas investment/revenue currency-mismatch, free market prices, infrastructure availability, adherence to contractual obligations, among others).
While analysts posit that the PIB does present several strengths which the Government should be commended for, they argue that as proposed, the bill does not improve Nigeria’s global competitiveness nor improve investor confidence.
Industry players recommended that the PIB should preserve base businesses, earned benefits, and contractual rights; %; ensure legislation which drives down Nigeria’s high cost premium, enable gas development by deregulating pricing, and simplify the tax system and administration to ensure clarity, and include a dispute resolution mechanism.