HARD AT WORK The balance of ownership is changing with the significant empowerment of local operators
Nigeria’s oil and gas industry is going through significant structural change, owing to production levels not exceeding 2.5-million barrels a day of oil in the past ten years, says strategy and communications consultancy africapractice.
Production levels have, in fact, often dipped below 2.5-million barrels a day, as a result of militancy and oil theft, besides other causes, says africapractice Nigeria MD Tim Newbold.
He adds that, simultaneously, the replenishment of reserves has slowed significantly, with overall reserves now dropping on a yearly basis, owing to a lack of significant investment in exploration activity.
Newbold notes that regulatory and legislative uncertainty has resulted in a “relative stagnation” of investments in Nigeria’s oil and gas industry. He points out that the delay in passing the Petroleum Industry Bill, which is intended to provide a framework for long-term investment through the consolidation of 27 different pieces of relevant legislation under a single Bill, has “little or no prospect” of being passed into law before Nigeria’s Presidential elections in February.
Further, he says, “partially as a result of the lack of legislative clarity, many international oil companies with significant onshore Niger Delta assets have begun a process of divestment, focusing on their deep offshore assets and selling onshore assets to a range of new or established indigenous companies”.
Newbold says further divestment from the country’s oil and gas industry is expected prior to this month’s elections.
“The balance of ownership is changing, with significant empowerment of local operators who are increasingly able to wield the financial clout to be competitive and who now have access to the requisite technical knowledge of partners who can deliver asset development.”
Newbold maintains that, following the completion of onshore asset transfers and the Presidential elections this month, the possibility of legislative reform will improve. “All it takes is for industry to agree on deep offshore fiscal regimes, and for Nigeria’s emerging indigenous sector to invest in oil infrastructure and deliver oil to get back on track and have medium-term visibility of its ambition to produce four-million barrels a day.”
However, Newbold warns that the industry will experience further decline if legislative change does not take place soon and if local companies fail to deliver on their development objectives.
He notes that, while the oil price has dropped from $100/bl to $80/bl in the past three months, the impact on Nigeria’s oil sector has not been significant. He maintains that many of the projects currently in operation will still be commercially viable at significantly lower oil prices.
However, if the prices continue to drop for an extended period after the Presidential elections, investment could be affected, particularly investment in deep offshore projects, which require significant capital expenditure.
“However, Nigeria’s macroeconomic stability is influenced by the oil price, with 2014 Budget calculations done on the basis of oil at $77.5/bl and production at 2.38-million barrels a day. With production lower than expected and the oil price deteriorating, there is significant pressure on the naira, which has started to devalue,” he says.
Meanwhile, Newbold suggests that, while the oil sector in Nigeria is mired by uncertainty, the prospects for new gas projects are improving. “Nigeria’s power-sector reform process, coupled with the privatisation of the generation and distribution companies and the development of investment frameworks for independent power producers, means that demand for domestic gas is at an all-time high and that viable projects are under way.
“However, gas pricing regimes need to be reformed to provide a commercially viable pricing mechanism for investors and to drive significant investment in new gas projects, despite some success to date,” concludes Newbold.