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Nigeria’s oil and gas sector is facing one of its most challenging periods in history as moves by international majors (IOCs) to exit the country, historical underinvestment and the renewed push by the environmentalist lobby globally to deny funding for new oil and gas development is posing an existential threat to the sector.
Analysts say while the under-investment theme is consistent with other oil producing nations in both emerging and developed markets, due to oil and gas financing drying up globally and societal pressures towards decarbonisation driving the investment budgets of the majors and E&Ps alike, Nigeria’s situation is exacerbated by, a challenging operating environment, unattractive fiscal terms, limited major project pre-Final Investment Decision (FID) pipeline and IOC divestments.
“The majors are selling much larger assets when financing availability is much more restricted in what is a buyer’s market globally,” said Renaissance Capital analysts led by Nikolas Stefanou, in a note to investors.
“The majors’ exodus from Nigeria, in particular Exxon’s from shallow water and Shell’s (from SPDC) are disrupting upstream activity, with current operators limiting upstream investment as this transition is ongoing and production suffering as a result.”
The two main assets confirmed to be in the market are Shell’s 30% stake in SPDC (about 500kboepd of gross oil and gas production in 2020) and Exxon’s shallow offshore assets (200kbopd of gross production), but other IOCs could potentially have all or some of their assets on the market, including Equinor, TotalEnergies, Eni and Chevron, according to Renaissance Capital.
Nigeria’s average daily oil production in the fourth quarter of 2021 slumped to 1.50 million barrels per day (mbpd), lower than the daily average production of 1.56mbpd recorded in the same quarter of 2020 and lower than the third quarter 2021 production volume of 1.57mbpd.
Real growth of the oil sector was –8.06% (year-on-year) in Q4 2021. Quarter-On-Quarter, the oil sector recorded a growth rate of -24.06% in Q4 2021. Annual growth stood at -8.30%. The Oil sector contributed 5.19% to total real GDP in Q4 2021, down from figures recorded in the corresponding period of 2020 and down compared to the preceding quarter, where it contributed 5.87% and 7.49% respectively.
Nigeria’s onshore oil sector is one of the most challenging operationally in the industry, with issues such as local opposition, oil spills, militant activity, crude evacuation constraints and logistical bottlenecks.
The onshore fiscal terms are also some of the least attractive globally, according to Renaissance Capital, with oil royalty at 20% and Petroleum Profits Tax at 85%.
The Petroleum Industry Bill (now Petroleum Industry Act – PIA) in the making for nearly two decades, resulting in a prolonged fiscally uncertain environment, was only signed into law in August 2021.
“The combination of punitive fiscal terms and fiscal uncertainty deterred investment in both upstream development and exploration, especially in onshore and shallow offshore terrains. The PIA has improved fiscal terms across all terrains, but its implementation is slow and we have not seen yet a positive response from the sector,” Renaissance Capital analysts said.
The limited exploration activity of the past decade has also led to a thin project pipeline, with only a handful of potential new pre-FID oil projects.
Moving on to deepwater, the potential billion-dollar plus price tags for greenfield developments are unaffordable for indigenous companies without material backing from financiers and other partners.
This backing is becoming increasingly hard to come by due to pressure by the global environmentalist lobby.
Some of the majors deepwater projects include Shell’s Bonga fields, TotalEnergies’ Preowei, Eni’s Zabazaba-Etan, Chevron’s Nsiko and Exxon’s Owowo – the development of which has slowed in recent years.
“Mounting environmental pressures on oil and gas production, the fast deployment of renewable energy, the advancement of climate mitigation technologies, and the exponential growth of government green policies, pose considerable risks to the oil industry, especially oil exporting countries.” said Coco Zhang, an energy researcher at Eurasia Group, a political risk consultancy.
Investors are facing pressure from shareholders to stop backing fossil fuel exploration projects, while the European Investment Bank and the UK government, for example, have announced they will no longer finance international fossil fuel projects.
Nigeria, which relies on oil and gas income for 45% of government revenue, just exited its second recession in five years, both triggered by a depression in oil prices. The World Bank estimates that 40% of the country’s population, 83 million people, live below the poverty line.
Deborah Gordon, leader of oil and gas solutions at global energy and climate think tank RMI, says investors are more likely to back oil extraction in wealthier and more politically stable countries if demand starts to fall.
“It is the smaller petrostates that will particularly struggle,” she says. “Countries that are war-torn, or with non-democratic governance, or a lot of corruption, are probably those that will teeter on the brink if we are successful in reducing our consumption of oil.”
The global demand for electric vehicles was recently upgraded by management consultancy Deloitte from 20 million to 30 million a year by 2030.
Greg Muttitt, senior policy adviser at the International Institute for Sustainable Development (IISD) adds : “Countries like Nigeria or Angola, with oil exports providing around half of government revenue, are facing dramatic change. Half the salaries of public sector workers – medical staff, teachers, public transport workers and civil servants – come from oil revenues. It is a difficult and precarious situation.”