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It has been an eventful couple of months in Nigeria, with the 2015 general elections assuming a larger than life stature, and practically taking over the daily life of the average citizen and nearly every single moment of his day.
The elections have been headlined by a too-close-to-call presidential election between an incumbent and a formidable challenger; and has in no small measure piqued the interest and attention of the global community – countries, agencies, heads of government and the media.
Along with this international spotlight beamed on the country has also come a certain uneasiness, an uncertainty, and a political air so tensed you could almost slice it with a knife.
As politicians and their avid supporters (plus political jobbers too) hobble and stagger with arrogant swagger unto podiums, screaming into microphones and singing in high-pitched voices the praises of their candidates and casting aspersions on opponents, they occasionally take a break to dance and sway away – even if it is clumsily so – to Shoki moves and the latest cacophony of youth beats in town.
We are entertained, irritated, optimistic and pessimistic all at once. We have all been caught up in the frenzy and our lives have suddenly become frozen. Thanks to ‘Twitter Power,’ news and gossip blogs, complemented by our daily staple of newspapers that bring us up to speed even when we are not on any the ubiquitous campaign grounds. Yes, it’s been a whole big lump of greasy business.
The campaign promises have been so, so impressive. Sometimes mindboggling; sometimes bogus-sounding like, as the Americans would say, a heap of baloney.
Bogus, because while bloated promises are being mouthed on the campaign podiums, scant attention has been given the chief vehicle to fulfilling them and the ultimate tie-breaker: crude oil.
While Nigeria has become one huge political festival ground with all the gladiators and Amazons, oil too is busy with its own global campaign to recover from a sharp slump late last year. Its success or failure at it might just put a lie to all the campaign promises when the chips are down and a new government is inaugurated in May.
Will the politicians still stick by their words when oil prices fail in its own current campaigns and Nigeria’s energy revenues don’t exactly match global crude prices “projections”? Or will they find a ready alibi to shelve some of those promises or cut back on them?
Global oil experts say given the current global scenario and oil politics, crude price is likely to remain below $100 for years to come. The futures market suggests the price will recover slowly to hit about $70 by 2019, while most experts forecast a range of $40-$80 for the next few years. Anything more precise is futile.
According to a Deutsche Bank/IMF report, Nigeria needs oil prices to stabilize at $123 to balance its budget projections. The figure is a far cry from the current world price which dipped below $50 a barrel for the first time since May 2009 after a fairly stable period from 2010 until mid-2014 of around $110 a barrel.
The government was forced to peg this year budget at $45 per barrel after hopes prices might perhaps recover quickly dwindled. Will the Nigerian government – new or old – seize the moment to further diversify the economy and maximise the country’s earning potentials.
Saudi Arabia, and Gulf producers such as the United Arab Emirates and Kuwait have amassed considerable foreign currency reserves, which means that they could run deficits for several years if necessary.
However, Nigeria and other OPEC members such as Iran and Iraq with greater domestic budgetary demands because of their large population sizes in relation to their oil revenues, have less room for manoeuvre. These countries have combined foreign currency reserves of less than $200bn, and are already under pressure from increased US competition.
Nigeria, which is Africa’s biggest oil producer, has seen growth in the rest of its economy but despite this it remains heavily oil-dependent. Energy sales account for up to 80% of all government revenue and more than 90% of the country’s exports.
Crude prices surged again on March 26, jumping $3.72 to $54.55/bbl as Saudi Arabia and its allies launched airstrikes in Yemen to neutralize Iranian-backed Shiite Houthi rebels. But hopes that pockets of global political upheavals like the tension in Yemen would spark the revival of oil prices might just fizzle out as soon as it begins as prices fell more than $1 in the next day as nuclear talks with Iran progressed.
Analysts say predicting the oil price is a bit of a mug’s game as there are simply too many variables involved to make any kind of meaningful, definitive forecast. What we do know is that, despite a recent upturn, the price of oil has slumped almost 50% since last summer following the longest-running decline for 20 years.
With the booming US shale industry showing little signs of slowing, and growing concerns about the strength of the global economy, there are good reasons to suspect that the current slump in the oil price will continue for some time.
This is precisely when OPEC, the cartel of major global oil producers, would normally step in to stabilise prices by cutting production. It has done so many times in the past, so often in fact that the market expects OPEC to intervene.
This time it hasn’t. In a historic move at the end of last year, OPEC said not only that it would not cut production from its 30 million barrels a day (mb/d) quota, but had no intention of doing so even if oil fell to $20 a barrel.
And this was no empty threat. Despite furious opposition from Venezuela, Iran and Algeria, OPEC kingpin Saudi Arabia simply refused to bail out its more vulnerable cohorts – many OPEC members need an oil price of $100 or more to balance their budgets, but with an estimated $900bn in reserves, Saudi can afford to play the waiting game.
OPEC now supplies a little over 30% of the world’s oil, down from almost 50% in the 1970s, partly due to US shale producers flooding the market with almost 4 mb/d from a standing start 10 years ago.
Without OPEC artificially supporting the oil price, and with potentially weaker demand due to sluggish global economic growth, the oil price is likely to remain below $100 for years to come.
-Kelvin Keshi Senior Strategy Manager, Zenera Consulting.
The 2015 global oil outlook for major exporters like Nigeria may appear bleak as prices plummet to below $70/b in June 2014 after a five-year stability at $110/b; but peer further into the horizon and the fortunes for Nigeria and indigenous energy firms in the country are looking promising.
This is just as international oil companies in Nigeria continue to lose their grip on the industry with major divestments expected to hit $11 billion in 2015, and local oil giants are mopping up the opportunities, moving up the ladder and changing the cityscape. The interesting scenario is also opening up new vistas for other small and middle-power Nigerian oil companies.
Some eight years ago, international oil majors – headlined by Shell and Chevron – began a trend that has seen them retreating from their dominance of the Nigerian oil industry. The divestments have increased in subsequent years as they continue to shed their controlling interests, enabling local giants like Oando, Sahara Group and Seplat to expand their stakes in the industry
The new reality is that for a motley of reasons, international energy companies are now disinclined to continue their grip on the oil-rich Niger Delta and giving up the onshore and shallow water fields; just as indigenous firms are filling the emerging vacuum and taking up increased ownership of the oil fields.
The trend is expected to climax in 2015 with several rounds of divestments estimated at about $11 billion worth of oil blocks anticipated to be concluded; thus presenting a significant year for indigenous oil firms to dominate the industry, through acquisition of these relinquished assets.
A recent report by Bloomberg quoted figures made available by the Nigerian National Petroleum Corporation (NNPC) as saying that for more than five decades, Royal Shell Plc, Exxon Mobil Corporation, Chevron Corporation, Total SA and Eni SpA pumped about 97 percent of Nigeria’s oil output. The figure is said to have fallen to 90 percent in 2006 and is set to shrink further to about 60 percent in five years as more International Oil Companies sell off their oil fields.
New Oil Field Landlords
The trends of divestments by international oil majors represent the single most important window of opportunity for indigenous energy giants with the requisite expertise, partnerships and capital – towards becoming global brands with firm footprints in the upstream sector and investments even outside of Nigeria’s shores. At a national level, the change of guard will be instrumental in Nigeria meeting its output target of 3Mbbl/d by 2020.
In June 2014 in the latest asset disposition by IOCs to indigenous players, US-based ConocoPhillips successfully concluded the sale of its Nigerian oil and gas business to Oando Energy Resources, the upstream business of Oando plc, valued at $1.5 billion. The assets purchase was the largest single upstream acquisition done in the country’s industry by an indigenous company last year.
Also last year, local oil and gas firm, Seplat made a stock market debut in Lagos and London in preparation for an IPO and expansion of its capacities to join the ‘Takeover’ fray in what analysts have described as a defining moment for the sector in 2015. This is just as a few deals are currently awaiting ministerial consent which could see big indigenous players control 20 to 25 percent of the nation’s oil fields, up from about 10 percent.
While delivering a keynote address titled: Assets Divestment in Nigerian Oil and Gas Industry: Opportunities and Challenges at the 2014 Offshore Technology Conference (OTC) in Houston, Texas, USA, the Minister of Petroleum Resources, Mrs Diezani Alison-Madueke, represented by the Group Managing Director of the NNPC, Engr. Andrew Yakubu informed that the IOCs are expected to divest over 20 oil blocks with not less than 4 billion barrels of oil equivalent and a monetary value of about $11.5 billion before the end of 2014.
Madueke said the Department of Petroleum Resources is currently compiling a list of all assets that had been neglected by the IOCs to begin a round of bids and make the assets available to local investors. The petroleum minister and current OPEC Chairperson added that the government would continue to draw up policies and laws that build the capacity and capability of indigenous operators in the upstream sector of the industry.
Emerging local brands like Petrolex and Zone 4 Energy have also been busy in the beehive of, albeit, quiet activities in the Nigerian petroleum industry while keeping an eye on the future. These firms are part of a cluster of new ‘heavy weights’ acquiring major assets and forming strategic alliances with OICs and major local firms like Oando, who are inching more towards a preference to play largely in the upstream sector and become international investors in the mould of the retreating Shell, Chevron and Total.
In a statement last October on its planned divestment of some of its downstream assets, CEO of Oando, Abayomi Awobokun stated that the indigenous energy giant has “procured shareholders’ approval… for the partial divestment of our downstream assets,” adding that the move is to “enable the Oando Group unlock value and inject liquidity which would enable us explore the best growth strategy.”
Other major divestment in the last three years, according to a research by Ecobank, include nine onshore and shallow-water oil leases worth 3Mbbl/d; 13 other fields jointly sold by Shell, Total and Eni, with most of them bought by smaller Nigerian companies including Seplat Petroleum Development Co., First Hydrocarbon Ltd. and Neconde Energy Ltd.
In mid-2013, 11 local companies including Seplat, South Atlantic Petroleum Ltd., Seven Energy Ltd., First Hydrocarbon and Sahara Energy Field Ltd. Were shortlisted to buy the Chevron fields on sale; while British Gas sold its Nigerian oil assets and invested the returns in gas production.
Brazil oil giants, Petrobas also notified Nigeria to auction 8 percent stake of its Agbami block and 20 percent of the offshore Akpo project for N795billion; just as Total, the French giant, sold its 20 percent stake in the Usan field in the Niger Delta. Shell also sold its stakes in eight of its onshore interests to local players in November 2012, as it began the process to divest its stakes in four additional onshore oil blocks.
But it isn’t just local players that are boosting their stakes in the oil industry; also taking advantage of the wave of operations scale-down by OICsare a few small foreign firms, like Afren and Chinese state oil company, Sinopec Corp which in November 2013 bought $2. 5 billion-worth Total stakes in an offshore block.
PIB and Other Factors Changing the Cityscape
While offering its entire 40 percent stake in oil fields to a group of 11 local Nigerian companies in 2013, the US spokesperson for Chevron stated that the deal was to “enhance capital efficiency,” and for the buyers “an opportunity to grow their own assets.”
Giving her own explanation why the landscape is changing to welcome new indigenous brand majors, petroleum minister, Allison-Maduekwe informed that the divesting IOCs were not leaving the country but only shifting their focus from onshore to the more challenging frontiers of deep offshore which currently accounts for 60 per cent of Nigeria’s production.
“The IOCs remain very much present in Nigeria. Shell still retains ownership of 34 onshore blocks while Total, ExxonMobil, and Chevron are still committing large amounts of capital to assets offshore Nigeria,” she stated.
Also, in a 2014 research titled: Divestment of Nigerian Oil and Gas Assets by IOCs by Akintola Williams Deloitte, the respected accounting firm stated matter-of-factly that “The rationale for the divestment decision is founded on pure economic and quasi-economic reasons.”
But observers believe these executive analyses are political-speak for industrial-scale oil theft, insecurity, sabotage to infrastructure and spills that have plagued onshore operations of OICs in the oil-rich Niger Delta region of the country, with consequent diminishing output of marginal fields. In contrast, they believe local operators would fare better with some of these challenges especially with regard to security as it is easier for them to communicate and relate with indigenous communities with greater empathy.
But the biggest disincentive to the IOCs may be the current uncertainties surrounding the introduction and operation of unfavourable industry policies and reforms, especially the Petroleum Industry Bill (PIB). This plays out well with regard to government’s long-term interest as public policies have been geared towards ending decades of industry control by foreign majors and increasing the role of local players through reforms like the PIB and the National Content.
The bill itself has dragged on for over five years because of conflicting political and economic interests,
thereby denying Nigeria about $37 billion in private sector investments in the oil and gas industry in the last five years, according to data released by Wood Mackenzie in 2013.
If passed, the law will further incentivise local operators for more active roles in the industry and increase government earnings; but international energy companies say the fiscal terms of the law would make oil exploration, including offshore, unprofitable.
The recent crash in world oil prices may have cast dark clouds on the Nigerian oil industry prospects this year, but there are silver linings, says a new report titled: Nigeria’s renewal: Delivering inclusive growth in Africa’s largest economy by the McKinsey Global Institute (MGI). Oil prices are also expected to bounce back by the end of second quarter of the year.
According to the 124-page report, although the Nigerian economy entered 2015 on precarious economic conditions as a result of falling price of crude oil and consequently falling revenue into the federation account (in addition to other negative economic indices), with the right reforms and investments the country could become one of the world’s leading economies by 2030.
The report states that should Nigeria reach its full potential, the nation’s annual GDP would exceed $1.6 trillion in one and half decade, and the country could be a top-20 economy. This would be a significant leap from the current GDP of $510 billion, which already ranks Nigeria as Africa’s largest economy.
The promising economic forecast is based on a bottom-up analysis of the potential for five major sectors of Nigeria’s economy, viz trade, agriculture, infrastructure, manufacturing and oil and gas.
The document projects that with renewed investments – as is currently ongoing led by big and competent indigenous energy brands – , and the right reforms, production declines of recent years will be reversed and liquids production could increase from an estimated 2.35 million barrels a day, on average, in 2013 to a new high of 3.13 million by 2030.
This will see the sector contributing 108 billion annually to the economy, compared with $73 billion in 2013 and enabling the rise of a new economically-empowered middle class and triggering growth in other sectors.
The biggest beneficiary by sector would be trade which would feed off the anticipated expansion of the consumer class, thereby tripling consumption to almost $1.4 trillion a year in 2030, at an annual increase of about 8 percent.
“This would make trade the largest sector of the economy and provide a particularly good opportunity for makers of packaged foods and fast-moving consumer items such as paper goods; categories that could grow by more than 10 percent a year,” the MGI report forecasted.
Article written by Kelvin Keshi- Senior Strategy Manager, Zenera Consulting.
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