- Total chaos.
- Muffled anger.
- Quiet resignation.
- Repeated shrugs.
- Stifled blaming.
These all represent the mood in the Nigerian oil and gas industry, as it suffers the highest level of shutdown of activities since Oloibiri was discovered. It has never been this bad. It is a CRISIS of seismic proportion and the consequences have already been felt in the exchange rate, inflation numbers, government revenue, and fuel subsidy.
There are five key onshore terminals that have been serving Nigeria in the last 40 years – Forcados, Escravos, Brass, Bonny, and Qua Iboe. Now, only two are operating at the minimum capacity. Three of them with a storage capacity of over 11 million barrels are practically out of service or operating below minimum capacity due to inexplicable accidents and industrial-grade sabotage of the pipeline network that forms the nervous system of the entire industry. Artisanal, illegal refineries, and rumored large-scale bunkers are stabbing the industry to death by a thousand cuts.
This has led many companies to shut down production completely for up to seven months in different parts of the Niger Delta patch. Many of these companies have humongous loans to service. More pointedly, it means that the government and businesses do not have enough forex to meet their needs. There is strong causation and correlation between that relentless slide in the black-market US Dollar/Naira exchange rate.
There is also not enough forex to fund our famous destructive narcotics – fuel subsidy. So, when you read in the dailies that NNPC has not remitted anything to FAAC in months, here is the reason. Not enough oil revenues to pay for our heavily subsidised oil. Recall, that oil has been selling at circa $90 – $100/bbl since Putin’s expedition in Ukraine. Double whammy, as we do not have oil to sell at high prices but have to subsidise petrol at those high prices from the money we do not have. That doesn’t sound fun, right?
If there is no oil production, there is no gas because even if it is non-associated gas, the derivative condensate from gas production must be sent through the pipelines that have been mutilated by these gangsters. There are industrial zones in Nigeria that have not received natural gas in six months, compelling them to source alternative fuels like diesel and compressed natural gas. Easy to see why the inflation numbers have been climbing to the north of the twenties. Running a factory on diesel now is for the brave. And I would attempt to explain why? Russia, which supplies a lot of diesel was shut off the market and due to climate change clamors, about a 1.5Million barrels of refining capacity have been shut down in the last 3 years. It is a cocktail of woes everywhere.
The leadership of the industry has been doing their best, attempting orthodox and unorthodox measures, but there is a broader governance issue that needs to be addressed. The inability to GOVERN every inch of our territory breeds chaos as we have seen in different areas of the country and until the right combination of law enforcement, justice, fairness, economic empowerment, and proper leadership is administered, it is safer to be bearish and take all risk management precautions.
A patient suffering from a terminal illness and a nervous breakdown needs the most special of intensive and therapeutic care. We should be able to find that cure and care. There is no alternative.
Distillers for the Month
1. Rig count
The drilling rig count is widely regarded as the bellwether of any local oil and gas industry, so this review will be covering it. We shall be relying on the Baker Hughes rig count reports, the gold standard in the industry. Covering rig count is important because it is assumed that one oil rig supports about 150 direct jobs and about 500 indirect jobs hence the more the rig count, the more jobs are available for Nigerians.
From the table below, it’s evident that the rig count has been trending up in 2022 compared to 2021 when it dropped to historical lows. This increase in rig count increased despite the shutdown of many oil assets that must have had drilling plans for this year. Ceteris paribus, it should have been more than this.
For proper context, it is however important to compare with other oil patches in Africa. Algeria has about 40 billion barrels of oil equivalent while Nigeria has about 72 billion barrels of oil equivalent. However, Algeria’s rig count as of August 2022 was three (3) times of ours. We surely have room for improvement. It has been
2. Oil Price
Oil prices have been at relatively elevated levels in 2022 mostly due to the invasion of Ukraine by Russia and the consequential sanctions that have hampered the 3rd largest oil and gas producer in the world. In recent months, despite the tight market, the prices have dropped from the high $100s/bbl to about high $80s/bbl, a relief for many economies. Especially those who are not buying at discounted prices like India, China, and Saudi Arabia.
Personally, I attribute the drop in prices to the intervention of the US government by releasing about 200 million barrels from their strategic reserve in the last few months (Biden has elections in November), the strengthening of the US Dollar, the slowdown of the world economies due to galloping inflation, fear of a recession and the cutback on quantitative easing by Central Banks.
All of these meant that prices are a little bearish. Typically, in winter, prices should moderate, so we may witness some more downward trend. Overall, barring any geopolitical challenge (Azerbaijan/Armenia, Saudi, Iran protests, Libya), if the rumored OPEC production cuts do not happen, we may drop to the $70/barrels range in the next few months. If OPEC cuts and SPR releases end as scheduled and China doesn’t release from its SPR, a bullish undercurrent may sustain high prices.
Normally, Nigeria should not be giddy about lower oil prices but with our current dilemma with production shutdowns, at least it helps ameliorate the subsidy burden.
3. National Energy Transition Plan
Nigeria launched its Energy Transition Plan (ETP) in September and it was an impressive work that seemed to have considered the local peculiarities in its design. The net-zero target by the year 2060, up from the year 2050 presented at COP 26 reflects a nuanced and realistic approach. Five (5) thematic sectors are the focus of the ETP – Power, Cooking, Oil and Gas, Industry, and Transport, all of which contribute the most to our carbon footprint.
Although our carbon footprint is minuscule compared to the world’s emissions. All the same, we must have an energy transition plan because it is basically religion for many of the developed countries, particularly in Europe. Despite the current pain and risk of subservience to Russia, they are still focused on their emission targets no matter how unrealistic they seem to be.
Nigeria must prepare for an inexorable rise in anti-fossil fuel sentiments once the Russian invasion ends and the ETP is a good step. The ETP seems to recognise that without the core public service agencies (Ministries, Departments, and Agencies) owning this plan, it would end up catching dust on the shelves and I hope that concern is addressed. Furthermore, the ETP like many initiatives in the Energy sector seems to suffer an orphan syndrome because the country does not have a wholesome, robust energy policy. A documented energy policy provides a coherent and clear strategy for the development of the energy sector and energy mix.
The last Energy policy developed for Nigeria was an ungazetted version developed in 2002 when Liyel Imoke was Minister of Power. That is some time ago. With an energy policy, legislative measures like the Petroleum Industry Act, Climate Bill, Energy Transition Plan, and Rural Electrification Plan will be subsidiary elements that all fit into a well-designed puzzle. The Energy policy would help galvanize the nation’s plans, and efforts and would typically be updated at defined intervals, maybe every five (5) years. There may be no alternative.
4. Leviathan in the Atlantic: The Nigeria-Morocco Gas Pipeline and Trans Saharan Gas Pipeline
A key Memorandum of Understanding (MOU) was signed between Nigeria and Morocco for the construction of a gas pipeline that will facilitate gas supply from Nigeria to Morocco. The Nigeria-Morocco gas pipeline project (NMGP) is planned to be a 48 Inch X 5,300 Km starting from Brass Island-Nigeria to Dakhla-Morocco and a 56” X 1,700 Km (onshore from Dakhla-Morocco to MEP), with a total length of about over 7,000 Km and about thirteen Compressor Stations. It is arguably the most ambitious energy project of any kind in Africa in recent memory. It is comparable to projects like the Suez Canal, Inga dam, and Mambilla dam in scale, cost, and complexity. For context, it will become the 2nd longest gas pipeline in the world, right after the humongous East-West gas pipeline in China, an 8700km pipeline that serves about 70 cities across China. It will be longer than the Yamal -Europe pipeline (4200km) and the now popular Nord Stream pipelines which are less than 1500km.
The pipeline is at the MOU stage, so details of cost and another engineering/commercial elements have not been made public but Morocco is keen for many reasons and the stars seem aligned for the consideration of the project. The earlier international pipeline, the Trans Saharan Gas Pipeline (TSGP ) was meant to run through Niger and Algeria than to Europe. The ongoing Ajaokuta-Kaduna-Kano (AKK) was meant to be part of the intra-Nigeria leg from where it then feeds into the TSGP. That project may have to take a second fiddle role to the Nigeria-Morocco pipeline now. An MOU for TSGP was signed as far back as 2002 but not a needle has moved because as press reports in North Africa indicate, the Algerians are not keen on any competition to their gas supply to Europe. They want to be Russia to the South of Europe. Moreover, the security situation in Niger and southern Algeria has made construction almost impossible and even if completed, it will be susceptible to sabotage by the terrorists that have a foothold in that axis.
For Morocco, it is a strategic advantage to have this supply from Nigeria as an alternative to their dependence on an increasingly adversarial Algeria. Algeria has stopped supplying gas to Morocco since October 2021 after a diplomatic spat, forcing the Moroccans to ‘ímport’ gas from Spain and buy LNG. Morocco seems to have leveraged its carefully nurtured relationship with Nigeria and ECOWAS. They supply phosphates on friendly terms to Nigeria as part of a fertilizer deal and they currently have a pending application to formally join ECOWAS having been on the courtside for some years.
Ignoring geopolitics, the commercial and engineering fundamentals of the Trans–Morocco gas pipeline (TMGP) are quite challenged. The Trans Sahara Gas Pipeline (TSGP) would have crossed just two (2) countries, but the NMGP would pass through the territorial waters of ten (10) countries. Interestingly, the project would also start from Brass, Nigeria, and not a continuation of the WAGP even though understandably, the limited capacity of WAGP could be a huge constraint. WAGP is twenty (20) inches while NMGP is expected to be 48 inches. The pipeline passing through ten (10) States could prove to be a challenge as there has to be a treaty between all of them to provide a sound legal basis for the project. TSGP would just have required a treaty between three (3) States, NMGP will involve eleven (11) States. Also, it will be important for Morocco to ensure that these countries will not require transit fees for transportation as that will erode the economics of the project.
Furthermore, the NMGP project does not have enough offtake points along its routes, an element that typically makes gas pipelines more profitable. A peer pipeline like the East and West pipeline in China has about 70 cities feeding off it. With the NMGP, there are only ten (10) countries and most are very small economies. All the States along the pipeline route combined have a GDP less than Nigeria at about $330 billion. More importantly, the two biggest of the ECOWAS economies apart from Nigeria, Ghana, and Ivory Coast ($145 billion GDP) have established secure gas supply sources for their economies. Ghana has domestic supplies that are planned to increase while Ivory Coast has the Foxtrot field and in the future, the Baleine field will start supply.
It is in all parties’ interests that the opportunities are maximised while being creative with the challenges.
Shell is building a new energy portfolio in West Africa and has been playing in the space with All-On, their VC-esque entity. This time they have undertaken a pure M & A with the acquisition of Daystar Power, a solar-focused company with extensive clientele among many Fast Moving Consumer Goods (FMCG) companies in Nigeria. As energy transition intensifies, it is likely that similar M & As will become common. This is important for new energy companies as they now have another exit option for their businesses.
6. Shell changes Global Head
Shell Global has announced Wael Sawan as their new CEO. Worthy of note is that Wael was in charge of upstream when Shell decided to exit many of its onshore fields. Will we see an acceleration of divestments when he becomes CEO? Time will tell.
This is our first installment of a detailed oil and gas newsletter written exclusively for Nairametrics. To get this once every month in your inbox, subscribe to the industry newsletter. Make sure to check this newsletter out of your spam box.
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