Nigeria squanders Western hunt for new energy sources as oil sector buckles

In late August, Mele Kyari, head of state-owned Nigerian National Petroleum Corp, gathered local representatives from the world's oil majors to encourage them to remain invested in Africa's biggest crude producer, amid a wave of divestments.

Rather than summoning the executives to the imposing NNPC towers in Abuja, Kyari instead travelled to Lagos for the meeting, in a sign of the state's weakening hand, sources told S&P Global Commodity Insights.

It did not stop the latest domino from falling on Sept. 4, when Italian oil giant Eni agreed to sell its onshore assets to local producer Oando, triggering a letter of objection from NNPC.

The chain of events symbolizes the poor health of Nigeria's oil sector, blighted by falling production, theft, under-investment, technical problems at fast-maturing fields, regulatory confusion, political in-fighting and minimal exploration activity.

With Africa's largest gas reserves, highest crude production and significant diplomatic clout, Nigeria stood to benefit when Russia's invasion of Ukraine prompted a European scramble for alternative energy suppliers. But 18 months on, despite major reforms by new president Bola Tinubu, it appears to have missed the boat.

"We do not believe that Nigeria is Europe's solution to the hydrocarbon shortage or a replacement for Russia," said Pieter Scribante, Nigeria analyst at Oxford Economics Africa. "The chronic under-investment, corruption, theft and infrastructure failures will take years to reverse, with limited short-term remedies available."

Production pain

Oil accounts for much of Nigeria's foreign exchange reserves and government revenue, but the OPEC member is producing well below capacity.

In April, crude production excluding condensates dipped below regional rival Angola to just 1 million b/d, reminiscent of a torrid 2022 characterized by a string of force majeures. By last month production had risen to 1.41 million b/d, according to official data, still well below its 1.742 million b/d OPEC quota. Traditionally a significant player at oil's top table, Nigeria has seen its influence wane in the Saudi-Russia led OPEC+ alliance.

An NNPC memo seen by S&P Global predicts that Nigerian oil production will rise to 1.81 million b/d by December -- driven by new production in the OML 30 block and Egbema field -- and 2.04 million b/d by 2026.

However, forecasts from S&P Global show output remaining below 1.5 million b/d through 2040.

NNPC functionaries say reducing crude theft will spur a production increase, while Kyari has praised Tinubu for having "re-engineered the security approach." However, Nigeria continues to lose an estimated 400,000 b/d of crude to thieves, with allegations of involvement by members of the military and officialdom.

Meanwhile, sources, speaking on condition of anonymity, said a pro-northern bias had taken root within NNPC under former president Muhammadu Buhari, leading to spending in northern regions, such as the Chad basin, at the expense of southern deep-water reserves. Majority-Muslim northern Nigeria was Buhari's electoral stronghold.

With the sector in bad shape, Shell, ExxonMobil, Eni, Chinese oil firms and others have begun selling onshore assets, although majors are retaining offshore and LNG assets. Eni is not the only one to face hurdles: Exxon's proposed sale to Seplat has faced court challenges.

Meanwhile, incoming investment has been muted. Between 2018 and 2021, only 11% of the $87 billion plunged into African oil and gas went to Nigeria, according to S&P Global, despite 37.1 billion barrels of proven reserves, according to the US Energy Information Administration. Some would-be investors have been spooked by vague fiscal terms and the possibility of retroactive changes to existing contracts, despite the new Petroleum Industry Act.

"The hydrocarbon sector is in dire need of new investments, infrastructure upgrades and support," said Scribante. "Systemic issues in the industry...should continue suppressing oil production."

Landmark reforms

Tinubu has upended Nigeria's economic orthodoxy since taking office in May, floating the naira, simplifying foreign exchange policy, and scrapping a longstanding $10 billion/year fuel subsidy that created a booming West African illicit fuel market.

Since then, fuel consumption has fallen from 67 million l/d to 46 million l/d, according to presidential advisor Ajuri Ngelale, although analysts put the fall closer to 50%. While the financial markets have praised Tinubu, skyrocketing gasoline prices have led to nationwide strike threats.

Aside from a rapid increase in oil output, economic woes look set to endure. "The 2023 budget assumes oil production of 1.69 million b/d and a GDP growth rate of 3.75%. We consider these budget targets as ambitious, increasing the risk of a budget overrun during the year," S&P Global analysts wrote in a recent note.

Meanwhile, mega-projects, including gas pipelines to Morocco and Algeria, have stalled due to financing issues and regional tensions and the game-changing $20 billion, 650,000 b/d Dangote refinery has been plagued by cost overruns and delays. Few expect the project to come online before late 2024 or early 2025, with key issues, including crude supply arrangements, still to be ironed out.

European demand

Production problems and divestments could hardly have come at a worse time, with Russia's invasion of Ukraine sending oil prices near $130/b in March 2022 and leading Western countries to shun Russian hydrocarbons.

Yet Nigerian crude exports to Europe fell following the invasion, from 642,900 b/d in 2021 to 607,200 b/d in 2022, according to S&P Global Commodities at Sea. Meanwhile, Indian refiners -- once a major destination for Nigeria's light, sweet crude -- have opted instead for Russia's bargain price Urals barrels.

"As Nigeria's exports have edged lower, volumes to Europe have also softened in recent years, averaging 610,000 b/d so far in 2023, down from a recent peak of 860,000 b/d in 2019," said Rebeka Foley, an oil analyst at S&P Global. "This has occurred amid shifts in Europe's crude slate due to the loss of Russian crude on the European market."

"EU sanctions against imports of Russian crude began Dec-22, leading volumes from Russia to Europe to collapse," Foley added. "Norway's Johan Sverdrup, a medium sour, has been a partial replacement for Russia's Urals, while crude imports from the US have also been on the rise."