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Commodities 2022: Divestment, not reform, to dominate Nigeria's oil sector

Highlights

Time running out for Nigeria's upstream: analysts

Implementation of Petroleum Industry Act critical

Pumping barely close to two-thirds of total capacity

2022 poses to be a very challenging year for Nigeria. Africa's largest oil producer faces a race against time to implement reforms needed to bolster exploration and check declining oil production as it fights a wave of divestments from international oil companies.

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The signing into law of the long-delayed energy legislation called the Petroleum Industry Act, previously known as the Petroleum Industry Bill, in August this year is not expected to bring the much-needed succor to the oil sector. Rather, Nigeria is likely to contend with a gale of divestments by major oil companies to reduce operating, security challenges and the huge costs of battling with the pandemic, industry officials and analysts told S&P Global Platts.

The landmark PIA was signed into law Aug. 16 and was expected to turn the state oil company Nigerian National Petroleum Corp. to a private company within six months in order to make it easier for the struggling company to raise funds for oil exploration and production. But impact of this bill has so far been barely felt.

Divestment dilemma

The PIA could be hugely beneficial, but government officials have lacked professionalism in putting it into place, Abiodun Adesanya, the CEO of Lagos-based oil consultancy Degeconek, told S&P Global Platts.

"The fact is that this Petroleum Industry Act is coming a little too late as it has been delayed for too long," Adesanya said. "Those who were rightly placed to pioneer the implementation are not the people in government now."

"So, I expect to see more divestment by oil majors from selected assets because things are not working as they should be."

Many oil majors are starting to divest legacy oil and gas assets in Africa as they target net-zero carbon emissions while hanging onto their most efficient and often largest oil projects.

Nigeria could be the worst hit as Shell, Chevron, and ExxonMobil are close to selling their onshore assets in the West African country.

Nigeria is under pressure to implement the PIA as soon as possible, according to Mike Sangster, managing director of TotalEnergies in Nigeria.

"The window for investments into fossil fuels is narrowing," he said at a recent industry event. "Very few years would remain for access to urgent funds to develop the Nigerian petroleum industry."

Production setbacks

This all comes at a time when Nigerian is struggling to produce at even two-thirds of its total capabilities.

Nigeria has the capacity to pump around 2.2 million b/d of crude and condensate, but in 2021 output has been languishing near 1.55 million b/d due to a slew of operational and technical issues.

The Nigerian government is aiming to attract much-needed investment to bolster oil exploration and production and increase reserves and output to 40 billion barrels and 3 million b/d, respectively, by the mid-2020s, but these targets are starting to look unattainable.

The pandemic and the acceleration of the energy transition away from fossils fuels does not bode well for Nigeria, which is desperate to kickstart its exploration and production programs.

Projects like Shell's Bonga Southwest/Aparo, TotalEnergies' Preowei and Exxon's Bosi are all at risk of never being developed. These fields have the potential to add a total of around 400,000 b/d to Nigerian oil production.

"Investment decisions are billed to be taken on these landmark projects around next year to arrest Nigeria's sagging oil production volumes," an official from the Nigerian Upstream Petroleum Regulatory Commission told S&P Global Platts. "But there are dark clouds hovering around sanctioning these projects now due to the emergence of the new COVID-19 variant."

Ongoing field and pipeline issues, fiscal stress and insecurity in the Niger Delta are likely to continue to threaten the growth outlook for Nigerian oil output, according to S&P Global Platts Analytics.

Bonny Light, Escravos and Forcados have all faced production issues in 2021, while the output of other key grades, such as Qua Iboe, Brass River, Agbami, Akpo, and Egina, has also remained consistently low this year.

Nigerian oil supply will grow to 1.7 million b/d by April 2022, down from levels of 1.9 million b/d in April 2020, Platts Analytics said in its recent forecast.

Gasoline subsidies

How Nigeria's government will navigate its policy of ending gasoline subsidies from July 2022 remains another stern test for the African oil producer.

Nigeria imports almost all the gasoline it consumes locally, estimated at 1.25 million mt/month, due to the poor performance of the four state-owned refineries. The government's subsidy is the difference between the landing cost of gasoline and the regulated pump price.

The removal of these costly subsidies is domestically viewed as unpopular and politically sensitive, with opposition parties and labor groups urging the government to reverse decision.

The Nigerian Labor Congress, the umbrella body for Nigerian workers, has said it will reject the government's bid to increase fuel prices. "The impact of price hike will be would affect be felt by all Nigerians, motorists, households, transporters, who are already contending with stagnated wages."