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Outlook 2019: Nigeria's desperate quest to banish oil sector inertia

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Fiscal, militancy challenge ahead of elections

London — Nigeria's oil sector is in urgent need of entangling itself from the web of economic stagnancy, stalled reforms and a risk of rising militancy next year.

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Nigeria's output will get a much needed boost with the startup of the 200,000 b/d Egina oil field which could take production, OPEC dependent, up to a decade high of 2.3 million b/d.

But the country faces uncertainties around a volatile presidential campaign season ahead of its February 2019 elections.

At first glance, oil production was a positive story in 2018. Output recovered to around 2 million b/d as President Muhammadu Buhari and his government found ways to keep the militants quiet through promises of development, money and an amnesty program.

But on closer inspection, the trend is one of oil output stagnation in recent years due to instability in the restive oil-rich Niger Delta and underinvestment in infrastructure.

Buhari's popularity is also on the wane especially in the south of the country where almost all of the oil in produced, analysts remain wary of attacks by militants.

"That early next year is an election period gives cause for concern, that of pockets of violence enough to disrupt operations," an official from an oil major operating in Nigeria said. "Politicians may want to use militants to score political points, so we can expect a couple of shut-ins, vandalization of pipelines and wellheads which can affect production," the official added.

In 2016, Nigeria output slumped to around 30-year lows of 1.1 million b/d due to attacks on its key oil infrastructure and the specter of fresh attacks still haunts the sector. The Nigerian National Petroleum Corp. recently acknowledged that sabotage on its oil pipelines was on the rise.

STALLED REFORMS

Nigeria has been starved of new investments in oil and gas projects and one of the reasons for this has been the inertia caused by the lack of progress of the Petroleum Industry Governance Bill (PIGB).

This PIGB is almost a metaphor for the problems in the industry, with many desperately hoping Buhari will approve the bill quickly after he withheld its assent in August.

"If the President signs the bill before the elections in February, the Nigerian oil outlook in 2019 will be brighter, the current cloud of uncertainty will be removed" Nigeria-based energy analyst Wunmi Iledare said.

"There is already uncertainty in the market, unstable oil prices, Nigeria cannot allow uncertainty in policies further engulf the industry," he added.

Analysts argue that the bill will better regulate upstream agreements, fiscal terms, and production-sharing contracts. The bill also aims to create efficient governing institutions with clear objectives, so as to diminish the powers of the stateowned NNPC.

"You cannot do major reforms on piecemeal policies without the fundamental plank that legislation provides," said Adeola Adenikinju, an oil analyst and professor at the University of Ibadan.

Oil majors including Shell, ExxonMobil, Total and Chevron are all losing patience with the slow progress of reform, particularly as regulatory changes in rival oil provinces such as Mexico prove more appealing.

"All of us have heard of the non- assent of the PIGB. It is important to state that the current state of the Nigerian oil and gas industry will likely remain the way it is for a long time to come unless there are reforms that will make it globally competitive and in line with current global practices," Andrew Ejayeriese, president of the Nigerian Association of Petroleum Engineers (NAPE), the umbrella body of Nigerian professionals involved in upstream activities, said.

LIGHT AND SWEET

Despite the unrest, Nigeria's crude oil, which is light and sweet and of high quality, could face a brighter future.

It is mostly low in sulfur and yields a generous amount of diesel, jet fuel, and gasoline, which are the most profitable products for global refineries.

Light sweet crude could stage a comeback as the International Maritime Organization's low sulfur cap on marine fuels comes into effect in 2020.

Nigeria's oil marketers and oil ministry need to increase the popularity of its crude amid global refiners and push more volumes in to the refining hubs in Asia, which are the heartbeat of oil demand.

Nigeria needs to find innovative ways to attract buyers from countries or regions where crude oil demand is rising--especially China, the world's largest crude oil importer--as exporters of US crude have recently done successfully. Nigeria has taken some steps to do this, but it needs to do more.

-- Eklavya Gupte with Staff Reports in Lagos, newsdesk@spglobal.com

-- Edited by Robert Perkins, newsdesk@spglobal.com