Nigeria’s potential as a major oil-producing country may be overrated as smaller countries hitherto unheard of have since overtaken Nigeria as the most sought-after in the fast paced global oil market, no thanks to some controversial policies by successive governments. Ibrahim Apekhade Yusuf in this report examines the issues
TIME was when Nigeria was regarded as the most sought-after beautiful bride by many suitors as it commanded a lot of attention within the global oil market. Big names like the USA, Germany, Russia, to mention just a few, literally danced attendance upon Nigeria as they couldn’t resist the allure of the “sweet oil” as Nigeria’s crude oil is so described as a result of it been largely free of sulfur.
But not anymore. Today, Nigeria’s oil fortune, to say the least, is fast ebbing, albeit diminishing at such an unprecedented pace worrisome enough to threaten the country’s economic health.
Tales of woes
Nigeria is on the verge of losing most of its major oil customers, one of which is India, the world’s third-largest oil importer has found a new market in cheap crude oil supplies from Iraq according to a Reuters report.
India oil imports from Iraq increased to a record high for the first time as it bought about 1.32 million barrels per day, bpd, of Iraqi oil in August. This was 29 per cent higher than its August imports in 2018.
Its crude oil imports from Nigeria, Angola, Cameroon and Chad which are known for its sweet crude also dropped significantly in August by 18.3 per cent which amounts to 764,500 barrels of crude oil drop as its prices rose.
India became Nigeria’s biggest export destination for its crude oil from 2013 after the US made a shift in crude oil demand by turning its attention to shale production.
Statistics from the Observatory of Economic Complexity (OEC), an international trade database tool that visualises data about countries and the products they exchange, showed that from 2008 to 2018, Nigeria earned $96 billion from crude oil exports to India.
However, this oil trade partnership between Nigeria and India is likely to be threatened with Iraq’s cheap oil type called Basra heavy crude which is sold to India at a lower premium price compared to the grade’s official selling price, OSP, through tenders.
This puts Nigeria’s oil sale in a precarious state which depends on proceeds from crude oil that constitutes about 90 per cent of the country’s total revenue the shift of its biggest oil partner due to the proximity of Iraqi’s crude to India and its cheap prices.
“In the spot market, Saudi and the UAE (United Arab Emirates) barrels are not available while Iraqi oil was easily available in spot markets at attractive prices, prompting refiners to maximize purchases of Iraqi oil,” according to a Reuters report.
The Organisation of Petroleum Exporting Countries, OPEC, and its allies have agreed to cut production by 1.2 million barrels per day through to the end of the first quarter of 2020, but U.S. sanctions on Iran and Venezuela have decreased crude oil supplies.
This action has enabled Iraq, OPEC’s number six oil producer, to gain its crude oil market share in India.
Currently, Iraq’s crude oil output is at 4.8 million, bpd, above OPEC’s target of 4.5 million, bpd, while Saudi Arabia has been producing below the targets to attacks on its oil installations.
Indian refiners are set to maximise production of very low-sulphur fuel oil (VLSFO) to supply ships from 2020 in compliance to Jan. 1, 2019 deadline by the International Maritime Organization, IMO, to ban ships from using fuel with more than 0.5 per cent sulphur to reduce air pollution.
“Some complex Indian refiners like Reliance can even produce very low-sulphur fuel oil with high-sulphur oil like Basra Heavy,” a Reuters report states.
Speaking in an interview recently, Chief Christopher Porbeni, Managing Director of Pinax Nigeria Limited, a petroleum trading company in Lagos, observed that it was hard to find buyers for Nigerian due to increased production levels from the United States of America, who had overtaken Saudi Arabia as the world’s largest crude oil producer doing 10.26 million barrels per day in February.
“Part of the problem is that while the US used to be Nigeria’s top crude oil destination, recent developments have seen the country drop to seventh place with 369,000 bpd exports as at February 18, 2018. It is also important to point out that India, currently the biggest buyer of Nigerian crude has also started buying crude from the US as it looks to diversify its sources of the commodity,” he added.
Reports have it that the US is flooding Europe with a record amount of crude. In April, US supplies to Europe reached an all-time high of roughly 550,000 bpd (around 2.2 million tonnes), according to the Thomson Reuters Eikon trade flows monitor.
Trade sources said US flows to Europe would keep rising, with US barrels increasingly finding homes in foreign refineries, often at the expense of oil from OPEC or Russia.
According to reports, Nigerian Qua Iboe was offered at premiums of between $1.50 and $1.75 a barrel to dated Brent, broadly unchanged.
Even though global demand is healthy, generous global supply is prompting China, the world’s largest importer of crude oil, to become increasingly choosy; and this poses a dangerous scenario as China happens to be the fourth largest buyer of Nigerian crude after India, US and Canada.
New entrants take over Nigeria
The OPECs’ smallest member awarded nine oil and gas blocks in November and last week granted Exxon Mobil a six-month extension to assess the potential of a further two fields. Noble Energy Inc., Trident Energy Ltd. and Kosmos Energy Ltd. all made offshore discoveries in 2019 and will do more appraisals next year.
Equatorial Guinea forecasts investments of at least $1.4 billion in its hydrocarbon sector next year through the development of oil projects and an increase in exploration.
“We expect 2020 to be the biggest year of investment in Equatorial Guinea’s hydrocarbons industry in years,” Minister of Mines and Hydrocarbons Gabriel Obiang said in a statement on the website of the Johannesburg-based African Energy Chamber.
New investments in the sector will help Equatorial Guinea’s economic recovery from the collapse of oil prices in 2014. Despite its vast resources and boasting one of the highest rates of gross domestic product per capita in Africa, Equatorial Guinea has some of the continent’s worst social indicators as President Teodoro Obiang Nguema Mbasogo enters his fifth decade in office.
In search of a game changer
After years of indecisiveness, on Monday, 4 November 2019, President Muhammadu Buhari, assented to the Deep Offshore and Inland Basin Production Sharing Contract (Amendment) Act, 2019 (“the Amendment Act”) following its passage by the National Assembly in October 2019.
DOIBPSCA defines the PSC as “any agreement or arrangements made between the Corporation or the holder and any other petroleum exploration and production company or companies for the purpose of exploration and production of oil in the Deep Offshore and Inland Basin.”
This means that there could be PSCs executed solely between oil companies without the NNPC’s involvement. The mandatory review every year should, therefore, not apply to such PSCs; though it is more likely that government will exercise its back-in right in such mining leases in the event of a significant commercial discovery.
Besides, the Amendment Act introduces a fine of at least ₦500 million for non-compliance with any obligation imposed by the provision of the Act, or imprisonment for a period not less than five years, or both, upon conviction by a competent court of law. While these penalties will apply to the Act in general, they seem to have been introduced to compel the Minister of Petroleum Resources and the NNPC to initiate a review of the PSC every eight years, as stipulated in Section 16(A) of the Amendment Act.
The amendment is in line with the provisions of Section 16 of the Deep Offshore and Inland Basin Production Sharing Contracts Act, Cap D3, Laws of the Federation of Nigeria, 2004 (DOIBPSCA or “the Act”) which requires the Federal Government of Nigeria to review the provisions of the Act when the price of crude oil exceeds $20 per barrel in real terms, or within a fixed number of years (15 years from commencement of the Act and five years thereafter.
The new royalty regime specifies a baseline royalty of 10% for crude oil and condensates produced in the deep offshore (greater than 200 meter water depth) and 7.5% for the Frontier and Inland Basin. In addition to the baseline royalty, a royalty based on the applicable price of crude oil, condensate and natural gas will apply, but only when the price exceeds $20 per barrel 1.
The level of impact the new royalty regime would have on total Government take and total Contractor take under existing Production Sharing Contracts (PSCs) will depend on the current royalty rate applicable to the contract area, the applicable price and the volume of crude oil/condensate produced.
As the Presidency stated, the amended Bill will generate an estimated $500m in additional revenues for the Federal Government in 2020, and over $1bn yearly after 2021. With the new law, the Federal Government hopes to place national interests above the interests of the International Oil Companies (OIC) to maximise their profits while exporting those profits beyond the shores of Nigeria.
However, Wole Obayomi, an analyst with KPMG in his cost benefit analysis of the PSC said, the general perception is that the key objective of the Amendment Act is to maximise government take from PSCs in the face of changing prices of oil and gas but a lot may still not bode well for the sector.
Flipside of DOIBPSCA
Industry analysts are of the opinion that investment in the deep offshore may be adversely affected based on the current decline in the flow of investment into the country and the oil industry in particular. As at last October, there were only 26 active rigs in Nigeria. Out of these rigs, only one deep water rig is currently carrying on work over activities, while three other rigs that are in between locations or in pre-drill mode.
Based on the Supreme Court judgement mandated the federal government to increase its share of revenue and recover all lost revenue under the PSCs. In the view of analysts, the way and manner the government implements this judgement will determine, to a very large extent, its ability to achieve its vision of 40 billion barrels of crude oil reserves.
Buhari, during the 2020 budget presentation to the National Assembly noted that amendment of DOIBPSCA is one of the priorities of the Federal Government of Nigeria, as it has the capacity to generate additional revenue of at least $500 million to $1 billion which will aid the government in achieving the proposed 2020 budgeted revenue and over $1 billion from 2021.
Giving fresh insights on the poor prospect of Nigeria’s oil wealth, Nick Branson and Ed Hobey-Hamsher, in a joint article titled, ‘The diverging fortunes of Africa’s crude kings’ published in Petroleum Economist recently, observed that profound differences in governance style will impact the speed and development of future energy projects across Angola and Nigeria.
According to the duo, successive years without final investment decisions (FIDs) left sub-Saharan Africa’s top two oil producers confronting maturing fields and declining production. “In Nigeria, president Muhammadu Buhari has done little to rekindle investment since assuming office in 2015operators now face another three years of his slow-moving administration. By contrast, Angola’s head of state, Joao Lourenco, was quick to enlist the support of oil majors after assuming power in September 2017. The countries’ trajectories will continue to diverge in 2020 as Lourenco’s reforms reap rewards and Buhari continues to dither.”
Expatiating, the duo noted that in marked contrast to the shake-up in Angola, President Buhari has actively blocked regulatory reform in Nigeria. Investors were left disillusioned when they learned in August 2018 that he had secretly vetoed the Petroleum Industry Governance Bill (PIGB) a month earlier but neglected to consult parliament or investors.
There is little prospect of new laws such as those which facilitated Angola’s gas bonanza. Instead, Nigeria’s president and parliament are intent on imposing stricter fiscal terms. A new uniform 10pc royalty was signed into law in November 2019, eliminating the more favourable rates enjoyed by deepwater operators. An additional price-based royalty will see IOCs pay a further 2.5pc when oil prices are low, rising to 4pc when crude exceeds $60/bl. The revised terms are set to render deepwater projects uncompetitive by increasing breakeven costs.
Only five new deepwater licences have been awarded in Nigeria in the last decade. In contrast, Angola launched the first of six annual licensing rounds in October 2019. Investment opportunities in the Kwanza and Namibe basins will enable Angola to attract new entrants, hot on the heels of Maurel & Prom, now backed by Indonesia’s Pertamina, which entered in 2018.
Oil Producers Trade Section (OPTS) a private industry group under the umbrella of the Lagos Chamber of Commerce and Industry (LCCI), said in the long term, investors would not invest in the deepwater projects.
To the oil majors, the five-year cycle for review of PSCs contradicts the principle of contract sanctity, adding that the amendment during the contracts’ effective period will add significant uncertainty to investment decision and reduce investor confidence and delay or stop additional investment.
They noted that between 2014 and 2018 alone, they paid $1.3 billion as Education Tax and $1.1 billion as NDDC levy.
To the Principal/Executive Director, Kaptepia Capital, Tosan Omatsola, the Federal Government needs to increase its investments in major upstream oil projects. He noted that the Federal Government loses over $1.5 billion yearly to the delay in taking final investment decisions (FIDs) on major oil projects that can produce 875,000 barrels of oil per day (bpd).
To the Executive Secretary, Nigeria Extractive Industries Transparency Initiative (NEIT), Waziri Adio, the Deep Offshore Act Amendment is perhaps the greatest boost to the drive to increase public revenue. President Buhari must be saluted for his principled stance. It is a victory for the Buhari Presidency, for the Ninth National Assembly and Nigeria.
Also, Chairman of Petroleum Technology Association of Nigeria (PETAN), Mr Bank-Anthony Okoroafor, said with the Act, all Product Sharing Contracts (PSC), would attract royalty based on a combination of water depth and oil price.
“Before this Act, we had zero royalties from Agbami, Akpo, Bonga and Erha, our biggest producers,” he said.
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