Oil Market

Nigeria’s 2021 Oil Market Playbook: Eyeballing Opportunities and Mitigating Threats

Global oil market playbooks are changing as countries look out for their interests in the glacial movement of oil prices and the market’s recent choppiness. India, for example, recently announced its decision to diversify its oil import markets as it angles towards lower average energy prices.

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The gambit sees the country looking to extend imports beyond its traditional trade partners of the United States of America (USA) and Guyana.  

The India market shift, analysts note, could set the tone for more aggressive supply chain competition amongst non-traditional suppliers of oil to India who would find the country a fine game for offering ‘sweeteners’ to take a piece of the Asian oil and gas market. How would the tactic pan out for prospective suppliers? the possible outcomes are mixed depending on the existing relationships between India and the new supplier and the type of oil produced in the prospective country of supply. For example, Indian industries prefer heavier oil to the lighter oil brands that come from countries such as Nigeria and Angola. This would mean that African countries would not be the first choices in India’s oil supply diversification plans.

Preferred countries for the Indian foray into new supply markets for heavy crude would be Iran and Venezuela, but the ongoing political tiffs between both countries and the USA would make these options very difficult choices.

Many non-oil-producing countries depend on OPEC and its allies, a group called OPECplus, to supply oil for their domestic consumptions. To strengthen oil price, OPECplus extended its production cuts to April 2021 with little exception to Russia and Kazakhstan. But as OPECplus uses the production cut to tighten the oil market, oil importers are seeing domestic growth chopped at the knees by the rising cost of oil imports.

The Local Cost of An Oil Squeeze

Analysts note that domestic inflation in oil-importing countries has started to rise above policymaker’s expectations and could lead to unexpected monetary tightening which in turn would raise domestic interest rates and clobber gross domestic product (GDP) growth.

Against this development, oil importers have started to look for strategies that would improve possible economic outcomes such as diversify their import sources to generate more supplier competition to contain a supplier price squeeze.

The Indian economy was adversely affected by the coronavirus pandemic as it recorded the highest number of coronavirus cases in the Asian continent. To curtail the spread of the virus the Indian economy enforced strict lockdown which adversely affected the economy. Although the Indian economy is out of recession as its GDP grew by +0.4% in Q4 2020, it recorded a pandemic induced recession in Q3 2020 as its GDP contracted by -7.3%

Fuel consumption has become an integral part of the Indian economy, therefore, activities in the international oil market affect the Indian economy. Also, recent reforms of the fuel taxation and subsidy system in India have meant that consumers would increasingly be susceptible to changes in the international oil market. Although India’s inflation rate eased to a 16-month low of 4.06% in January 2021 mainly on account of the softening of food and vegetable prices, the rise in crude oil prices and their transmission into retail fuel prices have posed a concern for the government’s economic recovery effort and the mandate by the Indian government to the Reserve Bank of India (RBI) to keep inflation within an average rate of 4% and a margin rate of 2% on either side of the average


Gas deals

Corporate oil, gas deals in Nigeria fall to lowest in 5yrs

The scale of corporate deals between privately held businesses and their investors in Nigeria’s oil and gas sector is at the lowest ebb in five years, as transactions hit a low of $123 billion in 2020, a sharp decline compared to a record high of $301 billion recorded in 2018.

READ ALSO: Why investors flock to Ikoyi, V.I despite challenges…

This is troubling because oil and gas sector deals such as mergers, acquisitions, asset sales, debt financing, among others, drive investments, improve infrastructure, technical expertise, and grow the economy, thus improving living standards.

According to data from IHS Markit, a London–based energy information resource, Nigeria recorded 82 oil and gas deals last year worth $123 billion, a 69 percent decrease compared to 138 deals valued at $208 billion in 2019.

The data also show that 2018 was Nigeria’s best performing year in the last six years with a total deal volume of 183 deals valued at $301 billion. This is lower when compared to $182 billion, $201 billion, and $196 billion recorded in 2017, 2016, and 2015, respectively.

A further breakdown of 2020 data reveals that the upstream sector accounted for about 45 percent of all deals recorded followed by the midstream sector with 26 percent, while the downstream sector and oil field service accounted for 24 percent and 5 percent, respectively.

Although investors in Nigeria’s energy sector are not immune to the economic effect of coronavirus and the impact of lower oil prices, which made acquisition financing much harder last year compared to previous years, however, experts say their fortunes are made worse by a regressive fiscal regime and increasing risk profile.

“Price volatility, tough fiscal regime, rough business environment, and lack of capacity are some of the biggest challenges facing Nigeria’s oil and gas deals in 2020,” Joe Nwakwue, chairman, Society of Petroleum Engineers (SPE) said.

In 2019 deals, IHS Markit showed the upstream sector was also responsible for the lion share of about 52 percent of total deals followed closely by the midstream sector accounting for about 40 percent, while oil field service and downstream sector account for the remaining share of 4 percent each.

“Nigeria needs to put the right fiscal regime that will make projects more valuable in the midstream and downstream sector which would attract the right kind investment,” Nwakwue said.

Elias & Co, a business law firm with specialty in mergers and acquisitions, said transactions in the energy sector had been less busy lately compared to six years ago.

“It is far from being inactive,” analysts at Elias & Co said in a note.

Mergers and acquisitions in Nigeria’s oil and gas sector have slowed in recent years after an initial surge two years ago when some indigenous players, buoyed by the Federal Government’s initiatives, took advantage of some divestment opportunities by international oil companies operating in the country.


Oil Spillage

Oil spillage is still a thing in the Niger Delta

Just last week, we reported on the resurfacing of Niger Delta freedom fighters stating the injustices their region grapple with and how they have been marginalised, not to mention the failure of the amnesty program.

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It was an opportunity – and still is – for the present administration to reacquaint themselves with the deteriorating conditions of Niger Delta communities, ranging from lack of infrastructure, loss of livelihoods, or absence of social services, arising from crude oil exploitation largely caused by the activities of international oil companies.

This is well-documented.

At this point, the Niger Delta should be prioritised in the context of ecological reparations, which simply means fully giving land, financial and material compensations to indigenes after years of environmental toxicity and destruction.

But this can’t be actualised when the politicians still appear oblivious of what’s happening, or are only just finding out and would most likely do nothing. As in the case of Eti-Osa Federal Constituency, Lagos Representative, Ibrahim Babajide Obanikoro, who in a recent tweet went to the South south and saw for himself an incident of oil spillage committed by international oil companies.

While Obanikoro’s experience further legitimises the situation in the Niger Delta, his show of empathy will surely not improve the living conditions of the people who can no longer fish in creeks or rivers, or use lands.

Only a sincere policy drive from the government can make the difference. The oil spillage in the Niger Delta often occur during extraction and for those who reside in waterfront settlements, because of how cheap or accessible shelter are there, they are faced with this kind of environmental pollution.

Ecological reparations as a pillar of environmental justice means channeling resources to restore the integrity of rivers.

As it is, Niger Delta freedom fighters are agitating against the continued exclusion from benefitting from their region’s natural resource. And it’s time the government listened.


Gas Tanks

How a gas company raised $650m facility…

The feat would have been remarkable on any given day. But amidst the threat of a raging virus that has shuttered national economies, it was even more remarkable.

READ ALSO: World Bank: Nigeria’s road to economic recovery

How a new company, ANOH Gas Processing Company (AGPC), secured financing during a pandemic – by sufficiently derisking the project through a solid governance structure and smart strategy – provides lessons for how to acquire debt.

In November 2020, Seplat, Nigeria’s leading indigenous oil company, announced that it secured financing for the construction of the $700m ANOH gas plant facility sited at Asaa, Ohaji/Egbema in Imo State.

READ ALSO: Nigeria’s local gas opens investment opportunities

ANOH Gas Processing Company (AGPC) is an incorporated joint venture owned 50:50 by Seplat Petroleum Development Company and the Nigerian Gas Company, a wholly-owned subsidiary of Nigerian National Petroleum Corporation (NNPC).

This facility was obtained primarily from Nigerian commercial banks who ruing their decision to lend to the oil sector.

“This means that there’s a lot of hope for financing gas and gas-related activities,” said Mele Kyari, NNPC GMD.

We distill lessons from this transaction for investors who are embarking on similar projects.

Clarify your strategy

From the very beginning the company articulated a clear funding strategy. This usually entails developing a practical, working plan that specifies how you are going to raise money and the resources that it would deploy.

But it should not be just in your head. Seplat began communicating this plan over four years hinting the market that it would raise money through debt and equity.

“By the time they went to the lenders, they were well aware that this was coming and were prepared to meet with them This made the process smooth,” said Yetunde Taiwo, GM for new energy at Seplat during a presentation at the Nigerian Gas Association (NGA) virtual multilogues last week.

Have a great governance structure

One reason for the Nigeria LNG’s success is that it is an incorporated joint venture, unlike the traditional unincorporated joint ventures in the upstream oil and gas sector.

The incorporated joint venture is both the company and the business, unlike the traditional joint ventures where the companies are different from the joint venture.

This model gives the company a license to fund itself. It goes out to the financial and capital markets to raise funds for its operations, unlike the traditional joint ventures where equity contributions fund the business.

It is this model that was replicated by the APGC. It is the first domestic gas IJV with a simple equal shareholding structure, which gave the lenders some comfort and made the due diligence go smoothly, Taiwo said.

Investors are wary when they have to deal with governments in developing countries like Nigeria because of regulatory uncertainty. A study conducted by KPMG some years ago found that regulatory and political risks were the most pressing concern for investors.

“Any relationship that you have with the government that is perceived to be cordial, it gives the lenders a level of comfort that the partnership is solid and there isn’t the fear of interference coming from the side of government,” Taiwo said.

The Nigerian government is notorious for disrespecting contract terms but the odds are definitely stacked against you if certain elements in government express disapproval, and loudly against a deal where the government is a partner. Having the Federal Government support, on the other hand, is euphoric.

It is possible you may not incorporate a joint venture with the NNPC, but having a good corporate governance system assures investors of the sustainability of the business.


Oil Demand

Oil demand to reach 100m barrels a day in four years

Read Also: Nigeria Gasp for new LNG Investments

Oil demand is expected to take two to four years to return to 2019 levels, depending on the duration of lockdowns and the pace of GDP recovery, forecasts by McKinsey and Company, a leading management consultancy firm, shows.

“Based on our Global Energy Perspective reference-case demand insights, current OPEC+ intervention will be sufficient to help balance the market in 2021, with prices remaining at a sustained level of $50 to $55/bbl through to 2025,” the analysts said in a report.

According to the Energy Information Administration (EIA), total oil production averaged more than 100.61 million barrels per day (b/d) in 2019.

OPEC said it expected global oil demand in 2021 to increase by 5.9 million barrels per day year over year to average 95.9 million bpd.

The report said that if GDP growth recovers faster than expected, the world may see a near-term price increase at more than $55/bbl.

However, if demand recovers slower than expected or if OPEC+ stops cutting output, prices could be depressed or highly volatile for the next three to four years.

Crude oil demand has partially recovered since April 2020 but still ended the year approximately 9 million barrels per day (MMb/d) below the 2019 level, with continued COVID-19-related lockdown measures in January 2021 keeping it around 6 MMb/d lower than January 2019.

Supply remained robust until April 2020 and then dropped by 13 to 14 MMb/d in May, driven by OPEC+1 cuts and shut-ins (that have mostly returned to the market), thus showing the willingness of OPEC+ to continue interventions.