Of Trade Wars and Oil Thieves: As Nigeria's Key Industry Legislation Gathers Momentum

Oil & Gas
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Thursday, July 04, 2019   /02:35PM / By Meristem Research / Header Image Credit: Resilience.org


Is the Petroleum Industry Governance "Act" finally on the horizon?

In late May, some cheery news surfaced for investors in Nigeria's oil & gas industry, as members of the House of Representatives joined their colleagues at the Senate to pass the re-drafted Petroleum Industry Governance Bill (PIGB). This move is quite significant because it should serve as the catalyst to push other components of the wholesale Petroleum Industry Bill (PIB) across the finish line. The Bill had initially been refused assent by President Buhari in August 2018, due to legal drafting and certain other concerns. For many reasons, the PIGB is perhaps the most important piece of the PIB which was divided into 4 (the Petroleum Industry Fiscal Bill; PIFB, Petroleum Industry Administration Bill; PIAB, Petroleum Host and Impacted Communities Bill; PHICB and the PIGB) in 2015 to expedite action on each section.

The PIGB seeks to reform NNPC through the creation of three new entities - a new governing body, a commercial oriented oil company which will manage the JV assets of the government and another which will manage assets under existing Production Sharing Contracts. The Bill also rewrites the provisions of the Petroleum Equalisation Fund, allowing the government to place a 5% surcharge on all refined fuel sold and distributed in Nigeria. With the bill having crossed both chambers of the National Assembly, it is only a matter of time before the President provides his stamp of approval. We believe the imminent writing of the bill into law clears a large chunk of the policy haze currently facing the industry, expediting Final Investment Decision (FID) on key oil and gas infrastructure projects. However, we note that it might take some time before the structures and policies created by the PIGB take shape, hence, any discussions about deregulation may only come up later in 2020.

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OPEC market share falls further in May

OPEC production figures released for May 2019 revealed a 5th consecutive monthly decline. The numbers sent a signal to the markets that members of the coalition are firmly in step with the voluntary production cuts agreed in December last year. Production was down by 236tbd m-o-m, to 29.88MMbpd with the biggest single decline coming from Iran. In our previous reports, we pointed out that Iran's gradual artificial "declines" are a result of sanctions imposed on it by the US, restricting its exports. In May, its woes were aggravated when waivers for imports of its oil were totally withdrawn and buyers scrambled to find alternative suppliers. The Gulf nation's output has now a hit 5year low of 2.37MMbpd, after plunging by a further 8.74% (-277tbd) in May. While Iran stood out, Nigeria was also a key contributor to the decline, as unexpected outages forced production to 1.73MMbpd again, the lowest figure since February 2019.

Force Majeures on the Aiteo-operated Nembe Creek Trunk Line, Shell's Forcados pipeline and Total's Amenan field shut in production and caused disruptions to loading plans for May. The declines notwithstanding, Nigeria's May output numbers still stand above the OPEC-imposed production quota of 1.69MMbpd. Saudi Arabia continued to lead from the front; cutting an additional 70tbd and marking the third consecutive month where its production has fallen below the 10MMbpd mark. Overall, the coalition's share of the global oil market is now less than 30%, giving scope to the US and other players to further creep into its market. Going into the OPEC+ meeting scheduled for July 1st, a key concern for the OPEC+ group remains the tepid cooperation levels from Non-OPEC allies led by Russia, with Saudi Arabia having to pick up the slack. In the last two months, the soviet nation has had to battle with contamination challenges on its 1MMbpd Druzhba pipeline, a bottleneck which has constrained production. Meanwhile, the Kremlin has repeatedly affirmed that it is comfortable with oil at USD60pb.

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Familiar foes don a different garb in Nigeria's Delta…

February to August 2016 will go down in history as a testing period for international oil companies operating in Nigeria. Attacks by the Niger Delta Avengers and other millitant groups on Shell's Forcados Terminal, Chevron's Escravos GTL facility and ExxonMobil's Qua Iboe facility took c. 300tbpd out of production and coincided with the worst period for oil prices (c. USD27.33pb in March 2016) before a gradual recovery towards the end of the year. Government reconciliation and amnesty efforts however restored relative calm to the Niger Delta region, and 20172018 ushered in a new period of gradual production growth, supported by considerably high oil prices. While the millitancy issues appear to be in check, outages are rearing their heads in the frame of a new monster - oil theft.

In April, Shell, Aiteo and Total, in separate incidents, declared force majeures on exports of crude following attacks on key pipelines, fields and pumps; the Nembe Creek Trunk Line and Amenam field inclusive. The steep production decline (-92tbpd) recorded in May 2019 therefore came as no surprise. Government crackdown on millitancy appears to have enabled oil theft as a safer and more lucrative industry; creating budding integrated energy companies with crude siphoned from pipelines, sent to illicit makeshift refineries and refined fuel sold in the black market. Several sources have put the daily losses due to theft at c. 100,000bpd - only c. 14,000bpd less than the total production managed by Equatorial Guinea in May 2019. For context, this amounts to a daily revenue loss of c. USD6.5mn.  To plug these holes, pipeline operators are investing in novel but expensive technology to protect their redundancies from saboteurs. Aircraft surveillance and community-based security schemes are the most popular of solutions deployed so far, but underground pipelines are gaining ground as an effective panacea, and Pan Ocean Oil is pioneering efforts in this direction.

D emand risks take centre stage, as OPEC+ extends agreement

OPEC, the OPEC+ informal group and its Joint Ministerial Monitoring Committee (JMMC) held separate but connected meetings in Vienna between July 1 - 2, 2019. Dominating the agenda were several critical matters relating to the state of the oil markets where ministers in attendance agreed that 2019 had been a turbulent year for the markets and that their deliberations could shape stability or otherwise for the rest of the year and beyond. On the suppply side, the committee condisered lingering political tension between Washington and Iran on the one hand and the US and Venezuela on the other. Also, unexpected outages elsewhere within OPEC and OPEC+'s voluntary production cuts added to the list of "positive sentiments" that spurredoil prices on an early-year bullish run, reaching USD74.57pb in late April.

However, as the second half of the year approached, negative inventory data, the potential for a rapid surge in US shale and the persistent Sino-US trade war have dampened the outlook for demand. Brent therefore receded to a 5month low of USD59.97pb in mid-June. Unsettled by the grim demand picture, members have settled for an extension of the agreement for another 9 months - into the first quarter of 2020. We understand that the lengthy extension period is required to give the coalition some scope to manage any further risks, and monitor the haze building over the global economy.

OPEC has a series of posers to address though, the most important being long term efficacy of the production cut strategy, particularly given that its share of the market is shrinking. Output fell below 30MMbpd in May - the lowest level since June 2014. Another key question, particularly for Saudi Arabia, is the increasing influence of Russia in the group's decision making. The Soviet nation is comfortable with oil at USD60pb (Russia prepared its 2019 budget on the basis of USD40pb), and realizes the pain it would inflict on oil prices if the deal is exited. The Kremlin is earnestly milking this leverage, as evidenced by Putin preempting the OPEC+ announcement at the G-20 meeting in Osaka on June 30. As it were, cracks are beginning to appear within the informal group.

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Is a breakthrough imminent in Nigeria's Power Sector?

In April 2019, Transcorp Power Consortium acquired Afam Power Plc., (987MW) and its sister company Afam Three Fast Power Company Limited (240MW) for a combined consideration of NGN105.30bn. This acquisition positions Transcorp as Nigeria's biggest power generating company, with total nameplate capacity of 2,199MW when combined with its other power portfolio - the Ughelli Power Plant (972MW). In March 2019, Calvados Global Services Limited (reportedly floated by Nigerian billionaire, Mr. Femi Otedola), also completed acquisition of FO Plc's 51% stake in Geregu Power Plant.

These acquisitions are coming at a time when  Nigeria's electricity market is broken, and the flow of cash across the value chain from Discos through the Nigerian Bulk Electricity Trader (NBET) and Transmission Company of Nigeria (TCN) to the Generating Companies has been rather problematic. Non-cost-reflective tariffs, high levels of Aggregate Technical, Commercial and Collection Losses (ATC & C), gas constraints, obsolete equipment, inadequate wheeling capacity, legacy debts and a porous market structure are only some of the many constraints impeding investment into the Power Sector. There have been a number of governement interventions in the form of the NGN213bn Nigerian Electricity Market Stabilization Fund (NESMF), and the NGN710bn Payment Assurance Facility which expired in December 2018.

Policies including the Eligible Customer Framework, Meter Asset Provider scheme, Minigrid regulations have also been established, yet, the challenges persist. It is on this premise that the recent significant investments come with an air of incredulity. However, we note that Nigeria's power sector offers potential for significant returns, given Nigeria's vast population. With NERC's renewed commitment to distribution of prepaid meters, to fill the 4.7m metering gap, there appears to be a silver lining which Nigeria's billionaires are expecting to milk.

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… as pipeline operators raise the bar

Pan Ocean's 20", 160,000bpd capacity Amukpe-Escravos line is buried at least 40 metres below ground level, a feat which was achieved using Horizontal Directional Drilling (HDD) technology. The crude carrier is expected to serve as a viable and cheaper alternative to the battered Nembe Creek Trunk Line (NCTL) and Trans-Forcados Pipleline (TFP) for operators in the Western region of the Delta, including Seplat and Sahara Energy. The pipeline is due for first oil in August 2019, and carries a price tag of USD500mn - a significant investment by any standards, and which should hopefully dent oil theft troubles.

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