Monday, August 28, 2017 10:30AM / FBNCapital Research
While the core agenda of the FGN is to diversify the economy away from oil, in the short term it depends upon the industry for the generation of wealth and taxes. The outlook has improved with the authorities’ more conciliatory approach in the Niger Delta. The incidence of sabotage has declined, but not ended, and the authorities will now see what they have to deliver in addition to the restoration of allowances to the said militants. Output less condensates is said officially to be back near 1.8 mbpd.
In July OPEC accepted a reported offer by the FGN to cap Nigerian production at 1.8 mbpd (excluding condensates) in line with its policy of restraint. This is consistent with the budget assumption of 2.3 mbpd in 2018, the balance consisting of condensates.
There are some output gains to report. Last week Shell announced the start of gas production from the second phase of its Gbaran-Ubie project in the delta, expected to deliver a peak of 190,000 b/d oil equivalent in 2019. Next year should bring the beginning of production from Total’s offshore Egina field with 200,000 b/d crude. We should add ExxonMobil’s discovery in its Owowo field and the talk of an addition of one billion barrels to crude reserves.
Greater investment should come from the much-awaited passage of the industry bill. The Senate has passed the Petroleum Industry Governance Bill, which is part of a larger overhaul.
While we await action from the House of Representatives, we note that the FGN has released a draft national petroleum fiscal policy. We understand from the local media that the petroleum profits tax will be dropped, and operators would be liable under the draft to a Nigerian hydrocarbons tax and the companies’ income tax. This would make a combined ceiling of 70%, compared with the previous 85%, in addition to a levy on capital gains.
In his two years as minister of state for petroleum, Ibe Kachikwu has been active: the NNPC’s costs have been reduced by an estimated 30%, the FGN’s fuel subsidy costs have been slashed, the supply of products has dramatically improved, an overhaul of the joint ventures is underway, and the corporation is in the habit of sharing information.
Finally we have to mention crude prices. US oil inventories have fallen for eight successive weeks and the approval of conventional projects such as Kaikias in the Gulf of Mexico on brownfield sites is picking up. More telling perhaps and supportive of the FGN’s price conservatism are reports that shale producers are hedging WTI contracts for 2018 at around the US$50/b mark.
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