Tuesday,
August 11, 2020 / 04:32 PM / By Afrinvest Research / Header Image Credit: Investors King
Executive Summary
Prior to the outbreak of the COVID-19 pandemic, the
performance of the global oil and gas industry in 2019 was shaped by issues
such as the Sino-US trade wars, sanctions on Venezuela & Iran as well as
middle-east tensions. However, there was optimism that calming US-China trade
tensions would support an increase in global demand by 1.2mb/d in 2020. Despite
projections of an increase in supply, crude oil price was expected to remain
stable at around $65.0/bbl. in 2020 according to the IEA.
However, following the outbreak of the COVID-19
pandemic, oil demand declined sharply - estimated at around 20.0mb/d at the
peak of the crisis - and this resulted in lower oil prices. In a manner similar
to prior shocks in the industry, the impact of the pandemic has now compelled
oil and gas players to improve cost-efficiency to manage the fallout from low
oil prices and support margins. Despite our expectation that stronger demand
would resurface for oil as COVID-19 eases and economies reopen, there is still
heightened uncertainty across the world due to the lack of a vaccine.
Meanwhile, the oil & gas industry also faces downside risk from the global
long-term objectives of reducing carbon emissions and diversifying into
renewable energy.
In Nigeria, the upstream oil & gas sector has huge
potentials but has been held back by the slow speed of regulatory reforms,
especially the non-passage of the long-awaited Petroleum Industry Bill (PIB).
The fiscal framework for the petroleum industry remains unclear as potential
investors continue to watch from the sidelines. Nigeria ranks among the richest
oil and gas nations of the world that have seen weak investment in its oil
industry compared to its peers over the years.
The amendment of the Deep Offshore and Inland Basin
Production Sharing Contract Act (DOPSC) was passed in 2019 mainly for its
revenue potential for the government, although this could hurt investment in
the oil & gas sector. Meanwhile, the implementation of the Finance Act
(2019) is expected to increase the tax burden for the oil industry as
incorporeal properties - such as the divestment of oil and gas assets - are now
subject to the new VAT provisions. In our opinion, this may have a negative
impact on local content in the aspect of the acquisition of divested oil assets
from IOCs.
In the downstream segment, price regulation on
petroleum products have continued to limit margins for oil marketing companies
and as a result, the sector continues to remain less attractive to potential
investors. Meanwhile, following the sharp decline in oil prices, cheaper petrol
prices based on PPPRA's pricing template has been passed to consumers. The main
adjustment was the reduction of the Ex-coastal price and Ex-depot price,
implying that petrol is no longer subsidised. Although the FG has hinted at the
removal of subsidies and creating room for increased participation by
downstream players, the true test of these plans would emerge when oil prices
are rising as well as how soon downstream players can resume importation.
Recent Articles from Afrinvest
Related News
Signup with Facebook
Signup with Twitter
