August 11, 2020 / 04:32 PM / By Afrinvest Research / Header Image Credit: Investors King
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.
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