Indications are that the planned divestments by oil majors from Nigeria may not bode well for the economy.
Checks by The Nation revealed that the need to divest investments from the shores of Nigeria may not be unconnected with a constellation of forces with the major reason attributed to the disruption caused by the ravaging COVID-19 pandemic.
Already there are is a foretaste of what to expect within Nigeria’s oil and gas sub-sector as most of the majors have made far-reaching decisions from their home office, a development expected to bub off on their operations overseas.
Take ExxonMobil for instance, the company has hinted of plans to develop Guyana’s Stabroek block. Specifically, ExxonMobil could install as many as 10 floating production, storage and offloading vessels, or FPSOs, at the Stabroek block off the coast of Guyana, the company’s manager for deepwater projects said Dec. 1.
But the environmental sensitivity of the region, especially close to recently discovered reefs near the mouth of the Amazon River, has also created obstacles to further development.
ExxonMobil also expects to ramp up work in Brazil, where the company has a portfolio of 28 blocks in the Campos, Santos and Sergipe-Alagoas basins. ExxonMobil previously held stakes in Santos Basin blocks holding subsalt prospects in the early 2010s, but the company eventually left Brazil after making no commercial discoveries.
Like ExxonMobil, Chevron the American oil major is set to cut capital spending by $5 billion about 26 percent of its previous plan for the year 2021.
Chevron said it will cut capital spending by 26 percent next year and make deep cuts through the middle of the decade, as a result of the Covid-19 pandemic’s industry-wide reappraisal of fossil fuel investment.
Chevron will spend $14bn next year and up to $16bn through 2025, a reduction from the company’s previous spending plans of $19bn to $22bn through 2024 made before the outbreak of the pandemic.
More than 100 companies operate in Nigeria’s upstream sector, according to a 2019 report by local investment bank Afrinvest. NNPC holds majority, non-operating stakes in 11 joint ventures with several IOCs including Shell, ExxonMobil, Chevron and Total. IOCs produce 80pc of Nigeria’s crude output, with Shell alone accounting for 40pc and operating the deepwater Bonga field with a 55pc interest. Shell also holds a 44pc interest in another deepwater field, Erha, the report states.
ExxonMobil has a 30pc operating interest in the deepwater Usan field. Total’s affiliates produce oil and gas through multiple shallow water and onshore concessions and also operate the deepwater Akpo field. Chevron is Nigeria’s second-biggest producer, pumping around 400,000bl/d as of January 2019 and operating and holding a 40pc stake in the Agbami field.
Points to ponder
With a maximum crude oil production capacity of 2.5 million barrels per day, Nigeria ranks has Africa’s largest producer of oil and the sixth largest oil producing country in the world.
According to information sourced from the Department of Petroleum Resources (DPR), Nigeria has a total of 159 oil fields and 1481 wells in operation with the most productive located in the coastal Niger Delta Basin in the Niger Delta or “South-south” region which encompasses 78 of the 159 oil fields. Analysts from Petroleum Economist have expressed similar concerns, noting that uncertainty often surrounds how Nigeria plans to implement crude production cuts after it has agreed them with OPEC. But, this time, IOCs are trimming output anyway due to plunging prices, depressed demand and limited storage, thus analysts expect foreign firms to further reduce their presence in Africa’s largest oil producer.
Though the Nigerian National Petroleum Corporation (NNPC) has ambitions to raise the country’s oil production to 3mn bl/d by 2023 but such targets are increasingly implausible, and output will decline in the next few years “unless there are marked improvements in the business and investment environment and security”, warns Gail Anderson, research director at consultancy Wood Mackenzie.
To cope with the price plunge, oil companies have filled storage to capacity, aggressively cut costs and trimmed production. The next stop will be to shut in wells.
“Shutting in a well is easy. The challenge is that if it remains shut for too long, transport infrastructure such as pipelines gets clogged—and unclogging that can be very expensive,” says Ekpen Omonbude, a petroleum and mining economist and group managing director of oil and gas services provider Eraskorp. “That is a painful choice to make. [But] IOCs will start announcing shut-ins in the near term, should the macro picture not improve.”
The coronavirus pandemic has had little effect on oil companies’ operations in Nigeria, with much of the Niger Delta supply chain based locally. International contractors have been unable to fly in engineers from abroad due to travel restrictions, which has impacted projects under development more than ones already onstream.
Oil provides about half of Nigeria’s tax base and more than 85pc of its goods exports, ratings agency S&P Global Ratings estimates, so the slump in both crude prices and production has further weakened the country’s already-strained finances.
Nigeria’s fiscal deficit will widen to 7pc this year, predicts consultancy Capital Economics. The country’s current account deficit (exports minus imports) could more than double to 3.3pc of GDP, S&P Global Ratings forecast in March.
Following the royalty increase, Wood Mackenzie put back its estimates for the start dates for all Nigeria’s new deepwater fields. For example, Preowei is now expected to begin production in 2025, Bonga Southwest in 2027 and Owowo in 2029.
“I still believe Shell wants to go ahead with Bonga Southwest, and Total would like to develop Preowei because it is such a small field that you can tie back to the existing infrastructure. But [for] a bigger project such as Owowo, I doubt ExxonMobil will develop it because the company has better projects in its global portfolio,” says Anderson.
The investments are deepwater assets and joint-venture assets onshore and in shallow water. “It is not an easy thing to leave, with potential decommissioning liabilities as well. Nigerian M&A is really a niche market and there are not many companies that want to enter because of the above-ground risks. The outlook is very uncertain.”
In the view of Mr. Joe Nwakwue, President, Society of Petroleum Engineers (SPE) Nigeria Chapter, the oil majors are globally consolidated and investment decisions are based on a global opportunity inventory. “So investments will go to projects that rank high on their inventories. Also the uncertainties occasioned by delays in passing the PIB further compounded our problems. So, investment in Nigeria has suffered in the past couple of years due to these factors.”
According to the SPE boss, “It’s hard to estimate at the industry level but think of a deferred $5b project. If you the local spend is 30 per cent of total costs, you are looking at $1.5b that could have come in to energise our economy. The good news is that the oil price is gradually showing signs of recovery and we are also working on reducing fiscal uncertainty by working on the PIB. So I’m optimistic we would not see our oil and gas businesses going under.”
Echoing similar sentiments, Prof. Adeola Akinnisiju, also argued that the development will greatly affect the Nigeria’s economy, because of her dependence on receipts from oil sales.
Raising some posers, he asked, “So what happens to the volume of oil produced would happen to the economy, what happens to the price will directly affect the economy. So what happens to export, the international market and quota is very crucial to the economy because it has direct impact on the economy.”
The implication is that is the largest oil producers in Nigeria including: Shell, Chevron and ExxonMobil cut down on their investments and production capacities, it is bound to affect the country’s revenue negatively, the varsity don stressed.
