Nigeria recorded a substantial growth in its oil drilling activities in January 2022, compared to the last quarter of 2021, with onshore production rising 12 per cent, while deepwater and shallow water activities increased by 5 per cent and 7 per cent respectively.
It was a marked improvement when put side by side the last quarter of 2021 when onshore production was down 36 per cent, deepwater 28 per cent and shallow water 20 per cent.
But in contrast, in January, according to a report by Renaissance Capital, a frontiers market investment bank, onshore production was only down 24 per cent, deepwater 23 per cent and shallow water 13 per cent.
However, there are still issues of sustainability of the new-found rhythm by the Nigerian National Petroleum Company (NNPC) and its partners which have lagged behind for months in terms of meeting its allocated quota. “It is too early to say if these levels can be sustained,” the RenCap analysts noted.
In January 2022, most major terminals experienced a sharp recovery in output, the report said, with Forcados in particular reaching pre-COVID levels, but with Bonny still lagging due to downtime at the Trans-Niger pipeline (TNP).
Nigeria’s ageing infrastructure, downtime and crude theft are chronic challenges for the onshore sector as it has been unable to meet its Organisation of Petroleum Exporting Countries (OPEC) cut.
Last week, a THISDAY analysis showed that although Nigeria undershot the 1.701 million bpd OPEC cut in January 2022, it was able to ramp up production to the tune of 202,000 bpd for the month.
According to the OPEC’s Monthly Oil Market Report (MOMR) for the month, the country managed to pump 1.399 million bpd out of the total allocation, quoting primary sources.
This was in contrast to December 2021, when it pumped 1.197 million barrels per day and November when it was only able to produce 1.275 million bpd.
Before now, in December, with a daily underperformance figure of 78,000 barrels per day in, THISDAY reported that Nigeria lost as much as 2.418 million barrels of crude.
Promises by the Minister of State, Mr. Timipre Sylva and the NNPC Group Managing Director, Mallam Mele Kyari, that the country would hit between 1.7 million bpd and 1.8 million bpd by the end of 2021 remained largely unrealised.
But for the month, the biggest increases in crude oil production came from Nigeria, Saudi Arabia, the United Arab Emirates (UAE), and Kuwait, while output declined in OPEC’s second-largest producer Iraq, as well as in Venezuela and Libya.
For months, Nigeria has been unable meet its required share of the OPEC quota, being 1.683 million bpd in December, 1.701 million bpd in February and now 1.718 in March.
Poor upstream infrastructure, sabotage, oil theft as well as lack of investment have been blamed for the ongoing default as the country’s oil sector is facing an unprecedented level of under-investment, with declines reflecting a near halt of upstream investment across all terrains since the Covid-19 pandemic outbreak.
Chronicling the level of under-investment in the sector, the RenCap report tagged “The Stakes Are High”, stated that for instance, since the start-up of the Egina (200kbopd capacity) in late 2018, only one or two new oil projects have come onstream.
“The near-term project pipeline screens thin, with Total’s Ikike (40kbopd), Amni’s Tubu (30kbopd) and Shell/Seplat’s ANOH (30-40kbopd of condensates) some of the scheduled 2022 start-ups,” it added.
Quoting Rystad, an oil and gas consultancy, the report stated that it is estimated that Nigeria’s project pipelines would add up to 100kbopd of production by the mid-2020s, which is not enough to offset current declines.
It explained that the under-investment and chronic infrastructure issues plaguing Nigeria’s oil sector manifested in a multi-decade production low in December 2021.
“The recovery in January offers some optimism, we think, but the outlook remains uncertain,” Renaissance Capital said.
It stated that Shell and Exxon’s announcement of divestment plans in Nigeria, if completed, would transfer most of Nigeria’s oil production from the onshore and shallow water terrains (65 per cent of total production in 2021) to indigenous control.
At a time that global oil and gas financing is drying up, the firm stated that this change of ownership could sway production either way, depending on the financial and technical power of the new buyers.
“Whether or not the operatorship succession, if it happens, will result in a Nigerian oil sector renaissance remains to be seen, but we believe the stakes are high for Nigeria’s oil sector,” it said.
It added that Nigeria’s production outlook has not appeared as uncertain as it does now, as most of the production operatorship control is set to change hands in onshore and shallow terrains, creating uncertainty with regard to future investment.
“We believe securing financing for the small/mid-sized indigenous players to complete the transactions will be challenging, let alone investing further for production growth in ageing assets of undetermined asset integrity.
“Add integration and operational risks to the mix and one can see why any of these deals might potentially be ‘too big to chew’ for any indigenous E&P. We expect 2022 production to be within the 1.601.75mmbopd range and our longer-term outlook is dependent on the level of investment.
“However, in the absence of major project start-up visibility, even with moderate investments, we expect declines to take their toll on production. With the likely start-up of new deepwater projects post 2025, we believe that Nigeria’s production could average <1.5mmbopd by the second half of this decade,” the report pointed out.
It singled out Seplat as better positioned among its peers to complete a transaction with either Shell or Exxon, saying it is the best way for investors to gain exposure.
RenCap analysts noted that Nigeria’s oil sector challenges are exacerbated by a challenging operating environment, with issues such as local opposition, oil spills, militant activity, crude evacuation constraints and logistical bottlenecks.
In addition, it mentioned unattractive fiscal terms as one of the negative factors, stressing that Nigeria’s onshore fiscal terms are some of the least attractive globally.
Although the Petroleum Industry Act (PIA) has improved fiscal terms across all terrains, the report pointed out that “its implementation is slow and we have not seen yet a positive response from the sector.”
Other major risk factors for the oil and gas industry, it said, include: Limited major project pre-Final Investment Decision (FID) pipeline and divestment, which may disrupt development.
“The majors’ exodus from Nigeria, in particular Exxon’s from shallow water and Shell’s (from SPDC) are disrupting upstream activity, with current operators limiting upstream investment as this transition is ongoing and production suffering as a result.
“As international investors, in particular the majors, are divesting their exposure from Nigeria’s upstream sector, the onus now is on the indigenous companies and NNPC to inherit operatorship, invest and grow production,” it posited.
It said that although the majors’ divestment theme is not new in Nigeria and has been ongoing for over a decade now, these current disposals round will not be like the last one.
“A decade ago, before the ‘energy transition’ and when peak oil supply theory still had proponents, the offering of assets and blocks in one of the world’s most prolific hydrocarbon provinces was too attractive for investors to pass up.
“Financing from investors and banks was abundant – Seplat raised $500 million from its IPO in 2014, the biggest in Africa at the time, valuing it at $1.9 billion. A decade later, the majors are selling much larger assets when financing availability is much more restricted in what is a buyer’s market globally.
“The first round was an opportunity for indigenous players and investors to develop peripheral non-core assets neglected by the majors. This round is about transferring control in most of Nigeria’s oil production from the majors to indigenous players. The stakes are high for Nigeria’s oil sector,” it noted.
