Why it could get worse for Nigeria’s oil and gas sector in 2023
Nigeria’s oil and gas sector failed to maximize opportunities provided by higher oil and gas prices in 2022 due to various challenges, one of which was crude oil theft.
In October 2022, Nigeria’s Minister of State for Petroleum Resources, Timipre Sylva, said crude oil theft was impacting the country’s foreign exchange inflows. At the time, he stated:
- “Oil theft has denied the country an estimated 700,000 barrels of crude oil per day. The adverse effect of this is the drop in the production of crude oil and decline in the national income.”
Multilevel losses: The earnings for companies in the oil and gas industry have declined 30% per year over the last three years for both downstream and upstream companies. Daily crude oil production fell below 1 million barrels per day (bpd) and significantly reduced export earnings and foreign exchange reserves to an all-time low.
Failure to cash out: Oil and gas analyst, Etulan Adu, told Nairametrics that international oil companies (IOCs) have pushed for divestments of marginal onshore assets and Nigeria has seen an increase in indigenous participation in the industry. But the gains of higher oil and gas prices eluded the country in revenues amounting to over $15 billion based on some estimates.
According to Adu, Nigeria’s oil and gas sector struggled for survival right from Q1/2022, despite surging crude oil prices and major oil-producing countries raking in profits. Nigeria lost its top oil producer position in Africa to Angola and regained it in Q4/2022. He said:
- “The challenge of oil theft, pipeline vandalism and under-investment in upstream activities brought Nigeria’s oil production to a 30-year low mark. We saw the government and the Nigerian National Petroleum Company (NNPC) engage stakeholders to bring an end to crude oil theft by engaging private security firms which have helped significantly the return of oil production to over 1.2 million barrels per day (bpd).”
Can we be optimistic? Etulan Adu tried not to be over-optimistic for 2023 as the country is set to experience a change in government administration. Although several deals on new floating liquefied natural gas (FLNG), gas export pipelines to Europe and a lot of projects were announced in 2022, energy analysts fear that some of these projects will not come to reality amidst challenges like a lack of finance and political willpower. Adu said:
“2022 brought gas and power generation conversation as a solution for economic development, diversification and job creation to the forefront and the Nigeria Liquefied Natural Gas (NLNG) Limited Train 7 project is kicking on fine. Offshore blocks are being issued for bids; revenues have also declined 13% per year. This means overall sales from these companies are declining and profits are subsequently falling as well.
- “Despite 2022 challenges, investors are optimistic about the Nigerian oil and gas industry and appear confident in long-term growth rates. However, in 2023, we expect that the prices of liquefied petroleum gas (LPG) also known as cooking gas will still be high for the common Nigerian, petrol prices will still be high, there will be increased oil production as the government keeps fighting the crude oil theft problem. There will also be further investment in natural gas.”
Rollercoaster year: Oil and gas analyst, Kayode Oluwadare says that it has been a rollercoaster affair in terms of production and pricing for the Nigerian oil and gas industry. He highlighted the fact that the Russia-Ukraine war has had a significant impact on oil pricing since Q1/2022. He said:
- “It is quite unfortunate that Nigeria was not able to maximize or take advantage of the price increase which went up to $100 per barrel at some point. We lost some ground, unlike Saudi Arabia, Qatar and even the United States were posting high profits from crude oil sales.
- “Looking at the oil industry performance of 2022, we saw how Nigeria’s crude production hit an all-time low, at a point we recorded just a little over 900,000 barrels per day. Although some concerted efforts have been made through the joint task force spearheaded by former Niger Delta militant, Tompolo, checking around the Niger Deta region for illegal pipelines and other installations which have helped to forestall the crude oil theft which has been going on for decades.”
Some positive projections: The good news, however, is that the oil market projections are good and reflected in the new $75 benchmark pegged in the 2023 budget. Oluwadare says that in the year 2023, the following factors will likely push oil prices high:
- Russia has decided to stop exporting its oil to countries with a price cap, so, the implication is that Russian production will drop, even though it is expected that some of those products will be diverted to countries like China, India and Pakistan. But generally, the production will drop.
- There will be some form of price increase in Europe, which is a net oil and gas importer. If prices go up in Europe, as a result of the price cap, it opens up opportunities for Nigeria to participate more in the European market. When production drops in the global scheme of things, prices will go up, that is basic Economics.
- From January 2023, China will cut down some stringent Covid-19 rules for travellers, so China will open up more in the coming months. This is big business for the oil and gas industry as demand increases, this will also lead to an upward trend in oil pricing, which Nigeria can take advantage of in 2023.
- Natural gas has always followed the crude oil trend, although there has been some disentanglement between both markets because of the increased volumes of piped gas, and liquefied natural gas in the markets. However, some gas markets are still indexed to crude oil, especially in Asia which is the biggest LNG market in the world.
- The Nigeria Liquefied Natural Gas (NLNG) Limited has had a good 2022 by taking advantage of the global increase in LNG price, although at some point, production dropped when the company was operating at 60% capacity due to feed-gas challenges, and crude oil theft. The outlook for 2023 is good for Nigeria’s gas market because the NLNG is efficiently run. The price cap for Russian oil also affects Russian gas, so, the drop in Russian gas production also provides an opportunity for Nigeria to take advantage and increase its gas production and increase its profit margin.
A good ending: Production Engineer, James Akwaji told Nairametrics that Nigeria’s oil and gas sector has faced challenges for many years but the NNPC and security agencies have made remarkable strides in halting crude oil theft and other nefarious activities in the south-south region of Nigeria where oil and gas companies are located.
According to Akwaji, data from the Nigeria Upstream Petroleum Regulatory Commission (NUPRC) and other international agencies show that the country’s oil and gas earnings moved up between September and November 2022. This shows that the oil and gas sector in Nigeria is going to end strong in 2022, despite all the challenges it has been through.
