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Oil industry’s challenges in 2017, prospects for 2018

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Nigeria’s oil and gas sector in 2017 ended with hopes that 2018 will be less challenging. The reason for the anticipation is that 2017 was marked with uncertainties over crude oil prices, pipeline vandalism and scarcity of foreign exchange, which made the business environment more challenging. In this report,UGO AMADI, Business Editor, examines the events that shaped the country’s petroleum industry in the past year.

Reviewing the current state of energy, oil and gas sector in the country as 2017 ends, stakeholders and energy experts have declared that the challenges confronting sector would lead to its total collapse if left unattended to.

According to them, uncertainties over crude oil prices, pipeline vandalism, scarcity of foreign exchange, change in leadership, power sector reforms challenges, issues around the regulatory environment, security as well as the appraisal of capital investment and how it impacts revenues and operational effectiveness have remained a big nut to be crack in the sector.

It is on record that the oil and gas sector has continuously dictated the pace and structure of growth of the Nigerian economy since crude oil was struck at Oloibiri now in Bayelsa state in 1956.

The huge oil and gas resource base, which currently stands at about 38 billion barrels of proven oil reserves and 197 trillion cubic feet of gas, has positioned the country as one of the key players in the global energy supply.  Yet Nigeria scores 42 of 100 points and ranks 55 among 89 assessments in the 2017 Resource Governance Index (RGI). As a matter of fact Nigeria is the 10th largest oil producer in the world and the 7th in proven gas reserve with potential to grow to 600 TCF.

Unfortunately, Nigeria currently maintains an economically unstable negative net energy trade balance in which the nation exports virtually all the crude oil produced and imports a substantial part of its refined petroleum products needs while under-utilizing other energy sources such as bitumen, coal, lignite, and shale oil, thereby leading to a mono commodity economy that is largely dependent on crude oil export.

It is against the backdrop of low oil price, dwindling oil revenue, that there have been strident calls for the nation to diversify her economy from the monolithic economy and absolute dependence on oil into other areas to sustain the nation in terms of revenue generation.

The year under review shows that preliminary results for the second quarter of the year, Nigeria’s economic recovery was driven principally by the performance of four main economic activities comprising oil, agriculture, manufacturing and trade. The results revealed that Oil contribution to the Gross Domestic Product, GDP recovered significantly from -11.63 per cent in Q2 2016 and -15.40 per cent in Q1 2017 to 1.64 per cent in Q2 2017.

But while Oil GDP expanded considerably in the second quarter of 2017, Non-oil GDP only grew at 0.45 per cent, down from 0.72 per cent in the preceding quarter and -0.38 in the corresponding period in 2016. So far in 2017, the oil and gas sector has accounted for approximately 16.05 per cent of Gross Domestic Product, (GDP), about 90 per cent of total foreign exchange earnings and 85 per cent of total government revenue resulting in near total dependence on oil and gas revenue for national development.

Indeed, 2017 has brought meaningful changes to the global commodity landscape, with investors seeing the year as a consolidation phase for many markets. While energy prices have been range-bound for most of the year, with oil prices posting a sustained recovery only in the final quarter of the year, there have been some pronounced structural shifts and impactful trends evolving in 2017 that are likely to carry through into 2018 and potentially beyond. The year has brought significant political changes and increased political risk, though the direct impact on commodities has been mostly contained.

Nigeria oil and gas business environment

Crude oil price, which was down to as low as $35 per barrel in 2016, only started its recovery process few months ago after members of the Organisation of the Petroleum Exporting Countries (OPEC), decided to reduce output in order to balance the market.

This was made worse by the renewed attack on oil facilities in the Niger Delta, which brought Nigeria’s crude oil production down from 2.2 million per barrel to 800,000 in 2016.Virtually all oil companies operating in the country recorded losses in 2016 as a result of low oil prices and pipeline vandalism.

A report by International Energy Agency (EIA )revealed that  crude oil production disruptions in Nigeria severely damaged the economy. According to the Nigerian National Petroleum Corporation (NNPC), the latest data showed that there was still no end to vandalism threats as it had registered over 340 cases of vandalism for the first five months of 2017.

Also , Nigerian National Petroleum Corporation (NNPC), GMD, Dr. MakantiBaru, noted that Year-To-Date 2017, NNPC had suffered at least 15 breaching incidents on  Trans Forcados Pipeline ( TFP). The increased disruptions come as militants continue to focus attacks on oil and natural gas infrastructure in the West African region.

However, on the Nigeria oil and gas business environment, the Chairman and Managing Director, Chevron Nigeria Limited, Jeffrey Ewing has called on the federal government to ensure sustained engagement with the Niger Delta people for adequate security so that the country can reach the desired oil and gas production level.

He said that with the challenges in the oil sector in recent times and the resulting recession in the country, it has become expedient that oil firms evolve ways to manage the situation.

“As an industry, we must challenge our cost structure and eliminate obstacles that directly or indirectly introduce unwanted cost premiums in doing business. We must take steps to increase efficiency in what we do and do more with less funding. We must continue to challenge all expenditure to ensure we get maximum value for every dollar or naira spent. Each player in the oil and gas industry must look inward and identify resources saving measures, opportunities for collaboration, efficiency and optimized operation to save cost. The more viable our business, the more we contribute to the economy,’’ he stated.

He added that significant progress has been made with regard to funding, stressing that recent successes in the “third Party Funding” for some projects have resulted in increase in production volumes. He commended the federal government and other JV partners in addressing JV cash call areas .

The Managing Director of Degeconek Nigeria Limited ,AbiodunAdesanya said, “the inevitable slowing down of the economy occasioned by the adverse crude oil prices regime still persists. Before Nigeria officially acknowledged we are in a recession, low oil prices had resulted in the slowdown in projects as well as the stopping of exploration activity in some fields. In the upstream, there had been a sharp cut-back in projects with companies instead, focusing on short term activities and production sustenance”.

According to him, successive administrations have enunciated economic policies and strategies on how to diversify the nation’s economy from oil to other sectors like agriculture, mining and tourism but the economy has not been diversified at the anticipated rate.  Contributions from non-oil sector still remains low, but signs of improvement have begun to show.

Lekoil’s Chief Executive Officer,  LekanAkinyanmi, stated: “In the current low oil price environment, we have prioritised the allocation of our capital to our production and development assets to generate short-term cash flow and compelling economic returns, focusing on extracting value from the ‘stability’ zone of our portfolio.”This means limited expenditure on exploration assets but maintained optionality for the future.”

He said that a recent International Monetary Fund (IMF) report indicates that a diversified economy based on several sources of income is more resilient and able to recover faster from different shocks as any weakness in any particular sector can be mitigated through the strong performance in other sectors.

Gas Sector

The gas sector equally is experiencing a high demand underpinned by the growth of diverse demands (industrial, domestic, nuclear and power generation). The sector is re-positioning Nigeria from being among the top gas flaring countries in the world to being the most aggressive in gas utilization growth.

Robust growth in the last five years has delivered a rich gas sector portfolio that should generate significant income for the country in the future as well as fuel for the rapid industrialisation of the economy.

Currently, there is a robust portfolio of planned projects aimed at increasing oil exploration and refining capacity. The average national daily gas supply to the nation’s power plants rose by 64 per cent, according to NNPC Financial and Operations Report for May 2017.The average Natural Gas supply to power plants of 729 million standard cubic feet of gas per day (mmscfd) in May 2017 was 63.74 per cent higher than the daily gas supply to the plants, of 446mmscfd, during the same month in 2016.

The report said the average national daily gas production as at May 2017 stood at 242.70billion cubic feet (BCF) or an average of 7,829.11mmscfd, representing a slight increase, compared with April gas production of 672mmscfd.

Despite the gas potential, the level of gas penetration and utilization in the country for both domestic and industrial purposes is still relatively low. For years, most of the associated gas produced  were flared and the initiatives implemented to reduce gas flaring have not yielded the desired results.

Various flare out dates were set but as these dates approached different reasons were adduced for a deferral. It is therefore ironic that despite the country’s large gas reserves and gas flares, domestic gas demand, especially for the power and manufacturing sectors are not being met. Also, there is lack of infrastructure to allow the easy movement of gas from the Niger Delta to the consumers. The existing gas pricing mechanism has also not enabled investments.

Exploration in the Frontier basin

During the year under review, there was intense search for oil by the Nigerian National Petroleum Corporation (NNPC) in the new frontier basins even as the NNPC GMD expressed confidence that the aggressive exploration of the inland basins being driven by the corporation would soon yield success with hydrocarbon finds in commercial quantity.

He said based on preliminary results from the exploration activities in the inland basins so far, especially the Benue Trough, there was a strong indication that commercial quantity oil and gas finds would s