How Government Policies Shaped Oil, Gas Sector Business In 2015

Nigeria’s oil and gas industry in 2015 experienced most difficult times following crashing price of oil in the international market and lack of investment as a result of government’s  inability to meet its cash call obligation as well as divestment of major oil marketers in the absence of conducive environment. Chika Izuora writes.

Security in the Niger Delta was a key issue that threatened oil exploration in Nigeria forcing notable international oil companies (IOCs0 to divest substantial aspect of their offshore and onshore investments. Shortly before inauguration of the present administration of Muhammadu Buhari, security in the oil rich Niger Delta was a key campaign issue which the president identified as critical to increased investment in the oil and gas sector in Nigeria.

The sector witnessed surgical operational and structural changes especially in the state- run oil company, the Nigeria National Petroleum Corporation (NNPC) with the appointment of Dr. Emmanuel Ibe Kachikwu, as the new group managing director (GMD) for the corporation. Kachikwu’s first assignment was the overhaul of the corporation with the reduction from 122 to 83 of management staff at the state-run company in August and appointment of four new group executive directors.

Also in a move designed at bringing perspicuity, probity and articulacy to the award of the annual Crude Oil Term Contract which was one of the measures adopted by the firm, the NNPC enunciated a new approach in the 2015/2016 award of contracts to companies for the evacuation of Nigeria’s crude oil equity, covering crude and condensates. The move was part of the measures to optimise the marketing of Nigeria’s crude oil and to secure new market potentials, the number of off-takers for the proposed 2015/2016 term contract which would emerge after a planned rigorous competitive bid exercise has been pruned from 43 to 16.

Also the cancelation of the Offshore Processing Agreements (OPAs) with oil traders is meant to have the opportunity to look at the contracts and make them more transparent for Nigerians to get better value than they are getting from the existing contracts. Government assured in the course of the year that it would raise funds from international investors and the private sector in 2016 to fund the Joint Venture (JV) cash calls between the NNPC and International Oil Companies (IOCs) operating in the country. Also average national oil production as at July 2015 stood at 2.1 million barrels per day despite challenges which the industry faced during the period.

Oil Price

In the period under review, the Global benchmark Brent crude extended its losses, dropping to $39 per barrel which threatened the federal government’s ability to save earnings from crude oil sales for next year. The Federal Executive Council(FEC) had proposed $38 per barrel as the oil benchmark price for the 2016 budget, down from $53 this year. The Excess Crude Account(ECA), into which the country saves the difference between the market price of oil and the budget benchmark to provide a cushion when oil prices fall or extra cash is needed for spending on infrastructure, has been depleted in recent times as oil revenues plunged.

The account, which stood at about $4.11billion in October 2014, dropped to $2.45billion in December that year, down from about $3.11billion in November. The balance in the ECA was put at $2.1billion in July this year. The National Assembly could not come to terms on the $38 per barrel proposed by the Federal Executive Council(FEC) as the oil benchmark price for the 2016 budget, which was contained in the Medium Term Expenditure Framework and Fiscal Strategy Paper forwarded to the upper chamber by President Muhammadu Buhari.

While some of the lawmakers called for an increase in the benchmark price, others supported the decision of the federal government to peg the benchmark at $38 per barrel. Brent, against which most of the world’s oil, including Nigeria’s is priced, has fallen by more than 60 per cent in the past 18 months, putting pressure on oil-exporting countries. The global benchmark fell below the $40-per-barrel mark in December for the first time in almost seven years due to oversupply.

Downstream

Nigeria’s four large refineries has a total nameplate capacity of 445,000 bpd, but historically their capacity utilisation rate has been low, around 30 per cent, and they are far from able to address domestic demand. And in response to the slump in crude oil prices in the international market, government in January announced a corresponding reduction in the pump price of petrol from N97 per litre to N87. The refineries domestic output meets only 9 per cent of daily petrol consumption, 24 per cent of dual-purpose kerosene use and 28 per cent of automotive gas oil consumption, with the rest imported from abroad and the country still relies on imports for some 86 per cent of its aggregate consumption of more than 50m litres a day.

During the period under review, production suffered due to under-maintenance and vandalism, but it has also been hampered over the past year by a number of other factors including power cuts and disruptions in crude deliveries, as some oil originally slated for local refineries was instead exported under a swap deal arranged by the NNPC. The NNPC announced on July 29 that the Port Harcourt and Warri refineries have started production after a nine-month phased rehabilitation programme. Within the period the Port Harcourt plant raised its operational capacity to about 60 percent of its 210,000 barrel per day (bpd) capacity, while production at the Warri refinery was projected to hit 80 per cent of its installed 125,000-bpd capacity.

Attention was shifted to the 110,000-bpd Kaduna refinery which was also projected to come on-stream. Other changes announced in attempt to bring accountability into the system announcement by President Muhammadu Buhari in July to split the NNPC into two entities, with an independent regulator for the energy sector and a separate investment vehicle, as part of his election promises to combat corruption. This followed recommendations from a committee tasked with managing the transition from the former administration for a partial privatisation of the four state-owned refineries. The committee had suggested cutting public equity to 49 per cent, a move it said would lead to improved efficiency and productivity. In an 800-page report, the presidential transition committee also proposed that the government prioritise the development of modular refineries for processed products such as diesel, aviation fuel and kerosene to reduce dependency on imports.

 

Credit: Leadership Newspaper