Eight major issues shaped the oil and gas sector in 2016 that impacted on the performance of the sector, which by the third quarter of 2016 had contracted by 22%.
The major issue for 2016 was the price of crude oil, which plunged to $27 per barrel, its lowest level since 2013, crashing an incredible 75 percent from its June 2014 peak of almost $108. This had a significant impact on all players in the sector.
The steady decline in the oil prices created a widespread headache for financial markets, causing energy companies’ profits to plunge, raising worries about the prospect of bankruptcies in the oil sector and spooking investors about global growth.
Nigeria, which depends largely on crude oil revenues for funding government budgets and also as the most significant source of foreign exchange earnings, had to adjust to lower revenues and foreign exchange earnings.
The country’s position was further weakened by militancy in the Niger Delta, which led to a sharp drop in crude oil production by about a million barrels per day. This led to significant loss of revenues for the country.
Faced with these huge drops in revenues and foreign exchange earnings, the Federal Government, which depends largely on imported refined petroleum products to run the economy, had to take the decision to remove subsidy on petroleum products to reduce government expenditure on importation of fuel and move Nigeria closer to a final deregulation of the downstream sector.
This development led to moving the pump price of petrol form N86 to N145 per litre.
There were however many positive developments in Nigeria’s oil and gas space, the biggest of which was that ExxonMobil announced a significant discovery of a new oil field with a potential recoverable resource of about one billion barrels of oil on the Owowo field, offshore Nigeria on October 27.
“It is a significant morale booster for the industry, especially as Nigeria’s reserve replacement ratio has been going down”, said Rolake Akinkugbe, head of Energy & Natural Resources for FBN Quest.
The Owowo Field spans portions of the contract areas of Oil Prospecting License 223 (OPL 223) and Oil Mining License 139 (OML 139). The well was drilled by ExxonMobil affiliate, Esso Exploration and Production Nigeria (Deepwater Ventures) Limited and proved an additional resource in deeper reservoirs.
“One billion barrels of oil reserve is about three percent of Nigeria’s current reserve and if the potential is realised, that will give the country an extra 100,000 to 200,000 barrels of oil per day”, said Wumi Iledare, professor of Energy Economics at Centre of Petroleum Institute, University of Port Harcourt.
Reserves also increased, as Lagos state became an oil producing state with the first export of crude from Aje field.
Within the year also, Nigeria exited joint venture cash call funding, as it signed off the joint venture arrangement, saving the country $8.4 billion yearly. This removes the burden of paying about $700m monthly as the NNPC announces plans for a self-funded joint venture arrangement to start January 1.
The agreement was signed by Maikanti Baru, NNPC group managing director, who was also in the course of the year, appointed the group managing director of the NNPC, and will see NNPC exploring alternative funding mechanism that allows the joint venture business finance itself by retaining its operating costs and capital allowances.
The implication of this move is that the Joint Ventures will relieve government of the cash call burden by sourcing funds for their operations. Cash call underfunding in 2016 alone amounted to $2.5billion, bringing total cash call areas to $8.5billion.
Significant deals were also witnessed in the sector, including the Nigerian Independent Petroleum Company (NIPCO) acquiring 60 per cent stake in the downstream operation of Mobil Oil Nigeria (MON).
In a message to the Nigerian Stock Exchange, NSE, after the deal was signed, the management of Mobil Oil Nigeria Plc said the Nigerian entity “has been informed by its majority shareholder, ExxonMobil Oil Corporation, that it has agreed, subject to regulatory approvals, to sell its shares representing 60 per cent of Mobil Oil Nigeria’s shares to Nipco Investments Limited, a wholly-owned subsidiary of Nipco Plc.”
Ibe Kachikwu also announced the signing of a Memorandums of Understanding (MoUs) with several Chinese firms for over $80 billion new investments, spanning five years, in the oil and gas industry, covering pipelines, refineries, gas and power, facility refurbishments and upstream financing. Kachikwu also announced plans to sign a US$15 billion advancement payment oil deal with India.
The world’s largest oil exporters finally agreed a deal to cut output for the first time in eight years, to erode a global supply overhang that has persisted for two years and halved the value of a barrel of crude on Novemember 30.
The Organisation of the Petroleum Exporting Countries (OPEC) confirmed its decision to implement a new production target of 32.5 MMb/d effective January 1, 2017 for six months to accelerate the ongoing drawdown of the stock overhang and bring the oil market rebalancing forward. The reduction agreed during the OPEC 171st meeting in Vienna, will cut output by some 1.2 MMb/d, from the current 33.64 MMb/d.
Iran, Libya and Nigeria were all given special dispensation not to join in with the reduction, as the three are still fighting to boost their exports and regain market share lost to international sanctions, or civil unrest and violence.
Policy-wise, the Nigerian government came up with a petroleum industry roadmap that brings clarity to the operations of the industry tagged ‘7 Big Wins’. The document is the short and medium term priorities to grow the nation’s oil and gas industry from 2015 to 2019.
Within the year, a public hearing was conducted on the petroleum sector governance bill, the NNPC has backed plans on its own unbundling, which will see the corporation dissolve into two entities: Nigeria Petroleum Assets Management Company (NPAMC) and Nigeria Petroleum Company (NPC), or national oil company. The PIGB is now expected to be passed in the first quarter of 2017.
The government also showed greater commitment towards the environment, by signing the Paris Climate Change Agreement and began efforts at cleaning oil spills from Ogoni land.
OLUSOLA BELLO, FRANK UZUEGBUNAM, ISAAC ANYAOGU
