…Investments in the Oil and Gas Sector Dwindling
…Pandemic Has Led to Global Economic Meltdown
…Gas as an Enabler for Domestic Energy Security
…Need for Increase in Non-Oil Sector
-By Felix Douglas
The Nigerian Association of Petroleum Explorationist (NAPE), is one of the foremost professional association with keen interest about the oil industry in Nigeria and sub-Saharan Africa.
NAPE had its second webinar series where the focus was on the current realities of the oil industry across the globe and what the industry faces as oil prices continue to fall amidst covid-19 pandemic.
Speaking at the webinar series, the special Guest speaker, Dr. Austin Avuru, a Fellow and past president of the association, spoke on the topic “The New Normal: Post Covid-19 and the Implications for the Oil and Gas Industry in Nigeria.”
Dr. Avuru who is the Chief Executive Officer of Seplat, an indigenous oil and gas company, gave stunning details about low oil prices which is currently in vogue across the globe that it is not the first time to see price shocks and rebound, “those of us who have been here for quite a while, we have seen these price shocks in the 80’s over the 1985-1986 price shocks including the recent one in 2016 when prices in February came as low as $26 before the rebound.”
IMPACT ON THE INDUSTRY
For the industry however, this is different because there is combination of a supply shock with unprecedented demand drop and a global economic meltdown. Usually, what the industry experienced was a supply glut and shock for some reason but more importantly any short fall in demand affected prices. But at present, the pandemic has led to global economic meltdown. 25millions barrels per day of demand was cut out at a time when the struggle for market share between the shale producers in the US on the one hand, Russia and Saudi Arabia on the other hand led to surprise shock.
Avuru added that there is an unprecedented case where prices went into negative but this time it is different with full impact on the oil industry due to the pandemic. The structural and financial health of the oil and gas sector globally is also different.
Between 1990 and 2005, there were growing demands, which came from 76million barrels a day up to about 95million barrels a day by 2005. The growing demand and lowering cost led to sustainable high prices.
Thus, oil and gas companies posted a Total Shareholder Return (TSR) over a period of time that attracted a lot of investment into companies. But between 2005 and 2020, demand had grown to about 100.5millions barrels per day. The demand had grown and high cost producers came into play to meet demand due to the high prices that has resulted. Again, between 2005 and 2020, high cost of oil met demand. So, shale oil came in and for the past five years, shale oil has introduced 7.7millions barrels a day.
Supply increased and price buckled. And over this period, TSR was 7% lower than S&P index. This leads to structural and financial health of the oil sector. At present, investment in the oil and gas sector are drying up. With the current issues, oil and gas sector is not a major attraction for investment anymore and it is difficult to predict any long-term high prices.
Avuru was of the view that high crude oil prices in the long-term are difficult to predict. When prices go beyond $35 per barrels some of the high cost of oil is taken out like shale oil. But it is available at a cheaper price. “So, once oil price goes between $30-$40 and get into the $45 rate you can very easily tune up the supply because it is available and the high cost price can come back in.”
This demand supply balance is such that are not likely to see high oil prices in the long term. Oil cost is hovering between $45 and $55 and the industry may not see $45 and $55 oil price because of oil cut until 2022-2023. Even in the NLNG space, the fact that shale gas and the US are becoming a net exporter of gas, it means that LNG prices are also unlikely to go much higher than $2 to $3.
This is a fairly gloomy picture for the industry hence there will be lower prices for longer period of time.
IMPACT ON THE ECONOMY OF NIGERIA
The Seplat CEO gave an insight on the impact of low price of oil on Nigerian economy since oil is the country’s mainstay. Taking a look at data, in 2019, the overall target tax collection by federal tax authority was N8.8trillion but the actually collection was N5.26trillion.
The oil and gas revenue target out of this expected collection was N4.3trillion which should have been about 50% of the target collection. The actual collection for oil revenue was N2.11trillion half of what was projected.
According to Avuru, “If you look at the oil revenue as to what was actually collected, as a percentage of what was total tax collected, was 40% and what was projected was 24%.”
He explained further that, in the federal budget, approved revenue target for the budget of 2019, was 6.998 which is about N7trillion. The actual collection was N4.3trillion, the target revenue from oil in the federal budget was N3.68trillion and the actual was N1.868trillion. The oil revenue as a percentage of the actual revenue collected of the percentage of total revenue was 63% the oil revenue in actual percentage for revenue was 40% which means the percentage of target revenue is 27%.
Avuru revealed that the 2020 budget before it was reversed, the target revenue was N8.4trillion and oil revenue with the inclusion of renewal and signature bonuses which is still being deliberated. The target is 3.7% which is 44% of the target revenue. The Q1 actual collection was 46% which is oil and gas collection of actual totals.
This means that oil accounts for 80% of total revenue on account of 92% of oil exchange. Oil revenue as a percentage of federal budget is falling below 50% whereas the current situation shows 40% to 45% range. At present, Nigeria is no longer in a situation where its oil revenue constitutes over 70% of federal collected revenue of overall tax. this is the direct impact on the economy and it is a key message.
THE COMING RE-SET
The Seplat helmsman with over forty years of experience in the oil industry, said, there has to be a re-set both in economic indices for the country and practitioners in the industry.
Oil and gas contributions to tax collection of federal revenue is trending downwards. Unfortunately, in Nigeria, the country is in a high cost scenario. The global oil prices explain why prices are low in lockdown. “But why everyone else is trying to cut down cost to be able to play along with a low-price regime, our cost in Nigeria keeps going up.”
Avuru pointed out that the key factors are; that some operators especially small size ones, do not have their facilities. They spend as much as $6 to $15 per barrel evacuation cost including pipeline, terminal and security cost to protect facilities.
Another disturbing issue which Avuru disclosed in the industry is that, extra money is being paid by operators with a bill in the National Assembly to increase 1% charge to Niger Delta Development Commission (NDDC) by 2%. “Anybody who wants extra money will tax the oil industry. But look, any increase in cost in this industry is borne between 65% and 85% by the tax man. As long as cost are going up prices are getting lower, tax revenue is going to stay low and overall revenue and contributions to the budget is going to stay low. That is the economic reality.”
As the industry is adjusting to long-term low prices, energy transition is real. Thus, by late 2030, there will be a flattering of oil demand and 2040 will also experience a flattering of gas demand with more renewables. These are realities in the long-term for the industry.
From an economic point of view, the kind of adjustment that Nigeria needs which should be emphasised in the country, is an increase in non-oil sector. By this the economy will be diversified.
Avuru asserted that since oil rental revenue is contributing up to 70% of Nigeria’s budget, there was no courage or political will to move in that direction, “but this time it is real. In 2020, oil prices as we know then, the total oil contributions to our budget will probably be in the 25% to 30% rate.”
When oil revenue is no longer available to enhance budget, the country will be forced to look for other practical sources of revenue.
GAS AS AN ENABLER
Attention will be shifted to gas not necessarily from the revenue point of view but as an enabler for domestic energy security and a catalyst for industrial growth. “So, when we start seeing gas generating 15Gigawatts of electricity and being responsible for all of our cement plants and heavy industries contributing major revenues to the budget and employment generation.”
This is what gas will do to the economy and not as a rental revenue like oil in the past 60 years. Midstream industry will be for import substitution. For instance, if the country is able to refine half of its crude oil production and export half of the products with in-country energy self-sufficiency, the economy will improve. This has to be enhanced with mineral, mining and agriculture, to boost additional foreign exchange because free oil revenue is no longer available.
Therefore, there is need to adjust to the new normal which is non-oil revenue, domestic midstream industry that will capture regional market.
THE RE-SET OF THE INDUSTRY
Avuru averred that the re-set of oil industry to survive, companies should use the current situation and realities on ground to boldly repositioned their portfolios and transform operating models, “we are not going to those high prices that will enable you make more money whether your Operating Cost (OP) or Unit Technical Cost (UTC), $30 to $40.”
For the oil company as it stands, if price is $40 after royalty and $32 operating revenue, if cost is $30 there is a downward with $2 and tax will be also from it. Therefore, it will be difficult to survive.
Avuru encouraged independent operators to diversify their portfolios and choose whether to continue with oil and gas business or focus attention to midstream such as refinery. If the current situation that confronts the industry continues with low oil prices for a long time, obviously, some companies with weak balance sheet will not survive.
There has to be regional market capture. The Dangote refinery and petrochemical should target West African region for selling of products. Operators in the gas sector, should take advantage of the West African Gas Pipelines to deliver gas that will empower the region with 200 to 300million scuff of gas outside Nigeria into the sub-region. As part of survival strategy, these regional markets have to be targeted for energy transmission opportunities.
Avuru said, full deregulation of electricity tariffs where it will be cheaper for people in the northern parts of Nigeria to get electricity through solar might be cheaper for them instead of joining the grid to get electricity like the south. This is also energy transmission opportunities for operators in the industry.
The economic landscape has to be re-set in line with new realities because oil revenue is sliding downwards below 45% of total federal revenue. Operations and portfolio have to transform into new price scenario and can only be successful if stakeholders take advantage of some of these niche play in addition to be a long-term low-cost producer. This is the new normal that faces operators of the oil industry in Nigeria.