Regulatory And Business Environment The Main Concern
BMI View : We believe that while current onshore outages are to be expected in the short-term, it is unlikely that Nigerian oil and condensate production will drop significantly below its current production level. We highlight that while onshore asset divestments by International Oil Companies (IOCs) illustrate the difficult onshore security situation, strong interest remains in Nigeria's hydrocarbon production, with many IOCs redirecting their attention to the less disrupted and more prolific offshore. While we believe that interest in Nigeria's hydrocarbon potential will likely endure given the country's below-ground potential, the largest risk faced by Nigeria will come in the form of offshore project and investment delays as a result of the uncertainty surrounding the adoption and content of the long-awaited Petroleum Industry Bill (PIB). FID delays would push back a Nigerian production ramp-up and lead to more modest oil production increase than currently expected as companies wait for a more stable environment.
Worrying Factors For Nigerian Hydrocarbon Potential
Several worrying factors can be pointed out for Nigeria's future hydrocarbon potential, including: crude theft, pipeline vandalism, a deteriorating business environment and regulatory uncertainty surrounding the Petroleum Industry Bill (PIB).
Theft, Outages and Force Majeurethe consequence of a progressive detrRecurrence of outages and force majeure cases as a result of oil thefts and pipeline vandalism has impaired production in both 2012 and 2013. Royal Dutch Shell and Eni were the primary victims of these attacks, with Shell for example reporting that 2013 average daily volumes for sale from Nigeria were 89,000b/d compared to 136,000b/d in 2012 on the back of illegal bunkering and sabotage in the Delta. Oil theft and subsequent regular shutdowns of the Trans-Niger Pipeline and the Nembe Creek Pipeline have important repercussions for Nigerian production as a whole: in October 2013, the Nigerian Federal Ministry of Finance stated that the theft of crude oil was costing Nigeria 350,000b/d, which equates to about US$1bn a month in lost revenues at US$100/bbl.
Uncertain Business Environment The most pressing issue is the legal uncertainty regarding the Petroleum Industry Bill (PIB). The PIB, long promised by President Goodluck Jonathan has been repeatedly delayed, creating uncertainty among investors with the respect to the future legal and fiscal environment. We now believe that despite regular attempts to pass the bill, the latest of which was in September 2013, the PIB is unlikely to be passed before the 2015 elections, as the country is increasingly engulfed in a political crisis which will erode political will to push through vital reforms such as the PIB until at least after the election.In addition, there is uncertainty as to the form the PIB will take. The proposed legislation has been in the works for 15 years is in its fifth year of deliberations by lawmakers. The current proposed bill includes higher taxes and an increase in royalties. Oil companies say that this will create one of the world's harshest fiscal regime and more divestments could follow as E&P would become uneconomical. Should a watered-down version of the bill be adopted, it would put in place clearer and more transparent guidelines guaranteeing a stable operational environment for operators. This would help launch several projects waiting on a final investment decision (FID). Added to the uncertainty regarding the PIB, controversies with regards to proper implementation of transparency standards are further deteriorating the business environment in Nigeria. In particular, the country's transparency standards are very low, ranking 40 th out of 58 in the Revenue Watch's 2013 Resource Governance Index which evaluates the quality of governance in the oil, gas and mining sector of 58 countries.
Uncertain Market For Nigerian CrudeThe US shale oil boom has been detrimental for Nigeria's hydrocarbon sector since 2009, due to the light sweet nature of US shale oil and the subsequent strong contraction of US demand for Nigeria's light sweet crude. Nigeria has had significant difficulties in finding a substitute market for its displaced crude. While the country has managed to increase exports to Europe and India and could ramp-up export to China in the near future, we highlight that these options are not necessarily long-term market opportunities and will not necessarily manage to absorb significant Nigerian imports ( see, 'Despite Uptick, Difficult Options For Nigerian Crude Exports,' February 20).
What Does This Mean For Crude Production?
Continued Short-Term Outages, But No Lack Of Company Interest/Moderating The Alarmist ToneThe issues of theft, outages and force majeure have had very direct consequences on total Nigerian production, resulting in Nigerian production punching below its weight since 2011: as we had forecasted, total Nigerian oil production in 2013 (including condensates) fell to approximately 2.4 barrels per day (b/d), a 4.5% decrease in total output from 2012 production levels of 2.5b/d. 2012 output was already down from outputs in 2011. We expect these outages to continue in the short-term, as no significant changes in the security situation have been noted, and the large size of onshore pipeline infrastructure and the magnitude of crude oil theft will make it difficult to control and crack-down on this development. Illustrative of worsening investor sentiment towards Nigeria can be seen through the onshore and shallow water oil assets divested by oil majors over the past two years, reducing their exposure to unstable onshore production, such as:
|Company||Date Announced||Announced Sells|
|Royal Dutch Shell||Jul-13||OML 13 and 16 onshore Ogoniland region in Niger Delta|
|Shallow water OMLs 71 and 72|
|Previous to July 2013, the company sold 8 Niger Delta licenses|
|Royal Dutch Shell||Oct-13||Shallow water OMLs 18, 24, 25 and 29|
|Royal Dutch Shell||Nov-13||97 kilometres Nembe Creek Trunkline|
|Petrobras||Mar-13||Selling stakes in Agbani and Akpo blocks|
|Chevron||Jun-13||Selling shallow water stakes in OMLs 52, 53, 55, 83 and 85|
However, while high-profile onshore divestments by IOCs is illustrative of the difficulties in Nigerian onshore production, we do not necessarily believe that this will be a precedence to a wider wave of IOC divestments or disinterest in the country as a whole.
Indeed, instead of representing an exit from the country, many IOCs actually seem to be re-balancing their asset portfolio towards offshore Nigeria, which accounts for a majority of Nigerian oil production and has seen continued interest by IOCs. The Nigerian offshore offers a high resource potential for companies when compared to depleting onshore reserves in older onshore fields, and enables the reduction of company exposure to onshore security problems. Large IOC presence (Shell, Chevron, ExxonMobil, Total amongst others) in the offshore signals continued interest in the country's oil sector despite operational and regulatory difficulties. In addition, we note that strong interest by local or smaller companies for IOC onshore assets being divested highlight continued investor interest, even in the difficult onshore security environment.
As such, while the onshore situation is certainly not an encouraging one and will likely result in continued outages in the short-term, we prefer to moderate the alarmist tone often taken by current analysis on Nigeria. It is unlikely that Nigerian production will fall further than it currently has, given the interest by companies for divested assets, the moderate role played by onshore production, the increasing importance of offshore production and the continued presence of large IOCs in the offshore.
Delays In Investments A More Likely Problem For Nigeria
While we believe that interest in Nigeria's hydrocarbon potential will continue, the largest risk faced by Nigeria will come in the form of delayed offshore projects and investments as a result of the uncertainty surrounding the adoption and content of the PIB. This is particularly true in a global context whereby major oil and gas companies are seeking to rein in capital expenditure in 2014, following global increases in project, operation and exploration costs.
Indeed, the delay and the unclear nature of the PIB has continued to cause uncertainty, limiting investments and delaying FID for several projects such as Shell's Bonga North and South West deepwater fields which has been waiting for the PIB to be adopted, or ExxonMobil's Bosi offshore project. Several other investors are in a similar situation - the Senate Committee for the country's upstream oil industry estimates that about US$28bn worth of investment has been postponed between 2010 and early 2013, waiting for regained certainty on the regulatory framework.
As such, the attractiveness of fiscal terms for deepwater offshore exploration and production included in the PIB will be key in launching several current and future projects waiting for FID. In this sense, the content of the bill and further delays in adopting the bill constitute the largest risk to Nigeria's hydrocarbon sector, by continuing to push back investment decisions, project developments and start-ups. The largest risk for Nigeria is therefore not a significant loss of company interest in the country's hydrocarbon sector, but rather project delays which would push back a Nigerian production ramp-up and lead to a stagnation of the country's production in the medium-to-longer term.
Our Forecast Given the above, we expect crude and condensate production to stagnate in both 2014 and 2015 at around 2.4mn b/d. We nonetheless expect production to ramp up in the coming years following the numerous offshore projects currently planned, such as Chevron's Agbami 2 project, ExxonMobil's Erha North Phase 2 projects and Total's Egina field project amongst many others. Taking into account the likely affects on onshore production due to continued instability and the possibility for project delays, we expect that production could ramp-up 2.8mn b/d by 2020, and fall slightly thereafter.
|Crude Ramp-Up Largely Dependent On PIB and Business Environment|
|Nigeria Oil Production, Consumption and Net Exports (000b/d)|
However, we reiterate that both downside and upside risk exists, largely depending on an improvement in the business environment and the content and adoption of the PIB. Should the current situation endure without an adoption of the PIB, project investments and cancellations could see Nigerian production stagnate in the longer-term.
In addition, we highlight additional downside risk to our outlook for Nigeria stems from rising piracy in the Gulf of Guinea; indeed, we note that piracy remains a particularly worrying trend which could slow exploration of Nigeria's offshore waters. Nigerian waters are increasingly called the 'hot spot' of West African piracy, with maritime crimes in the area having significantly increased since 2012: the 2012 report from the International Maritime Bureau highlights that there were 43 vessels attacked in 2012, with 206 people (21% of those attacked) held captive by pirates seeking to steal equipment, crude or refined oil. In 2013, pirate attacks on Nigerian coasts have again increased by a third, and the worrying trend is continuing in early 2014.
Although the loss in onshore production due to instability is already factored into our forecasts, growing offshore instability could also lead to an eventual downgrade of our forecasts if the security situation worsens.