Nigeria’s Upstream Sector Post COVID-19: The need for restructuring

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Upstream Oil & Gas Sector in H2-2020

The upstream oil & gas sector is one of the worst-hit sectors by the COVID-19 outbreak. Clearly, the combination of global lockdown measures (which weakened oil demand) and the oil price war, fueled a historic drop in crude oil prices.

Notably, Nigeria being a major oil exporter was not spared, as the NNPC discounted crude grades to attract buyers.

Nigeria’s Upstream Sector Post COVID-19: The need for restructuring - Brand Spur
Sources: Baker Hughes, Bloomberg, United Capital Research

Also, according to the NNPC, netback value of crude oil for long-haul journeys to China declined to $1.0/ b on 1st Apr-2020, due to the price plunge and high freight cost.

Although gradual re-opening of economies globally – which is fuelling a slow recovery in oil demand- and the recent supply cuts by OPEC+, is rebalancing the oil market, we note that the realities of the pandemic have fostered some changes in the Nigerian upstream sector.

Firstly, due to weaker demand and uncertainties, many operators are cancelling/deferring the fresh investment and cutting capital expenditure, while focusing on drilling only high yielding wells. For instance, SEPLAT’s Capex guideline for FY-2020 is $120.0mn, compared to $125.0m n in FY-2019.

Also, major IOCs – Exxon Mobil, Shell, Chevron and Total- have announced a reduction in their 2020 Capex program. Elsewhere, the total count of active rigs has dropped from a high of 23 in Feb-2020, to only 8 active rigs in May-2020.

Furthermore, total foreign capital imported into the sector dropped by a whopping 41.4% y/y in Q1-2020, to $10.1mn.

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To make the investment case for the Nigerian upstream oil & gas sector compelling again amid improving crude oil prices, there is a need to integrate modern technology in operating models.

Production efficiency is also paramount, as average operating cost per barrel, among both JV and PSC operators in Nigeria, is estimated around $25.0/ b and $17.7/ b respectively, relative to the NNPC’s target of $10.0/ b. In addition, to really boost investment in the sector, the Petroleum Industry Bill (PIB) has to be passed or implemented.

Finally, blessed with abundant gas reserves, the pandemic offers an opportunity for Nigeria to increase its focus on the gas value chain, to maximise the inherent value of the upstream sector.

United Capital Research