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Market Digest Nigeria

Economy

Oil hits $60 a barrel

oil

As oil hits $60 a barrel, the rhetoric from Nigeria is the need to be reminded of lag in demand fuelling uncertainty and preparation for a world beyond oil to avert a repeat of the year 2020 crisis.

oil

The collapse of oil prices to below zero last April shook many oil producers and jolted an energy sector to rethink strategy. For Nigeria, it was time to take the bitter pill and hedge the crisis with gas. With gas offering the resilience for transition and increased electricity supply, the Federal Government’s decade of gas mantra appears soothing for a gas nation,

Last year, the price of West Texas crude fell to negative $37.63 per barrel on April 20, as sellers scrambled to offload their May futures contracts before the next expiration date — even if they had to pay buyers to make the deal. The reason: with the pandemic bringing the economy to a standstill, there is so much unused oil sloshing around that American energy companies have run out of room to store it.

The above scenario was not peculiar to American producers but also Nigeria, as the Federal Government had in a desperate effort to offload and sell stranded barges of oil, offered oil traders huge discounts on Nigerian crude oil grades below the $10 mark for the month of May.

Data from the Nigerian National Petroleum Corporation (NNPC) on government’s crude oil grades for sale in May 2020, showed prices as low at $1.51 while two of Nigeria’s banner grades — Qua Iboe and Bonny Light — sold at discounts of $3.92 and $3.95, respectively to Dated Brent.

Without refining capacity, Nigeria lacks the space to store unwanted supplies at a time the cost of hiring ships to take its supplies to importers had soared because many tankers are being used for floating storage.

Indeed, the Group Managing Director of the NNPC, Mele Kyari, had painted a gloomy picture of the Nigerian economy in the months ahead, appealing to industry captains and Nigerians, to be prepared for very lean times.

As projected at the time, the country went into a recession and continues to deal with worsening revenue problems, owing to low oil prices.

With the uncertainty trailing oil exports and revenue due to the lingering impact of the pandemic, PriceWaterhouseCoopers (PwC), last month, advised Nigeria and other African countries to be strategic in their energy transition plans, while exploring opportunities in gas development.

Noting that much of Africa’s gas supply growth will come from Nigeria, PwC, in its Africa Oil and Gas Review 2020, themed: ‘Energising a New Tomorrow,’ added that the positive outlook for natural gas, which is often termed the renewable bridging fuel due to its lower carbon footprint, will see stronger price and demand recovery as countries move to rebuild their economies.

The report reflected the opportunities in gas export for Nigeria, noting that Africa consumes 63 per cent of its total gas production, predominantly for power generation, even though the continent’s gas exporting countries saw a total decline of more than six per cent in 2020 from 39.7 million tonnes per annum (mtpa) in 2019 to 37.3 mtpa in 2020.

Available data show that Nigeria produces 49.3 billion cubic meters (bcm) of gas, with 24.8bcm or 50.3 per cent exported to Europe and Asia.

Indeed, projections on natural gas demand in Africa show a gradual increase over the next 20 years with global peak gas-only expected towards 2035 and 2040.

Already, oil majors are reviewing their portfolios with a view to embracing transitioning to renewables.

With nearly two-thirds of the continent lacking access to electricity, and most countries depending on expensive fuel imports, there are calls for increased energy spending and the need to explore hydrocarbons for domestic growth rather than solely trading such.

Given the global migration from oil to cleaner fuels, such as gas, the Nigerian economy is going to become increasingly dependent on gas and less dependent on crude oil. The gas sector simply cannot be allowed to follow the same path as the power sector as this would have terrible consequences for our economy.

According to the NNPC, demand for natural gas by the country’s domestic market, which currently comprises mostly power and industries, would rise from 1.5 billion standard feet per day (bscfd) to 7.4bscfd in 2027.

But the Corporation said it was making plans to plug this expected rise in demand with seven natural gas projects it christened the ‘Seven Critical Gas Development Projects (7CGDP),’ which would bring in about 3.5 billion standard cubic feet daily (bscfd) of gas in 2021.

Speaking at this year’s Atlantic Council Global Energy Forum, on the topic, “Delivering Energy Access in the Developing World,” Kyari noted that although the country aligns with the push for renewables, it is now focused on using its oil and gas resources in developing infrastructure till when the commodities become less relevant in about 40 years.

He disclosed that Nigeria, with significant gas reserves, has approximately $3 to $4 billion projects currently ongoing in the sector, some of which have reached advanced stages, in the country’s effort to rev up production for domestic use and for export.

“We are not a petroleum country in real sense. It’s agreed that we have the 10th largest reserve of oil and a significant gas reserve. Of course, what everybody recognises is the oil.

“The reality today is that we have a country in excess of 200 million people. Seventy per cent of this population is well below 30, with a growing middle class and one of the fastest-growing economies in Africa.

“More importantly, for us today, an energy deficient country, over 60 per cent of our country is not electrified, the poverty level is very high, extremely challenging. But so much is going on to see how we can reverse this trend. When you combine all these, you will see that as a country of focus today, many things are happening in the energy sector.

“For instance, we are seeing investment in our energy infrastructure, especially in the area of gas in excess of $10 billion, this is ongoing. There are a number of gas-based projects about $3 to $5 billion and some of them are at the Final Investment Decision (FID) stage,” he stated.

He maintained that Nigeria as a country is currently in transition and not necessarily in the energy transition, but added that the country is not oblivious of the changes in the global oil and gas sector.

According to the NNPC boss, Nigeria is at the moment witnessing increased domestic gas demand in the industrial and power sectors, leading to increased production and reduced gas flaring.

Kyari explained that the country is also witnessing increasing household access to gas networks and natural gas in the main cities, saying that there are deliberate plans to expand that access to rural areas.

He added that the Federal Government’s recent plan aimed at deepening domestic gas consumption, led to the advent of Compressed Natural Gas (CNG), and Liquefied Petroleum Gas (LPG), as part of the policy to deploy resources in the right places.

“The best of forecasts has said that in 30 years, we will still have at least 100 million bpd of oil consumption.

“So, oil and gas will still remain relevant in the near future, but the transition is real. What countries and nations are doing is to move towards much cleaner fuel and this cleaner fuel is clearly gas and that’s why we as a company are focused on gas resources, making sure to supply the domestic market and create opportunities for export.

“So, what we see as an energy resource-based country is to utilise the available resources of today to create the enabling environment for growth and prosperity in the country and that clearly aligns with the reality on the ground.

“We have significant goodwill and understanding across countries, nations and companies. For instance, we have significant engagement with the United States Department of energy in the sense that we receive some support in our transition to cleaner fuels, so that we can develop our gas infrastructure so that we move away from liquids to gas ultimately,” Kyari noted.

On the question of whether Nigeria can survive without oil, especially given the current crisis in the global oil market, the GMD explained that Nigeria was gradually moving away from its dependence on oil.

“What does this mean for a country like ours, which depends on oil for cash? Obviously, we have seen how we can transit to something better for our country, so we don’t depend on that today. You may be aware that today, the country’s resources are mostly coming from taxes and those taxes are growing because population and prosperity are growing and we want to get more work done.

“As a country, we are facing the new realities and we are moving towards the use of gas and also we are developing our resources as quickly as possible so that when the real transition comes in 30 to 40 years’ time, we will be in a position to say this is a developed country that has taken advantage of its resources,” he stated.

 

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