Expect Zero Project in Nigeria’s Oil Sector in 2021 — Report

…Bonga, Zabazaba, other deepwater projects to delay further

-By Fred Ojiegbe

No significant projects are expected to be approved or come online in Nigeia in 2021, due to the COVID-19 pandemic and the subsequent global crude oil demand drop and crude price crash that came with it, the Africa Energy Chamber said in a report.

According to the report titled Africa Energy Outlook 2021 and published in November, many high profile projects like the Shell-operated Bonga North and Bonga Southwest–Aparo deepwater developments, and the Eni-operated Etan–Zabazaba project, also in deepwater, are now expected to be delayed further as such investment intensive projects have come on the chopping block as IOCs and operators across the world are now focused on cutting down investments and delaying projects with a high breakeven oil price.

The 2021 outlook of the Africa Energy Chamber details all of the major challenges facing African oil and gas stakeholders, as well as workable solutions that will keep the industry on a strong and stable growth path.

Commenting, NJ Ayuk the Executive Chairman African Energy Chamber, publishers of the report, said Africa’s oil and gas industry is facing extraordinary circumstances from an ongoing energy transition and new efforts to decarbonize the world are weighing on oil demand, the shale revolution and of course, the COVID-19 pandemic has wrought havoc on markets around the world.

According to him, external headwinds are forcing African petroleum producers to re-examine their strategies.Restrictive fiscal regimes, inefficient and carbon-intensive production, and difficulties in doing business are preventing the industry from reaching its full potential. As companies delay projects and cut costs, planned capital expenditure in 2020-2021 has fallen from $90 billion pre-COVID-19, to $60 billion now.

He noted that ro remain competitive, African producers and governments must adapt. “But how can they do it when the economic order is being remade?” He asks.

“We believe the short-term outlook will improve if countries apply more competitive fiscal regimes. Emissions can be reduced by curbing flaring and monetizing gas, improving and future-proofing the carbon profile of African petroleum production. Developing gas-to-power infrastructure will increase access to affordable energy for all sectors of the economy, offering massive knock-on benefits and making it easier to do business. Reducing lead times to limit risk premiums put on long cycle projects will further bolster the industry’s viability and growth prospects. It will not be easy, but these reforms are necessary,” Ayuk suggested.

“Again and again, our oil and gas sector has proven its resilience and adaptability. The world still needs oil and gas, and Africa still holds enormous untapped potential,” he added.

According to the report, the petroleum industry in Nigeria was already plagued with existing issues like the long-delayed Petroleum Industry Bill (PIB), which later transformed into the Petroleum Industry Governance Bill (PIGB).

In September 2020, President Buhari resubmitted the bill to the National Assembly, hoping to pass it by the end of 2020, although when or if this action will occur is unclear. To add to this, Nigeria also passed in late 2019 a revision to the 1993 deep water PSCs which increases the royalties on deep water fields from existing 0% to a possible 12.5% at current oil price.

While few other West African countries are taking initiatives to provide fiscal incentives to bring in and retain long-term investments in deep water projects, Nigeria has taken a step in another direction in a gamble to increase government revenues, but in doing so, has created an unattractive fiscal environment for upstream investors, the report noted.

The latest development in Nigeria’s upstream sector has been the announcement of the 2020 Marginal Fields Bidding Round for which as many as 57 marginal fields are up for bidding. The round includes: 22 fields wrested from concessions held by Shell Petroleum Development Company (SPDC), 12 fields left dormant by Chevron, 11 fields held by ExxonMobil now wrested, Five fields held by Total now wrested, Two fields under concession by ENI and an additional five more have been added to those offered by the Department of Petroleum Resources (DPR).

The report noted that the entire process right from registration to  award is expected to be done electronically, due to the coronavirus outbreak.

All the technical and commercial bids were expected to be submitted by August 2020. Under the DPR Guidelines, the entire process is not expected to take longer than six months, from date of announcement and commencement to signing of Farm-out agreement with the OML holders.

Meanwhile, there is dissent building up in the host communities with Indigenous Ijaw rights activists saying that a minimum of 25% equity stake in upcoming marginal field awards has to be allocated to host and transit communities in the oil producing Edo and Delta States. Some militant bodies have warned any award arising from the 2020 Marginal Field Licensing Round that fails to consider the interest of host communities will be an exercise in futility as farm-in allottees will not be allowed access.

While the decision to conduct the bid-round is a step in the right direction and has generated a lot of buzz, the development of these oil fields in a post COVID-19 world may be challenging, given the oil price collapse in the international market, and the unfavourable fiscal regime for marginal field operations in the country.

2021 to see renewed push for domestic gas monetization

Going further, the report revealed that depressed global gas prices and the ever-increasing demand for affordable power offer a unique environment for Africa to push for further domestic gas monetization.

COVID-19 also caused gas demand disruption. While less prominent than for oil, it was nevertheless sufficient to further depress prices.As a result, all major reference prices have converged as a glut of LNG has to be absorbed.

Africa is expected to increase its gas exports once big LNG facilities are on-stream, ultimately increasing African exposure to global gas market.

Given the gas glut on global markets with corresponding depressed prices, there may now be an opportunity to stimulate to more domestic gas consumption. Expanding infrastructure to displace diesel, increased use of gas in the power mix and gas for industrial purposes are all initiatives that would benefit from the low cost of gas.

Post 2025, gas production is expected to accelerate on the back of big new developments in East Africa coming on-stream. Domestic gas consumption is still not expected to follow this growth acceleration unless strong gas-friendly policies are adopted and result in the expansion of African gas infrastructure, which implies increased exports towards 2030.

Only sustained political will, friendly legislation and strong industry support can unlock the true potential African gas can have within Africa.

The report noted that only gas-friendly policies can further unlock Africa’s gas potential for the continent split on key countries.

Overall, it said flaring is expected to decline in line with the oil production, but nevertheless represents significant resources that could be utilized for industrial purposes