How is Nigeria Positioning for World’s $1trn Energy Market?
By Yange Ikyaa
The global market for oil and gas contractors has been projected to rise to a peak of $1 trillion in the year 2025 and remain at high levels for several years thereafter, according to a recent industry report.
Released by Norwegian based Rystad Energy, the report also said it expects strong growth in the midstream part of the industry to liquefy, transport, and re-gasify natural gas, will help push overall oil and gas spending to stay above $920 billion annually on average for the 2022-2028 period.
Despite the fears about a possible risk of another downturn cycle in oil and gas that may occur after 2025, oilfield service suppliers are still considered to be able to balance out the downturn by branching out into other parts of the wider energy market and, in so doing, expanding the overall target market for contractors.
Rystad believes that the key for suppliers is to continue chasing obvious opportunities within geothermal energy, hydrogen, offshore wind, and carbon capture, utilization and storage. And together with oilfield services, this anticipated expansion into other energy areas could provide a $1 trillion market for suppliers by 2025, which could be sustained for several years after that.
By breaking down the various service segments among the oil and gas suppliers, it has been revealed that all segments will grow in nominal terms, led by suppliers targeting equipment and materials, as well as those providing operations and maintenance services.
While Rystad expects the next seven years to provide a strong market for energy services, companies will still have to improve their economics to make it a feast. Luckily, overall utilization is improving rapidly and suppliers are careful not to overinvest in more capacity, as rigs, vessels, plants, and other units in the supply chain are affected by natural wear and tear.
The result of this is better pricing for suppliers, as the past 12 months have driven up prices for offshore rigs, land rigs, frac fleets, proppant, OCTG, vessels, and subsea infrastructure to levels not seen in a decade.
According to Audun Martinsen, Partner and Head of Energy Service Research at Rystad Energy, “global oil and gas suppliers look set to echo the biblical story about the Egyptian Pharaoh’s dream of seven years of feast and seven years of famin- only in the opposite order. All signs point towards last year (2022) being the start of another super cycle for the energy services sector.”
Last year was a turning point with the post-pandemic recovery and record high gas prices and strong oil prices, allowing oil and gas companies to lift their oil and gas investments by 20%.
Furthermore, energy security concerns prompted petroleum producers to raise production and contract goods and services from suppliers, and the oilfield service industry was quickly sold out of fracking fleets, rigs, and casing and tubing steel.
The prices that suppliers could charge surged by double-digit percentages, allowing EBITDA margins to climb. EBITDA refers to earnings before interest, taxes, depreciation, and amortization, which a key metric for measuring profitability among companies. This implies that, after the rebound in 2022, the industry has entered a very promising 2023, with potential for 13% growth for both oil and gas investments and 10% for low-carbon investments.
The above energy market realities mean a lot for Nigeria, which depends largely on oil and gas imports to sustain its economy. For instance, the National Bureau of Statistics noted that, in the fourth quarter of 2022, the value of exports from Nigeria was dominated by crude oil valued at N4.9 trillion, which accounted for 77.24 per cent of total exports.
This left the value of non-crude oil exports value standing at N1.44 trillion or 22.76 per cent of total exports, of which non-oil products contributed N732.24 billion, representing 11.51 per cent of total exports.
Therefore, how is Nigeria positioning to take advantage of the huge global energy market opportunities that are projected to even grow further and expand from now through 2025 to 2028, reaching an unprecedented worth of $1 trillion annually?
In order to appropriately answer this question, it is important to understand what the nation’s current production volumes and also consider what market challenges existing in the country that need to be tackled, as well as how well the collective Nigerian oil and gas industry is trying to approach the matter.
For instance, in the month of February 2023, crude oil output in Nigeria rose to 1.3 million barrels per day (bpd), which was the highest in a period of 13 months, according to the latest Oil Production Status Report of the Nigerian Upstream Petroleum Regulatory Commission (NUPRC). It also stated that, in percentage terms, Nigeria’s oil production increased by 39 percent from 937,766 barrels per day in September 2022, when the country was battling with the disruptive activities of petroleum installation vandals and oil thieves.
On a month-on-month basis, Nigeria’s crude oil output rose by 48,154 barrels per day from 1.26 in January to 1.3 million barrels per day in February 2023.
While oil and gas analysts have pinned the continuous improvement in oil production on government reforms and partnerships by oil companies, it is important to note that the realization of the new Petroleum Industry Act (PIA) and security improvements in the oil producing environment of the Nigerian Niger Delta region have remained fundamental factors in this gamut of reforms and partnerships.
For said Uwaye Omijie, who is a Petroleum Production Engineer at Midwestern Oil & Gas Company in Delta State, “the increase in oil production was because loose ends were tightened. Tompolo and his gang discovered so much pipeline bunkering in the Niger Delta and some companies merged, which increase production.”
This development, Omijie believes, will generate more money for the country and influence the availability of products in the oil market, thereby meeting the world’s demand.
According to him, “our target used to be 2.2 million barrels per day. With the International Oil Companies (IOCs) selling out the fields, moving to Deepwater Operations, and some leaving the country, I doubt our national companies can pull as much weight as the IOCs.
“In that sense, my forecast for Nigeria’s oil production will not surpass 1.5 million barrels per day for now, although more companies are drilling more wells.”
However, more needs to be done than what Nigeria is producing and selling now, if it actually intends to adequately take its own share of the $1 trillion annual global energy contracts market in the next five years.
Valuechain checks indicated that in February, Nigeria’s crude oil output fell short of meeting the largest production quota increase of the Organization of the Petroleum Exporting Countries (OPEC), even after the West African nation boosting production by 100,000 barrels per day within the said period.
This was 50,000 barrels below OPEC’s average crude oil production for February, which was 150,000 barrels per day more than in January, making the 13-member oil cartel’s crude oil output to rise to 28.97 million barrels per day.
While Ayodele Oni, who is a Partner at Energy Practice Group, Bloomfield LP, said that intensified efforts at reducing oil theft along pipeline routes to export terminals have been critical to increased production in Nigeria, he also insisted that “the government needs to ensure this trajectory is sustained,” adding that “the high oil prices have also been some form of encouragement to produce more.”
In consonance with Oni’s position, the Nigerian National Petroleum Company Limited (NNPCL) in February revealed that Nigeria is on course to achieving an oil production level of 1.8 million barrels per day in the next two to three months.
The Group Chief Executive Officer (GCEO) of NNPCL, Mele Kyari, said NNPCL crossed the 1.6 million bpd oil production threshold on February 16, moving from 1.3 million barrels per day at the beginning of the same month. Kyari also added that there is a line of sight to hit a recovery level to the budgeted level of 1.8 million barrels per day.
“I know that it is not far away, probably two to three months maximum, but we will be there, and that will bring back partners to invest, return the confidence of our investors and ultimately bring back growth,” he said.
In December 2022, Minister of State Petroleum Resources, Timipre Sylva, said that improved security surveillance along major crude oil pipelines is helping to shore up oil production from about 900,000 barrels per day to between 1.4 and 1.6 million barrels per day.
The Minister further explained that the Federal Government was working to ensure that all local and international oil companies returned to full capacity production in the country.
OPEC data reviewed by Valuechain suggests that Nigeria may have been working the talk as claimed by Sylva and Kyari, as the country’s oil rig count increased to 13 this year, its highest level since January 2020, rising by 85.7 percent from seven rigs in September 2022 to 13 rigs in February 2023.
Rig count is an important stock-taking matrix that reflects the level of exploration, development, and production activities in a country’s oil and gas sector. This is because active oil exploration attracts investment and revenues into petroleum-rich countries for economic growth.
Dr. Ndubuisi Okereke, who is a Senior Lecturer in the Petroleum Engineering Department at the Federal University of Technology in Owerri, said that the increase in oil rig count in Nigeria implies that more infill wells were drilled from existing oil fields during that period under review, and possibly on some of the recently auctioned marginal oil fields.
In petroleum industry parlance, infill wells refer to additional wells that are drilled on oil fields, targeting pockets of oil that are left behind from the original development plan. This process is extensively carried out on the Norwegian continental shelf and contributes massively to accelerated and improved recovery in the area.
Commenting on the overall rig-count performance in Nigeria, Okereke noted that “the increase suggests that the fight against oil theft is yielding results, and some of our abandoned production lines are beginning to come on stream again. That, he said, “is a welcome development.”
Apart from the value that Nigeria intends to derive from petroleum exploration, development and production activities, the Nigerian Content Development and Monitoring Board (NCDMB) and Bank of Industry (BoI) recently launched a $50-million-dollar Fund for a manufacturing product-line for the Nigerian Oil and Gas Parks Scheme (NOGPS).
The Fund is intended to incentivize companies that would operate in the Nigerian Oil and Gas Parks and engage in the manufacturing of equipment components that are used in the oil and gas industry and linkage sectors.
Speaking at the occasion, the Executive Secretary of NCDMB, Engr. Simbi Kesiye Wabote, mentioned that the Fund would particularly support oil and gas companies that would operate in the Oil and Gas Parks which have been developed by the Board in Bayelsa and Cross River States.
He reiterated that the fund will only be accessed by companies that take up spaces in the Parks to procure equipment or build their manufacturing shopfloors within the Parks. Wabote also pointed that the NOGaPs Manufacturing Fund is different from the initial $300-million fund being managed by BOI with five product lines, which is aimed at supporting Nigerian companies that contribute their statutory one percent to the Nigerian Content Development Fund.
The new Fund, he stated, would be a stand-alone product line with distinct fund allocation and special eligibility criteria and collateral structure. According to Wabote,” the decision of the Board to establish the product was informed by the business peculiarities of the manufacturing sector, which include infrastructure challenges, long gestation, long lead time before returns, low margins on products, and high risk attached to the endeavor, in addition to the reluctance of commercial banks to lend to the sector and the application of stiff collateral and eligibility criteria where loans are extended.”
On the criteria for accessing the NOGaPS manufacturing funds, the NCDMB Boss hinted that unlike the Nigerian Content Intervention Fund, which requires companies to be contributors before they can benefit from it, the NOGaPS Fund can be accessed by companies that will be domiciled and will manufacture their products within the Parks.
His words: “The Fund will provide loans to Nigerian companies that meet the criteria to operate in any of the designated NOGPS Industrial Parks for the purpose of financing manufacturing activities, purchase of fixed assets, working capital and logistics.
“Beneficiaries will get a maximum single obligor of $3 million and a minimum of single obligor of $250,000, with one-year moratorium repayable within five years at five percent interest per annum.”
On the sidelines of the event, NCDMB and BOI signed a supplementary Memorandum of Understanding (MoU) for the $300 million Nigerian Content Intervention Fund for extension of the agreement.
With respect to the various incentives available in the NOGaPS Parks, Wabote disclosed that the rate for accommodation is reduced, power is guaranteed, and the rent will only begin to count when the company commences manufacturing.
The Managing Director of the Bank of Industry, Mr. Olukayode Pitan, applauded the NCDMB for being a partner in progress. He also noted that the Fund will further help promote in-country manufacturing, as well employment creation. Pitan pointed out that the interest rate will help companies to easily access the product and pay back.
“The interest rates are very good just like the initial fund which is less than ten percent and the same thing will apply to this one. All we are looking for are Nigerians who want to manufacture in Nigeria,” he said.
The BOI MD further charged Nigerian companies to harness the opportunity to pick up space within the Parks in order to produce locally.
The NCI Fund was established by NCDMB in the year 2018, with the purpose of financing Oil and Gas companies to increase capacity and grow Nigerian Content in the Industry. Presently, the NCI Fund has five product lines that are being managed by BOI. These include Manufacturing Finance ($10 million), Asset Acquisition Finance ($10 million), Contract Finance ($ 5million), Loan Refinance, ($10 million), and Community Contractor Finance (N20 million).
The Board also has a $30-million Working Capital Fund for Oil and Gas service companies and another $20-million Women in Oil and Gas Intervention Fund. The last two facilities are administered by the Nigerian Export-Import Bank (NEXIMB) and the agreements for the two facilities were signed in mid-2021.
