By Gideon Osaka
The year 2021 was a landmark one for the Nigerian Oil and Gas Industry following the conclusion of the marginal field bidding rounds and the passage of the Petroleum Industry Act (PIA) with the industry now poised to attract the much anticipated investments. The oil and gas industry rebounded strongly throughout 2021, with oil prices reaching their highest levels in six years.
While the industry’s recovery is better than expected, uncertainty remains over market dynamics in 2022, with the challenges posed by the clean energy transition agenda and the new Omicron variant of Covid-19. Valuechain’s outlook for 2022 focuses on some of the potential developments in the industry in 2022 that will shape the path forward for oil and gas sector in Nigeria.
Full operationalisation of the PIA
The President assented to the Petroleum Industry Act (PIA) on 16th August 2021. Some of the benefits of the law to the sector are expected to begin to manifest by 2022. The enactment of the PIA, was described as the boldest attempt at lifting the uncertainty surrounding the fiscal and regulatory environment of Nigeria’s petroleum industry for decades. With the assent of the bill, concerns of its timely implementations became rife. Such concern was immediately put to rest with the inauguration of an Implementation Steering Committee headed by the Minister of State, Petroleum Resources, Timipre Sylva followed by the incorporation of NNPC Limited and the announcement of a new Board for the company. Also completed was the inauguration of the successor agencies and Boards of the Nigerian Upstream Petroleum Regulatory Commission and the Nigerian Midstream & Downstream Authority as stipulated in the Act.
The President while inaugurating the Implementation Steering Committee directed immediate implementation or activation of the Act within 12 months. Although the general expectation is that full operationalisation will take between 18-24 months, some of the benefits of the law to the sector are expected to begin to manifest by 2022.
The timely passage of the Act will help the country attract investments across the oil and gas value chain, according to President Muhammadu Buhari when he signed the law in August.
“The Petroleum Industry Act 2021 will create a regulatory environment that would ensure efficiency and accountability across the oil and gas value chain.
“The Act also provides for a direct benefit framework that will enable sustainable development of host communities.
“Furthermore, the Act provides for deliberate end to gas flaring, which would facilitate the attainment of Nigeria’s nationally determined contributions of the Paris Agreement,’’ he said at the time.
Could 2022 be the final end of petrol subsidy?
A high level of fear and uncertainty will be the lot of most Nigerians in 2022 because of the plan by the government to remove subsidy on premium motor spirit (PMS), better known as petrol, during the year. While the actual cost of importation and handling charges amounts to N234 per litre, the government is selling at N162 per litre. PMS price either at the depot or retail stations have since February 2021 been frozen thanks to the Nigerian National Petroleum Corporation (NNPC) who as the sole importer of the product has continued to shoulder the deficit.
However, the federal government by November announced it would remove subsidy on fuel in 2022, which may lead to the product being sold at a price range of N320 and N340 per litre.
Despite numerous attempts at reform, Nigeria has never successfully removed fuel subsidy, due largely to strong popular opposition to reform. 2022 may likely witness series of strike and protests by labour unions and civil groups over the removal.
Subsidy comes at a great cost: spending on other development objectives is lower; the distribution of resources to the state governments is reduced; the vast majority of the subsidy goes to better off Nigerians; and cheaper petrol encourages greater pollution, congestion, and climate change. There is consensus among experts that deregulation of the petroleum downstream sector was inevitable if the economy must progress and put an end to the corruption that comes with the subsidy regime. On the other hand, subsidy removal will lead to increase in the price of PMS which is the most used fuel for transport and electricity generation, has spiral effect on transport cost, food and ultimately the general purchasing power of Nigerians.
On the one hand are organised labour and ordinary Nigerians who would not accommodate any PMS price increase, on the other hand is a government heavily constrained by finances to continue subsidising petrol.
Despite threats of strike by labour and trade unions there seems to be little evidence to prevent the implementation of the zero subsidy in 2022.
Gas penetration, expansion
Some level of progress is expected to be achieved around gas utilisation in 2022 on the back of the declaration of 2021 to 2030 as the decade of gas by President Muhammadu Buhari, aimed at transforming Nigeria into a gas-powered economy. The Decade Of Gas is a decade that will witness the elimination of gas flaring, a decade of more domestic Liquefied Petroleum Gas (LPG), and a decade of a fully gas-powered economy.
The government has supported the launch of programmes geared towards harnessing Nigeria’s gas resources for national development. Ongoing construction of the 614 kilometers Ajaokuta-Kaduna-Kano (AKK) pipelines and the NLNG Train 7 Project are among gas projects expected advanced to appreciable milestones in 2022.
Facilities for auto-gas conversion, new LPG plant and jetties are expected to be inaugurated in 2022 following the successes of the recent inauguration of the Emadeb Energy 120MT LPG Storage and Bottling Plant in Abuja and the inauguration of the Butane Energy 100 metric tonnes capacity LPG storage and bottling plant in Katsina State.
Underproduction struggles to abate
With the historic resolution in April 2020 by OPEC and its allies (OPEC+) to cut its members production, the expectation was that when implemented, oil prices would rebound by at least $15 per barrel in the short term. Crude oil price did rebound as Brent futures hit a near three-year high.
Despite the rally in oil price since Nigeria joined the OPEC cut deal, significant under-production by the country against the OPEC quota means that Nigeria is unable benefit from the gains of the rally in oil price.
On September 21, 2021 Minister of State for Petroleum Resources, Chief Timipre Sylva confirmed Nigeria had officially written OPEC, requesting a higher production quota under the OPEC+ accord. The current OPEC+ agreement calls for the group to collectively raise output by 400,000 bpd each month through the end of 2022, with a review of the pact scheduled in December 2021.
Though data showed that Nigeria’s production contrast with her request to OPEC for a higher production quota under the OPEC+ accord, Sylva maintains that the technical problems that have hampered Nigeria’s output will soon be resolved.
Does the country deserve a higher quota come 2022?
The minister insists on the affirmative noting that aside its efforts to fix the technical difficulties, the basis for the current production quota, which was mainly because of the problems in the Niger Delta at the time, no longer exists. Despite the production curtailments by OPEC, Chief Sylva assured that all planned industry development projects would progress after the termination of the OPEC/Non-OPEC adjustments in April 2022.
Should Nigeria be able to ramp up crude oil sales to the assigned levels of including condensates, then it could have been able to shore up its foreign exchange and revenue earnings in 2022.
Improved refining landscape
Nigeria’s refining landscape is set to completely change in 2022 once the 650,000 barrels per day, Dangote refinery in Lagos comes on stream. Originally set for completion in 2016, Africa’s largest oil refinery, is now expected to be finished by the end of 2022. The refinery is part of a vast petrochemical project that will also house the world’s biggest ammonia plant. Once operational, the facility is intended to curb, or even end, the nation’s dependence on fuel imports — a source of embarrassment for the government of Africa’s largest crude producer.
The company expects fuel production within two months of completion of the refinery, which could transform Africa’s biggest crude producer from a fuel importer into a net exporter, upending global trade patterns. The refinery will be able to supply all the petrol, diesel and aviation fuel used in Nigeria, and a third of its output will still be available for export. Efforts by the federal government to boost domestic refining capacity and guarantee fuel sufficiency through alternatives like modular refining, will bolstered by certain strides expected in 2022.
Following the successful completion of the Waltersmith modular refinery two additional modular refineries in Edo and Bayelsa states are due for completion and commissioning in 2022. One of them is the Duport Modular Refinery, situated at Egbokor in Edo state, which is on track to be completed before the end of December 2021.
The 650,000bpd Dangote Petroleum Refinery, existing and new modular refineries coming on stream are expected to be the major drivers of Nigeria’s demand for petroleum products in 2022, which is projected to grow massively in the nearest future.
Mixed outlook for global oil prices
Analysts at Fitch Solutions Country Risk & Industry Research in their revelation of “key” oil and gas themes for 2022 forecast that oil markets will shift from undersupply to oversupply in the first half of 2022. The change should lead to lower oil prices and a potential divergence in production between OPEC+ and non-OPEC members.
“Despite the emergence of the Omicron variant in late 2021, OPEC+ have confirmed they will continue with a monthly production increase of 400,000 barrels per day,” the analysts stated in the report.
“This, combined with the coordinated release of strategic petroleum reserves orchestrated by the U.S. over the early months of 2022, will see increased supply come onto the market despite concerns that demand growth is slowing and with the impact of Omicron still unclear,” the analysts added in the report.
Goldman Sachs however has forecast crude oil price of $85 per barrel in 2022 as demand growth outpaces supply growth. According to Goldman’s analysts, the recent drop in oil prices—fuelled by fears about the latest coronavirus variant—was an overreaction. Going into 2022 after the year of recovery in 2021, the oil and gas industry will be looking to balance increased shareholder distributions with emissions reductions to heed investors’ concern about the industry’s relevance in the energy transition. Lower emissions, higher investments in alternative energy, and repositioning of asset portfolios will continue to be the key themes to watch in the oil and gas industry next year.
Goldman has become the second bank to maintain its bullish stance on oil despite the recent dip. Earlier, JP Morgan brushed off Omicron fears saying 2022 will see the end of the pandemic and forecasting oil prices could hit $125 per barrel.
For Nigeria, there is no cause for alarm in 2021 based on analysts prediction about oil price, as Nigeria is most comfortable with a price range of between $50 to $60.Nigeria’s 2021 budget was predicated on a crude oil benchmark price of $40 per barrel, while $57 per barrel was proposed for 2022.