OIL
Nigeria's Oil Uncertainties
May 2017
Nigeria’s oil production still 1Mbpd below 2011 peaks despite increased production in Q1 2017. Political deadlock about the new Petroleum Industry Bill has seen capital investment levels and number of new projects decrease since 2008. Proposed greenfield developments in the pipeline require a break-even price of US$60¬90/bbl. Currently, there is 800kbpd in future projects that remain unsanctioned.

Nigeria Oil Potential Remains Stifled by More than Just Oil Prices

Nigeria’s oil production has decreased by over 1Mbpd in the past five years. In 2016, Nigeria’s crude oil production was 1.54Mbpd. Because of this decline, Nigeria was one of two OPEC nations exempt from the production cut agreement currently in place. However, we believe it is unlikely Nigeria will be able to significantly increase production rates in the short term as capital investment has sharply reduced. We are attributing the reduced capital investment to increased militant activity, low oil and gas prices and fiscal uncertainty in Nigeria.

The main problem has been fiscal uncertainty. The Petroleum Industry Bill was first introduced to the Nigerian Parliament in 2008 but has yet to be passed. The bill will change deep-water fiscal terms and could render many projects uneconomic. Some of the most contentious areas of the bill include potential contract renegotiations with IOCs, changes in tax and royalty structures, and a mandatory contribution of 10% of monthly net profits to the Petroleum Host Communities Fund. These changes will increase project breakeven prices which are already in the US$60–90/bbl range for greenfield developments. Since the bill was announced, deep-water developments have stalled. Only three start-ups were recorded since 2009 compared to 20 in neighbouring Angola.

Militant activity has also increased in 2016 with attacks on oil infrastructure forcing oil production to dip below 1.25Mbpd in some months, close to a 22-year low. The government’s efforts to clamp down on arrest have been hampered by the weak oil prices because 95% of Nigeria’s exports is petroleum. Production recovered slightly in Q1 2017 to over 1.6Mbpd but investment conditions in the country remain feeble. We expect oil prices to increase above US$60/bbl in the second half of 2017. Around these prices, few deep-water development prospects make economic sense, particularly when including a significant risk premium. Therefore, there are 13 proposed projects with a combined oil production capacity of over 800kbpd that remain unsanctioned.

Nigeria is currently the largest oil producer in Africa and was the world's fourth-largest exporter of LNG in 2015. The country has proven potential in its deep-water assets, however, we expect Nigeria to be unable to exploit its position in the short term because of its internal issues and the global price environments.