The fragility of the reserves being used to support the naira and it's revalued rate shows that Nigeria needs to find new ways of earning foreign currency. In the first story of our series on the impact of COVID-19 on Nigeria, we look how its economy considers strategies to reduce the naira’s dependence on volatile oil prices.
Nigeria VS Coronavirus: Gas could be saving grace over crashing oil
In the fourth story of our series on the impact of COVID-19 on Nigeria's economy, we look at why the country's neglected gas reserves need to form part of the energy reforms.
This is part 4 of a series.
Nigeria’s oil projects are facing threats from the coronavirus pandemic as international majors slash capital spending.
That puts the onus on the Nigerian government to raise its game in terms of competitiveness in gas as well as oil.
Nigeria’s gas reserves are the most extensive in Africa and in the top 10 globally. According to International Energy Agency (IEA) in Paris, gas-based economies were largely shielded from impact of the pandemic in the first quarter as prices held up.
There is a chronic shortage of gas inside Nigeria, which has continued to rely on oil. But gas can be Nigeria’s saving grace, according to Ekpen Omonbude, a petroleum and mining economist.
- “It is getting increasingly challenging to get risk capital for fossil fuel projects,” he says. But “natural gas provides a cleaner and sustainable transition for big energy projects.”
- The government has been seeking to increase its gas capabilities. The Nigeria Liquefied Natural Gas (NLNG) venture, a partnership between the state oil company and international oil majors, in May closed the deal on its Train 7 gas expansion project.
- The project is expected to lift the country’s LNG output by more than 30%.
- Omonbude also points to Nigeria’s gas-flare commercialization programme as an example of the potential shift to gas.
- In the first quarter, the ministry of petroleum resources shortlisted 200 companies to bid for the development of 45 gas flare sites.
- The ministry has also launched the Nigerian Gas Transportation Network Code, which aims at enhancing the availability and affordability of domestic gas.
- The code seeks to create guidelines for agreements between gas sellers, transporters and buyers. According to KPMG, the code alone does not constitute a coherent gas policy, “especially as Nigeria still lacks a comprehensive legal and fiscal regime for developing its natural gas.”
Nigerian indigenous producers have shown resilience in the face of the crash of oil. Seplat Petroleum at the end of April said it still could produce oil at a profit despite the price collapse, and raised its full year capital-expenditure budget.
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The short-term picture on oil prices has since improved a little. The government said in April that the country’s average oil production cost had dropped to $23 per barrel. Today, Brent crude trades at $36.
That price is not enough for many US shale producers who collectively were losing money before the pandemic with oil at $60. Their demise would lessen the competition for Nigerian oil producers. The partial price recovery also provides “some comfort for the government which has surely run out of options for funding its budget,” says Omonbude.
But slightly healthier prices do not hide the need for greater competitiveness.
- For more than a decade, Nigeria has been considering the passage of a Petroleum Industry Bill (PIB) to liberalise the sector and improve transparency.
- The aim now is to pass the legislation by the end of 2020, but few will be surprised if the timetable slips yet again.
- An oil and gas advocacy group within the Lagos Chamber of Commerce and Industry has warned that the government’s move to increase the deep-water royalties will worsen Nigeria’s competitiveness and could cost the country more $15bn in planned investments in the sector.
- The law prescribes a flat rate of 10% royalty on all projects over 200 meters deep and another 7.5% royalty on frontier and inland basins.
Only countries that can offer the most competitive terms are likely to be seen as viable once the worst of COVID-19 is over. “Nigeria would have to get more competitive in order to secure investment in field development,” says Omonbude.
Success in offering fields “is going to depend greatly on how attractive they make the assets look,” he adds.
Bottom line: Nigeria needs to resist any temptation to hide behind oil’s bounce and press forward with a legal and regulatory framework for oil and gas production.
For part 1, click here.
For part 2, click here.
For part 3, click here.
For part 5, click here.
For part 6, click here.