Nigeria election special: What future for oil and gas?
Exclusive analysis for the oil and gas sector, and macroeconomic pointers for the year ahead, from Renaissance Capital
Nigeria’s 16 February presidential election will bring one of two scenarios for the country’s most crucial sector, depending on which candidate scrapes through in the polls:
- Scenario 1 – Atiku wins: Opposition challenger Atiku Abubakar has proposed a range of measures to overhaul the oil and gas sector, from seeking to renegotiate production-sharing contracts with oil majors to breaking up and privatising the Nigerian National Petroleum Corporation (NNPC).
- Scenario 2 – Buhari stays: A lack of fiscal clarity on deep-water licence renewals and ongoing litigations (i.e. OPL-245), coupled with the uncertainty and continuous delays in passing of the Petroleum Industry Bill, mean international oil companies are unlikely to change their cautious stance and will remain reluctant to commit to significant investment decisions on new projects, such as Bonga SW and Zabazaba.
Whatever the outcome, the sector will be in a much better state than it was in 2016, when it experienced the peak of oil theft and bunkering. Oil production fell to its lowest level (based on over 15 years of available data) of 1.5mb/d in August 2016, from a peak of 2.5mb/d in 2010.
We envisage less risk to Nigerian oil production in 2019 due to a combination of several factors:
- the relative calm environment over the past 24 months;
- the fact that most producers have de-risked their export routes with alternative pipelines and oil evacuation routes;
- the government’s increased dialogue with Niger Delta stakeholders;
- the government’s decision to triple the amnesty deal, which is now linked to per barrel of production.
The February elections and possible changes in the government could bring about some tensions in the region, but we do not expect an escalation in militant activity. There could be minor, short periods of shut-downs and disruptions to Nigeria’s pipeline infrastructure this year, mainly owing to wear and tear, and low investment in recent years.
We believe there is upside potential to Nigeria’s production in 2019, following the commencement of the 200kb/d-capacity Egina project on 29 December 2018. The initial condensate production of 50kb/d from Egina will offset losses in crude oil production from OPEC cuts (as the OPEC quota only captures Nigeria’s regular crude oil production and not condensates). The Egina oil field, which is being developed by Total in partnership with NNPC, CNOOC, Sapetro and Petrobras, is the deepest offshore project ever operated by Total, with depths ranging from 1,400-1,700 metres. At its peak, the Egina field will be capable of producing 10% of Nigeria’s total oil production. We expect production from Egina to marginally increase government revenue through royalties and taxes (by 50%) initially; this should rise further following a ramp-up to peak production and post cost recovery.
Nigeria’s total 2019 crude oil and condensate production should come at 2,035kb/d in 2019 – this is calculated by aggregating Nigeria’s crude oil quota of 1,755kb/d, 2018E average condensate production of 220kb/d and 50kb/d condensate production from Egina. Our estimate is below the government’s budgeted production of 2,300kb/d and above our expected 2018 production of 1,940kb/d.
The agreement between OPEC and its Russia-led allies (OPEC+) to cut output by 1.2 mb/d in 2019, which implies a 2.5% cut by each OPEC member country, would, we believe, support oil prices. This cut is likely to remain in place for an initial six-month period until June 2019. US sanctions on Iran have proved less severe than we feared and strong global crude supplies were maintained. Elsewhere, strong OPEC and non-OPEC production growth YtD contrast with slightly reduced demand expectations; however, we believe the OPEC agreement will keep markets in balance until at least the second half of 2019.
2019 Brent oil price estimates:
- $65/bl (RenCap)
- $60/bl (Nigeria’s federal government budget assumption)
Snapshot of Nigeria’s macroeconomic outlook for 2019:
- We expect a modest GDP growth of 2.5% in 2019, vs 2.0% in 2018E, on the back of new oil production that restores growth in the oil and gas sector and sustained, albeit modest, growth from the non-oil sector.
- Despite the signs of a meaningful pick-up in Nigeria’s consumer confidence in the second half of 2018, we fear a weaker Nigerian Naira in 2019, owing to a lower oil price (2018 average: $72/bl), which may create higher inflation and undermine real wage growth.
- As always, the central bank’s first instinct will be to defend the Naira, but in doing so the Naira may become increasingly overvalued. Nevertheless, we believe downward pressure on forex reserves will compel the authorities to let the naira “slide” a little – we forecast the FX rate at NGN395/$1 at the end of 2019.
- Considering the increasing risk of depreciation and upside risk to inflation, we expect the central bank to sustain a firm policy stance and the key interest rate at 14.0%. We think there is a small risk of monetary policy being tightened.
- On the fiscal front, we see the budget deficit coming in wider than the 1.3% of GDP target, at 2.0%, due to what we view as optimistic revenue assumptions.