Nigeria’s Bright Spots Emerge as NLNG, Refining Sector Provide Upside
The Fitch Solutions Macro Research has stated that Organisation of the Petroleum Exporting Countries, OPEC, production cuts are expected to limit upside growth in crude output, combine with declines at mature fields to leave total output flat.
It notes the exemption of condensate from production cuts leaves room for some fields to maximise output
Fitch forecasts Nigerian crude and condensate to average 2.1 million barrels per day (mb/d) in 2019, an increase of 2% compared to 2018, as production numbers to date indicate mixed compliance with OPEC targets.
It observed that Muhammadu Buhari’s re-election has somewhat stabilises the restive Delta region, although progress on the petroleum industry bill will be needed if new investment and long-term growth are to return.
According to the report, the LNG and refining sectors will provide significant upside for Nigeria as Nigeria LNG continues to achieve high utilisation and new investment and construction for Train 7 and the Dangote refinery continues to report steady progress.
It said that full compliance would leave production roughly flat for 2019, compared with 2018. However, according to OPEC reports to June, Nigeria has averaged 80,000b/d over its production cut target of 1.685mn b/d.
“A key area for growth is the Egina field, which produces condensate that is not counted towards OPEC targets. Muhammadu Buhari’s re-election somewhat stabilises the restive Delta region, although progress on the petroleum industry bill (PIB) will be needed if new investment and long term growth are to return”, the report reads.
According to Africa Monitor, the 2019 election results confirmed Buhari’s second term, which also marked a shift in support in both houses of the National Assembly, which should be supportive of the president’s policies.
It observed that passage of the first bills of the long-awaited reform oriented PIB are an important structural reform within the oil and gas industry that is needed to spur investment.
Delays in passage of the bill have called into question the timing of ongoing license renewals. The expiration of nearly 42 production and exploration licenses is due in 2019.
“If the licences are not renewed, it would mean the stakes would revert to Nigerian National Petroleum Corporation (NNPC) control”, Fitch stated.
It stressed that Shell, Eni and Seplat are among the key companies which are at risk of losing rights to these licenses.
But observed that the lack in transparency in the renewal process, is expected to be more stringent under the PIB, is a concern among lawmakers and outside observers.
Similar opaque transactions continue to mar Shell and Eni as they are currently under criminal trial over the OPL 245 block, it was revealed.
The review also stated that Buhari’s administration has filed a lawsuit over the purchase of the deep water block and is seeking substantial damages.
Fitch said: “This coupled with continued NNPC demands for back-taxes totalling USD20 billion will further cool investment appetite, as will the non-renewal of key licenses due in 2019.
“There has been a marked decline in incidents of vandalism and pipeline disruption to oil and gas infrastructure in 2019 so far, with May recording only 60 breaks, a decline of 27% from a year previous.
“We attribute this to a ramp-up in disruptions prior to the February elections as various factions sought to establish their relevance on the national stage”.
It added that the LNG and refining sectors will provide significant upside as Nigeria LNG (NLNG) continues to achieve high utilisation and new investment and construction for Train 7 and the Dangote refinery continues to report steady progress.
The Macro Research firm stated that NLNG is planning a seventh train at the Bonny LNG plant, proposing a final investment decision on the project in October 2019.
Nigeria exported around 31.5bcm of LNG in 2017 and 2018; approved capacity would rise to more than 40.0bcm with the additional train.
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Nigerian commercial gas production is forecast to average 49.3bcm in 2019. Additional supply from the start of projects such as Forcados Yokri integrated gas and the Southern Swamp associated gas project is expected to buoy production in 2019.
“Full operation of the Dangote refinery is likely to be delayed to 2022, and we hold to our forecast that an ambitious 2019 start-up will prove elusive as the Dangote Group is acting as the engineering, procurement and construction contractor and is a first-time refinery builder and operator”, Fitch noted.
The integrated fertiliser plant is expected to begin production in the fourth quarter of 2019 or in early 2020 and will produce 3.0 million tonnes per annum of urea.
A key component of the refinery, the atmospheric distillation tower, set sail from Ningboa in China in late July, with delivery to Lekki expected in August.
The tower is world’s largest, and its design is a central determinant of fuel yields and ideal crude grade for efficient operations. As the world’s largest single-train facility, the refinery design will use scale to maximise output and increase operational simplicity.
It reckoned that the Dangote refinery will be an essential development for Nigeria given the decrepit state of Nigeria’s existing refineries, which operated at a utilisation rate of 7.3% in 2018.
The output from the Dangote refinery will need to meet pent-up demand, although fuel subsidies will help keep demand high.
Data for 2018 show that demand for gasoline and diesel continued to grow at a fast pace, recording 124% and 149% growth from a year previous.
“We expect consumption of refined products to moderate for 2019 as a result of a slowing economy, with gasoline consumption expected to slump by 27%, to 366,000b/d of demand, but still keeping well above historical consumption values”, Fitch Solutions Macro Research stated in Africa Monitor.
