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Oil and Gas Weekly: Oil Price prediction, the sure path to disgrace & OPEC was right.

In the month under review, there have been some interesting developments in the oil, gas, and energy sectors. We shall be covering the most important ones.

Oil Price prediction: The sure path to disgrace & OPEC was right.

The easiest way for any energy professional to lose their hard-earned reputation is to predict oil prices. Surely, you will be embarrassed. Neils Bohr said, “prediction is very difficult, especially about the future”, more so for oil because the trajectory of oil prices is determined by many dynamic factors that continuously interplay in an unpredictable manner.

  • Supply and demand, geopolitics, market sentiment, speculation, and government policies amongst others all contribute to the direction of prices but it is not practicable to consistently and accurately predict prices hence a plethora of caveats are necessary, and appropriate risk management tools are widespread.
  • Crude oil is the most important commodity traded globally and despite the increasing demonisation, it bears the burden of sustaining modern life and comfort.
  • The crude oil market is 10 times bigger than the next largest commodity – gold. It is a behemoth and as the chart below shows, the crude oil market, excluding natural gas and petroleum products, the market deserves more respect.
Size of Oil Market vs other Commodities

Last month, we discussed the OPEC cut announced in October 2022 and the visceral reaction of the West.

  • We also advised that in contrast to the conspiratory theories that greeted the decision, OPEC led by Saudi Arabia has always prioritised balance in the market rather than politics.
  • They have been proven right. Since the announcement of a cut on October 5, 2022, Brent oil prices have declined by about 13% to $84/bbl in contrast to the alarmist prediction of the OECD countries. In fact, these prices are the lowest seen in the year 2022.
  • A combination of factors has softened the market: slower seasonal demand, China COVID-19 lockdowns, SPR rollouts by China and the USA, massive buying ahead of the Russian price caps, a stronger dollar due to market uncertainties, and an increased chance of recession.

OPEC will have to act, again; First, the 2 million bopd cuts will have to be sustained till December 2023. Second, there is a chance that further actions might be taken at the meeting scheduled for this weekend (December 4, 2022) to discuss the market.

  • It was supposed to be in Austria but it will now be online. The chance of a further cut is higher than last week and it will not be a surprise.
  • The delay in cutting the supply quota combined with a black swan event tanked the market in 2020 and the memories are still fresh.
  • OPEC’s equilibrium price remains around $100/bbl and right now, the market is drifting farther from that anchor.

Improved security in the Niger Delta

The incessant attacks and accidents on our oil evacuation infrastructure have subsided in recent weeks largely due to the implementation of a redefined security architecture and the repair at the terminals.

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  • The Trans Nigeria Pipeline has been available consistently for probably the longest period in 9 months while the Force Majeure on Bonny Terminal has been vacated. Good news!!
  • The typical sabotage of upstream flowlines still persists in pockets around the Niger Delta but the major trunklines are now more available.

Two key lessons can be taken from this challenge to the energy infrastructure.

  • First, dedicated and consistent enforcement of a security framework is fundamental. There is no alternative.
  • Second, there is a need for significant investment to overhaul the network. Some of our evacuation pipelines are as old as 40 years, with most never replaced.
  • There is a very tight headroom for non-oil-bearing projects considering our fiscal challenges but as we have learnt in recent times, infrastructure might not be romantic but it determines everything else.

Rig Count and Emiefele.

Nigeria Rig Count data

The rig count is a bellwether for the domestic prospects of the industry and that’s why we review it every month.

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  • Compared to some of its peers, Nigeria has not been a traditionally rig-intensive country but from historical data, the biggest determinant of rig count is policy.
  • Policy determines investments, which in turn impacts rig count and ultimately oil and gas production. No drilling, no increased production, no revenue, no economic growth.

In the month of October 2022, the month with the most recent complete available data, Nigeria had about 8 active rigs across the patch, 6 onshore and 2 offshore. In the same month, Algeria had 32 rigs, Libya (with no central government) had 6 rigs, Abu-Dhabi had 51 rigs, Angola had 9, Egypt had 32 rigs, Iraq had 55 rigs, and Pakistan had 11 rigs.

  • Assuming liberally that all these rigs in Nigeria were for development wells, it means we had about 16,000 bopd to mitigate production decline and increase production in October 2022.
  • With our national budget production target of 1.88 million barrels, the shutdowns that have hampered oil and LNG production in the year, and this abysmal rig count, the budget deficit for 2022 may set another record.
  • If the FG continues to lean on the CBN’s Ways and Means as it has done in recent years, the risk of semi-permanent economic fracture increases. It is all linked.

COP 27

COP 27 occupied a lot of headlines in October 2022 but under the sceptre of an energy crisis that is reeling Europe, the bumbling sanguinity, borderline utopian, and unpragmatic stance of the recent COPs faded.

  • Despite the obvious lessons from the errors of the past decade, there were still very dangerous efforts by activists to make fossil fuels illegal without any reasonable and practicable transition plan.
  • The need to ensure cleaner energy sources underpin our civilisation is fundamental and not debatable but the careless expeditionary policies that were been accelerated before the recent energy crisis were always going to be counterproductive.

In the words of Oman’s energy minister, ‘’it would be “foolish” to assume that the world’s growing energy needs can be met with renewables. There can be no transition without energy security and no energy security without fossil fuel’’.

  • The condescension of the needs of developing economies and the avoidance of the fact that our contribution to carbon emissions is negligible was evident.
  • An EU official said Africa must not develop any coal power anymore. How is Nigeria expected to provide power to about 200 million citizens from renewable sources?
  • We have the lowest power supply per capita below the equator but we should only focus on windmills and solar panels to grow a $500 billion economy.

Climate justice as it is being called should be Africa’s message to the developed countries compelling us to make disproportionate sacrifices.

  • Anyway, a few days after COP 27 ended, news broke that Germany is generating 45% of its electricity from coal with intensity as high as 745 CO2 gr per KWH while they also signed a 15-year LNG purchase agreement with Qatar.
  • It’s a cop-out.

UTM Floating Liquified Natural Gas: Opening up a frontier.

During the month, UTM and a consortium of engineering firms signed a  Front-End Engineering Design (FEED) deal for a 1.2-million tonne/year (tpy) floating LNG (FLNG) plant to be at Yoho field in offshore Block OML 204, operated by ExxonMobil Corp. in partnership with Nigerian National Petroleum Corp. Ltd.

  • This is the first proper FLNG FEED in the Nigerian industry and it is good news that such a milestone has been recorded. It can only get better from there.
  • FLNGs have become quite popular in the last decade as LNG demand burgeoned and liquefaction technology became nimble enough to be placed on a floating vessel.
  • The first notable FLNG FID was Shell’s Prelude located in the inclement waters off the coast of Australia but Petronas’ Satu FLNG achieved 1st gas due to delays encountered in the construction of Prelude.

There are currently 5 operational FLNGS in the world and guess what, 3 are in Africa. Hilli Episeyo in Cameroon, Fortuna in Equatorial Guinea, and the Coral FLNG in Mozambique. The others are Prelude in Australia and Petronas’ Satu. 

  • The rule of thumb is that an LNG plant requires about 130mmscf/d to produce 1mtpa, meaning that UTM FLNG will require about 150mmscf/d for its 1.2mtpa capacity.
  • For a 20-year period, the feed gas reserves should be about 1tcf, which is not a stretch.
  • The absence of the upstream suppliers at the ceremony was however noticeable and it is earnestly hoped that does not mean a lack of complete synergy between stakeholders.

If UTM works, it would spell a great future for our often neglected gas fields.

Shell Gas flows to Oyo State

In 2020, Shell Nigeria Gas, a fully owned subsidiary of Shell International signed a MOU with Oyo State for the construction of gas infrastructure in Oyo State.

  • In October 2022 the construction of a Pressure Reduction Metering System (PRMS) was flagged off with fanfare. It is a very important milestone for the capital of the defunct Western Region.
  • Gas is cheaper, cleaner, and more reliable fuel compared to the options available for industrial and commercial use in Nigeria.
  • On a cost basis, it provides as much as 40 – 50% cost savings on fuel costs even with switching costs compared to diesel and LPFO.
  • It is a no-brainer that any government interested in developing or retaining industrial capacity needs to invest in bringing natural gas closer.
  • Oyo State, particularly Ibadan lost much of its industrial glory to the Sango-Ota axis in the last 20 years as industries had access to cheaper energy (natural gas) in the latter.
  • Well, guess the company that led the distribution of natural gas in the Sango-Ota axis? Shell Nigeria Gas in partnership with NNPC’s subsidiary, NGC.

I wish Oyo State and Shell Nigeria Gas godspeed. I don’t know if it also matters that the Governor of Oyo State and the Secretary to the State Government are all former Shell employees.

NGML & NIPCO dips toe into Lekki FTZ

Another very important announcement on gas distribution was made in October 2022.

  • The Nigerian Gas Marketing Limited (NGML), a subsidiary of NNPC and NIPCO PLC announced the signing of a gas supply deal with the Lekki Free Trade Zone.
  • The duo will collaborate to construct a natural gas pipeline and supply natural gas to the industrial zone.
  • Recall that a special purpose vehicle established by Falcon Corporation, ND Western, and First Hydrocarbon Nigeria had signed a similar deal with the Lagos Free Trade Zone. This is an addition to the deal signed between Shell Nigeria Gas and Shoreline which seems to have stalled.

Lekki/Eti Osa and its environs are the fastest-growing axis per capita in Middle Africa and the extension of cheaper energy to its industrial and residential areas will provide a big fillip.

  • Ceteris paribus, we could see many of the estates/office towers generating power with diesel and CNG switching to natural gas in the nearest future.

Building an IPP in Nigeria: The road to Kanfanchan

It is instructive that in Nigeria’s history, only one privately owned independent power plant has even been built from the scratch – the Azura Power Plant in Ihovbor, Benin City.

  • All other power plants were either constructed for the government or sold by the government.
  • We are aware of the  Nigerian Electricity Supply Corporation Nigeria Limited (NESCO)in Jos but it may not be classified as an IPP in the strictest sense.
  • This lack of success has not been because of a lack of trying by various investors but it is just almost an impossible task characterised by drudgery, bureaucracy, and market minefields.

In this month’s edition, we will attempt to list the types of arrangements and agreements that a typical gas-fired IPP will have to execute to close out on FID for a power plant in Nigeria:

  1. Gas Supply Agreement: An agreement with gas producers to supply gas to the power plant. Securitisation of payments is the most important element of this agreement and in Nigeria, Letters of Credit, Bank Guarantees, or Partial Risk Guarantees are acceptable forms of securitisation.
  2. Gas Transportation Agreement: An agreement with a gas transmission company or other gas pipeline owners to transport the purchased natural gas to the power plant.
  3. Engineering, Procurement & Construction Agreement: This is an agreement(s) with construction companies and manufacturers of power turbines and associated facilities to purchase goods (turbines/balance of plant, etc) and services (construction etc)
  4. Operations & Maintenance Agreement: Agreements with companies to support the continuous running of the plant. Operations and maintenance ensure power assets’ continuous operations, extends their useful lives, and streamline their performance and availability.
  5. Long term Maintenance Agreement: Agreements typically engaged with the original equipment manufacturer (OEM) to provide, on a relatively “fixed-priced” basis, maintenance services for the very equipment that they manufacture (e.g., gas turbines, steam turbines, etc.).
  6. Power Purchase Agreement: A power purchase agreement (PPA) is a contract between two parties, one which generates electricity (the seller) and one which is looking to purchase electricity (the buyer). In Nigeria, the counterparty is the Nigeria Bulk Electricity Trading Company (NBET) except for captive power.
  7. Put and Call Option Agreement: This agreement is a form of securitisation for the IPP financiers that compels the sovereign entity to commit to buying the power plant at a pre-determined price if the PPA is prematurely terminated. This is a stronger, iron-clad form of sovereign guarantee that compels discipline and as we have seen in Nigeria, it provides confidence to investors and forces discipline by the government. Supranational agencies like the World Bank, AFDB may provide enhancements for the PCOA.
  8. Grid Connection Agreement: An agreement between the power plant and the transmission entity to underpin their relationship.

Killing the 70-year-old BP Statistical Review

There were rumours during the month that BP, the British IOC wants to stop publishing its annual statistical review of the oil and gas industry as part of its drive to move away from fossil fuels.

  • This would be a practical and symbolic blow to the industry because their reports have become a critical source for thousands of researchers, students, and the government over the decades.

We hope common sense prevails.


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