Global rating agency, Fitch Ratings has said that the Nigerian oil and gas sector continues to suffer from security issues and weak oil prices that drag down the ratings of indigenous companies in the sector. The agency stated this in a new presentation released on Monday, November 28,2016. It noted that significant oil oversupply and increase in oil inventories contributed to the collapse in the global oil prices since the second half of 2014, pointing out that the 14-member OPEC, of which Nigeria is a member, was partially responsible for the supply glut.
Global oil supply reached nearly 98 million barrels of oil per day (mmbopd) in October 2016, up 0.8mmbopd on September 2016, due to a record OPEC output of 33.8mmbopd, according to the International Energy Agency. Companies are adapting to the USD50/pb environment by improving efficiencies of existing operations and developing new resources in regions where infrastructure already exists. According to Fitch Rating, the breakeven prices for some new projects have been cut dramatically for cost optimization.
Nigeria remains Africa’s largest oil producer, but its production dropped by 25 per cent in 2016 due to security issues and the closure of a number of export pipelines. Nigeria has a healthy proved reserve life of 43 years, but its future oil production will be driven by the resolution of security issues and infrastructure constrains.
According to Fitch, “We view positively Nigeria’s recent ‘Seven Big Wins’ programme, which covers sector regulation, upstream and downstream projects, security, as well as transparency and corporate governance. The list of proposals include disclosing fiscal rules and contract terms, promoting energy affordability and constructing another Nigeria LNG train.”
Another welcome sign is Nigeria’s reported $5billion settlement with western oil majors to cover their exploration and production costs since 2010. On the other hand, the long-overdue Petroleum Industry Bill, a cornerstone of President Buhari’s oil sector reform, is still far from final, and the recent rebel activity in the Niger Delta region is only delaying the bill’s passing.
“Proposed de-consolidation and partial privatization of the Nigerian National Petroleum Company would likely promote investment and hence benefit the country’s oil sector. We also remain skeptical that the multi-billion crude-for-loans prepayment deals with India and China will achieve the announced targets. “Furthermore, Nigeria’s dependence on oil product imports and the low use of natural gas hamper its oil & gas sector. Without developing domestic refining and natural gas capabilities, the Nigerian oil and gas companies remain exposed to oil price fluctuations, thus capping their ratings,” Fitch added.