The “Buyers Remorse” Edition: Weekly Nigerian Oil, Gas and Power Round-up, June 19–24 2016.
Brexit: The mourning after.
Lets be frank here, i never expected a Brexit. Last week when i analysed the potential impact of Brexit on our domestic energy industry, it was perfunctory. I assumed just like the referendum, reason would prevail.
Wrong! Wrong!! Wrong!!!
I am hesitant to make any predictions here but the snafu generated by Brexit may be overstated. Already the BOE Governor has attempted to calm the market even if the problems are beyond monetary interventions. More important would be the position of the UK in the single market - European Economic Area. Would he EU kick them out in revenge?
Whatever happens I don’t expect material impact on our oil, gas and power sector. Probably more impact on the finance sector. In reality, our trade with the UK has diminished over the years. Some of our Indies(Independents)may suffer funding challenges in the medium term but that can be mitigated. Beyond fashion items when last did you use any product made in the UK? Let me know if I am wrong in this.
Crude Oil Price
Why do I bother about crude oil prices everyweek? About 80% of our revenue depends on it. We can’t afford not to bother. With Brexit and a surge to safer assets,dollars in this case, oil would take a hit. Brent sank but surprisingly domestic gas prices at the NBP (National Balancing Point) has risen. If Scotland decides to Scotxit then its a whole new game for the oil industry.
Authentic Petrol Demand
I asked an independent marketer friend who operates 3 stations how the semi-liberalisation of petrol has impacted him. It's bloody. Demand has dropped by over 60% largely because of reduced demand and competition. In his words(paraphrased), "if your station is close to a mega station,you are finished. They have dropped prices and you can't compete".
For years national petrol demand has been estimated at about 40 million litres per day. Seems we were living a lie. Subsidy payments encouraged excessive importation and inefficient use. Don't blame the importers because the more litres they import, the more the subsidy payments. Don't let's talk about the millions of litres that find its way across our borders. That demand was not real. A 50-60% drop in demand for an inelastic product is not normal.
Now that subsidy is gone, our real demand is been established. With time the numbers would be clearer but let’s assume a 30% drop in demand,down to 27 million litres. Our 3 local refineries can produce 7 million litres at average capacity. If 25% of petrol demand can be met locally guess the impact on forex demand. With oil production now touching 1.9 mbopd and prices at high 40s, i am very optimistic of a good Q3/Q4 2016 GDP growth.
Furthermore, If the competitive forces in petrol industry persists, we may also expect a consolidation of independent marketers on the long run. Some would collapse into the major’s chain to benefit from synergies. Dont be surprised if the good old days of getting free windshield cleaning return.
Did I tell you my friend expects this current calm to be short-lived? He wants the chaos back so he can profiteer. Imagine my face when he was saying that.
Gas curtailment in Nigeria
During gas supply shortages, the tradition for the major transporter is to prioritise supply to power plants over industrial zones. The politicians prefer that I guess. Recently I have been thinking about it and I am bold to say that it’s a very flawed strategy. Gas supply to industrial clusters should take priority.
When gas supply to industrial zones is constrained politicians and the economy loses. In one of the biggest industrial zones in Nigeria, about 75 companies are forced to switch to costlier energy during curtailment, leading to job losses, less profit and less taxes for government. Moreover,power plants don’t even pay for the gas anyway. It’s good politics to supply the factories first.
The dearth of data
The opacity in Nigeria's energy sector is not solely due to corruption. There are institutional capacity limitations hindering access to data and information. If you need information on rig count, acreages, products importation, electricity consumption, employees, costs in Nigeria as at today,you may not find it easily.
NNPC has started publishing reports but there is a limit to what the NOC can do. The regulator has the overaching responsibility of warehousing and publicising relevant information for industry use. The EIA, DOE, NPD(Norway),
The road to Mogadishu - Power Project Structuring in Nigeria.
Lagos based, African Finance Corporation (AFC) announced a sleuth of financing deals targeted at power during the week. The deals are meant to consolidate funds and shorten project funding maturity cycle in Africa. There are two major challenges with power project development in Nigeria-lack of bankable projects and the lack of funding itself. This AFC deal helps out on providing funding but the dearth of bankable projects still a recurring challenge.
The average developer in Nigeria will execute at least 10 different contracts - regulatory, commercial, financial, legal before FID. It’s like a camel through the needle’s eye. Little wonder only 1 privately owned power plant has gotten to FID since the ESPR Act of 2005. Barriers, byzantine laws, credit and political risks hurt us more than we admit.
In later round ups,these pre FID power agreements would be discussed in more details. Also watch out for insights on the Ugandan Oil Industry, Dangote’s big oil and gas strategies, Energy education in Nigeria in our coming editions. Click on the follow button so you don’t miss out.