Nigeria’s oil and gas sector failed to maximize opportunities provided by higher oil and gas prices in 2022 due to various challenges, one of which was crude oil theft.
In October 2022, Nigeria’s Minister of State for Petroleum Resources, Timipre Sylva, said crude oil theft was impacting the country’s foreign exchange inflows. At the time, he stated:
“Oil theft has denied the country an estimated 700,000 barrels of crude oil per day. The adverse effect of this is the drop in the production of crude oil and decline in the national income.”
Multilevel losses: The earnings for companies in the oil and gas industry have declined 30% per year over the last three years for both downstream and upstream companies. Daily crude oil production fell below 1 million barrels per day (bpd) and significantly reduced export earnings and foreign exchange reserves to an all-time low.
Failure to cash out: Oil and gas analyst, Etulan Adu, told Nairametrics that international oil companies (IOCs) have pushed for divestments of marginal onshore assets and Nigeria has seen an increase in indigenous participation in the industry. But the gains of higher oil and gas prices eluded the country in revenues amounting to over $15 billion based on some estimates.
According to Adu, Nigeria’s oil and gas sector struggled for survival right from Q1/2022, despite surging crude oil prices and major oil-producing countries raking in profits. Nigeria lost its top oil producer position in Africa to Angola and regained it in Q4/2022. He said:“The challenge of oil theft, pipeline vandalism and under-investment in upstream activities brought Nigeria’s oil production to a 30-year low mark. We saw the government and the Nigerian National Petroleum Company (NNPC) engage stakeholders to bring an end to crude oil theft by engaging private security firms which have helped significantly the return of oil production to over 1.2 million barrels per day (bpd).”
Can we be optimistic? Etu
lan Adu tried not to be over-optimistic for 2023 as the country is set to experience a change in government administration. Although several deals on new floating liquefied natural gas (FLNG), gas export pipelines to Europe and a lot of projects were announced in 2022, energy analysts fear that some of these projects will not come to reality amidst challenges like a lack of finance and political willpower. Adu said:
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“2022 brought gas and power generation conversation as a solution for economic development, diversification and job creation to the forefront and the Nigeria Liquefied Natural Gas (NLNG) Limited Train 7 project is kicking on fine. Offshore blocks are being issued for bids; revenues have also declined 13% per year. This means overall sales from these companies are declining and profits are subsequently falling as well.
“Despite 2022 challenges, investors are optimistic about the Nigerian oil and gas industry and appear confident in long-term growth rates.
“However, in 2023, we expect that the prices of liquefied petroleum gas (LPG) also known as cooking gas will still be high for the common Nigerian, petrol prices will still be high, there will be increased oil production as the government keeps fighting the crude oil theft problem. There will also be further investment in natural gas.”
Rollercoaster year: Oil and gas analyst, Kayode Oluwadare says that it has been a rollercoaster affair in terms of production and pricing for the Nigerian oil and gas industry. He highlighted the fact that the Russia-Ukraine war has had a significant impact on oil pricing since Q1/2022. He said:
“It is quite unfortunate that Nigeria was not able to maximize or take advantage of the price increase which went up to $100 per barrel at some point. We lost some ground, unlike Saudi Arabia, Qatar and even the United States were posting high profits from crude oil sales.
“Looking at the oil industry performance of 2022, we saw how Nigeria’s crude production hit an all-time low, at a point we recorded just a little over 900,000 barrels per day. Although some concerted efforts have been made through the joint task force spearheaded by former Niger Delta militant, Tompolo, checking around the Niger Deta region for illegal pipelines and other installations which have helped to forestall the crude oil theft which has been going on for decades.”
Some positive projections: The good news, however, is that the oil market projections are good and reflected in the new $75 benchmark pegged in the 2023 budget.
Oluwadare says that in the year 2023, the following factors will likely push oil prices high: Russia has decided to stop exporting its oil to countries with a price cap, so, the implication is that Russian production will drop, even though it is expected that some of those products will be diverted to countries like China, India and Pakistan. But generally, the production will drop.
There will be some form of price increase in Europe, which is a net oil and gas importer. If prices go up in Europe, as a result of the price cap, it opens up opportunities for Nigeria to participate more in the European market. When production drops in the global scheme of things, prices will go up, that is basic Economics.
From January 2023, China will cut down some stringent Covid-19 rules for travellers, so China will open up more in the coming months. This is big business for the oil and gas industry as demand increases, this will also lead to an upward trend in oil pricing, which Nigeria can take advantage of in 2023.
Natural gas has always followed the crude oil trend, although there has been some disentanglement between both markets because of the increased volumes of piped gas, and liquefied natural gas in the markets. However, some gas markets are still indexed to crude oil, especially in Asia which is the biggest LNG market in the world.
The Nigeria Liquefied Natural Gas (NLNG) Limited has had a good 2022 by taking advantage of the global increase in LNG price, although at some point, production dropped when the company was operating at 60% capacity due to feed-gas challenges, and crude oil theft.
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The outlook for 2023 is good for Nigeria’s gas market because the NLNG is efficiently run. The price cap for Russian oil also affects Russian gas, so, the drop in Russian gas production also provides an opportunity for Nigeria to take advantage and increase its gas production and increase its profit margin.
A good ending: Production Engineer, James Akwaji told Nairametrics that Nigeria’s oil and gas sector has faced challenges for many years but the NNPC and security agencies have made remarkable strides in halting crude oil theft and other nefarious activities in the south-south region of Nigeria where oil and gas companies are located.
According to Akwaji, data from the Nigeria Upstream Petroleum Regulatory Commission (NUPRC) and other international agencies show that the country’s oil and gas earnings moved up between September and November 2022. This shows that the oil and gas sector in Nigeria is going to end strong in 2022, despite all the challenges it has been through.
One thing the earlier and later parts of 2022 had in common is the rude shocks. Events previously considered unlikely did happen. For instance, very few people predicted that Russia would drop missiles in Kyiv in February, even though it was a known fact that the two countries had a fraught relationship for years. But that happened.
Investors and speculators knew that the invasion could have a ripple effect on most assets. So, many of them quickly shoved all predictions of economic rebound under the carpet. After all, it doesn’t take an economics degree to know that wartimes are bad for the economy.
But just when investors (especially those in the crypto market) thought the winter was over, FTX happened. The crypto exchange once thought to be too big to fail, collapsed much to the surprise of everyone.
For lack of better words, 2022 “swallowed” the enormous gains we saw in 2021. The 26.6% gain in the S&P in 2021 was quickly erased by a sharp 18.54% drop. Bitcoin’s 59.64% gains have since been overshadowed by a massive 62.27% drop.
Most economies scrambled to stay afloat. Meanwhile, currencies like the naira, the British pound sterling and the cedi all hit lows that haven’t been seen in decades.
A dramatic year for investors: If 2022 taught us anything, it is the fact that the old methods might fail sometimes. In the last five years, investors have made good returns by betting on big-cap American stocks like Amazon, Tesla and Meta(Facebook). In 2022, these stocks shed double digits in their share prices.
For some, their only wrongdoing was stacking naira-based assets. This year saw the Naira plummet close to N900/$ in the parallel market.
As it turns out, some people did not consider this a problem, at least in the short term. Those who remit money to loved ones from overseas suddenly became more loved by family members here in Nigeria as the same dollar equivalent just some months ago fortuitously swelled when converted to naira.
Another group of people who found these times exciting were dealers in imported merchandise. Every hike in prices was blamed on the falling naira.
How did your investments perform? Did you get burnt by any of the crazy events that happened this year?
Did you foresee the huge drop across several assets? If you did how did you prepare for it?
Did you sell off your digital assets or do you still want to hold them?
Did the skyrocketing inflation affect your purchasing power? How did you adapt?
Did you invest in yourself? A new certification or education that boosted your career and employability chances?
Did you earn money while you were sleeping or did your investments not allow you to sleep?
Did you diversify your investment into Dollar based assets or did your assets devalue?
Did you eventually convert your Naira to Dollar at its peak because everyone was screaming “1000/$ before January”?
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Everyone is an investing superstar when assets are making a good run. But the real challenge is when they are bleeding. Hedge funds that naturally thrive in volatile markets made a killing this year.
In 2022 for example, throwing your investments across various assets still wouldn’t have saved you as the dip was across asset classes. For the 5th time since 1928, the S&P 500 and the 10 YR US Treasuries had negative returns.
So this is not necessarily because your investment strategies are wrong or you have made poor decisions, it’s simply because the general economic climate has been harsh.
So this isn’t a time to beat yourself up as you look at how badly some of your assets have performed this year. Even the legendary stock speculator George Soros still has a few losing streaks under his belt.
Expectation versus reality: One problem investors face is expecting the same level of returns in different economic conditions. In 2022, several warning signs emerged that foretold a slow year.
Most smart investors began to lower their expectations and reduce exposure to risky assets. We also saw many banks, including the CBN, hike interest rates to figures never before seen. These and several other reasons are why we have seen increased interest in traditional “safe” assets like treasury bills and bonds.
On the plus side, this may be the best opportunity to pick up that asset that you believe would perform in the long run. Smart investors buy at low prices and sell at a higher prices. As Warren Buffett said “Be fearful when others are greedy, and greedy when others are fearful”
While you may not have met your targets in terms of returns for the year, or you lost some money as these assets plummeted, remember that the game of investing is a marathon and not a sprint. The goal is to arrive at good returns at the end of the day, the losses are part of the game. You may take two steps forward and a step backwards, but the most important thing is that progress is being made.
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