Low oil price

Date:


Fears that escalating tensions between the United States of America and Iran following the former’s involvement in the killing of Iranian Gen. Qassem Soleimani in Iraq would send oil prices climbing, appear to be unfounded. Whilst oil prices climbed initially above $70 per barrel for the first time in three months, the upward momentum quickly eased as tensions abated.

The investigation by Sweetcrude indicated that oil prices, which have dropped to as low as $58.38 per barrel, will likely remain relatively low for a long time, apparently because of many factors, especially slow economic growth around the world. As captured in the latest report of the Organization of Petroleum Exporting Countries, OPEC demand for OPEC crude in 2020 remains unchanged at 29.6 Mb/d, which is around 1.1 Mb/d lower than the 2019 level.

Low oil price
Low oil price

Shift to Gas

The continued see-saw in crude oil prices has prompted some close watchers of the oil market to call on the Federal Government to prioritise the domestic natural gas sector at least for a reason. Nigeria’s domestic gas sector is struggling to capitalize fully on the potential of its sizable reserves even though some big-ticket projects are emerging in the country. The Nigerian National Petroleum Corporation reported that Nigeria’s total gas production for the period September 2018 to September 2019 stood at 3,091.74 billion cubic feet (BCF) of which 44 per cent was exported and 15 per cent was used domestically.

The report indicated that domestic gas is primarily utilized for power and ad a key input in the production process by manufacturing companies. Natural gas it is the fuel of the future as it is abundant, more cost-effective than liquid fuels, safer and environmentally friendlier (that is, lighter than air, odourless, colourless, and contains the least carbon among fossil fuels). This methane-rich fuel has proven to be one of the fastest paths to industrialization and there is evidence of a correlation between Gross Domestic Product, GDP growth and gas consumption by productive sectors of the economy.

Current Issues

Investigation showed that before the widespread utilization of gas, the only source of energy liquid fuel (mostly by-products of crude oil), and in Nigeria, predominantly Automotive Gas Oil (AGO), Low Pour Fuel Oil (LPFO) and Premium Motor Spirit (PMS). For industrial production, AGO and LPFP were the fuels of choice. Issues such as scarcity, labour strikes, pilferage, port delays, refinery shutdowns and unpredictable product pricing, especially for deregulated fuels, however, plague these fuels.

It indicated that liquid fuels are susceptible to a myriad of issues that make them unreliable, port delays, labour strikes, the under-performance of refineries etc., make it difficult to predict when products will be available. In addition, because these fuels are mostly imported, the scarcity and unpredictability of exchange rate movement impede operational planning and efficiency. With liquid fuels, the issue of product stock-out is prevalent because manufacturers are not able to effectively manage inventory. This ultimately results in loss of sales, customers and market share. The combustion of liquid fuels typically produces two-three times more carbon dioxide, thus polluting the atmosphere and accelerating global warming. In addition, liquid fuels also produce other harmful substances, including soot. All these affect the health and productivity of staff and manufacturing organizations as well as present them in a bad light as contributors to environmental pollution, which usually scares global finances.

Low oil price
Low oil price

Impact of PIB

The inability of the nation to complete work on its Petroleum Industry Bill, PIB, comprehensive legislation, targeted at overhauling the petroleum industry, entrenching efficiency and transparency and bringing operations in line with international standards, has also affected gas-related investments. In an interview with Sweetcrude, managing director of a major company, who preferred not to be named, said: “The PIB should have been completed before now to attract investments. I know of companies that have gone to invest heavily in Angola, Ghana and even in East African nations. Nevertheless, we have decided to wait because the Minister of State for Petroleum Resources, Chief Timipre Sylva, had given us assurances.

He stated: “We do base our operations on such assurances; but will wait for the PIB, before deciding on the next steps for our proposed oil and gas projects in Nigeria. It should be noted that oil and gas require long-term investments, ranging from medium to long term planning and collaboration with many people and organizations, including consultants, technical partners and financiers. We need to tap into new opportunities in Nigeria and the PIB would be one of the main determinants”.

Low oil price
Low oil price

 Problems

In his recent presentation, Disincentives in Current Gas Pricing Strategies, obtained by Sweetcrude, Managing Director, Lopacoil Limited, Dr Lawrence Ijebor, stated: “There are underlying problems in the industry, particularly gaps in the price of both export and local gas. There is no significant change in the relationship between the export and local gas and this means that suppliers or producers will tend towards exportation because that is where maximum returns are made. This is why the Federal Government made it an obligation to forcefully withhold some gas in the local market.

About 60 per cent of the gas in the local market is used for power generation and the balance for industrialization and this has a significant impact on the economy. Some industry commentator’s focus on flared gas into products will eliminate the problems. The actual gas needed for power and industrialization cannot be generated through flared gas but through Non-Associated Gas. There is a need to invest in reducing Non-Associated Gas to achieve the goals and plans of the nation.

From the findings, one of the shortcomings identified is sector-based pricing. The government’s decision to conclude that the easiest way to deliver gas to the market is by breaking industries into various sectors. The problem, however, with this decision is that gas will only be provided to sectors that pay the most.

Investment is structured in a way that investors don’t get returns from their investments and this will discourage current and intending investors. The implication of this is that it will slow down development. There is the absence of formal consultation with the gas industry. This element is critical in ensuring that all stakeholders work collaboratively to achieve a common goal.

Suggestion

Ijebor, said: “The goal of the FGN must be to release the industry from the shacks of pricing controls which have inhibited the growth of the industry in Nigeria. The government cannot afford to flinch in the task of deregulation because the long-term consequences of price control in the sectors will subvert the rise of Nigeria in the 21st century. The net rise of electricity tariff will be ameliorated by improving transmission efficiency and metering coverage.

Policy changes will need to be proposed in enough time to engage all stakeholders and for legislative considerations. The price of gas leaving any processing plant into the National Transmission pipelines will be fixed at an ex-facility price without regards for its source.

“Federal Government, with its partners (in the JVs and PSCs), will utilize the model already in place and established for the NLNG supply price to the domestic market. The Grid will not include any pipelines connecting the Gas Field to the facility for processing gas or any pipeline used for the purposes of transporting “wet gas”. It will not include pipelines used for local distribution and for transfer to storage facilities”.

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