5 February 2021
On 20 April 2020, the oil and gas industry witnessed a historic fall of benchmark US oil futures into “uncharted territory” of below $0 a barrel. Indeed, the severe decline in oil demand following the lockdowns and general reduction in global economic activity, coupled with the price feud between Russia and Saudi Arabia stood out as the obvious reasons for the price fall.
The initial response by global oil producers to cut crude oil production heightened the problem, as the lack of storage facilities for the excess crude oil led to negative US WTI benchmark prices for the first time, between 20 April and 22 April 2020. Oil prices have increased since then, but we are unlikely to see the same price buoyancy as after the 2008 global economic recession, partly due to the rapidly decreasing cost of renewable energy and a growing commitment towards decarbonisation.1
The decline in oil prices has led to pressure on state budgets and national economies. As a result of the pandemic and associated restrictions, many companies shut down or significantly curtailed exploration and production activities, leading to job losses. These cuts in capital expenditure have also caused delays to the commencement or continuation of capital-intensive gas projects in Africa, with a significant negative impact on forecasted economic growth in the affected countries.
Several months after the oil price crash, the largest oil producing and oil reliant African countries have put into effect various plans directed at keeping their economies afloat. Nigeria, like many other oil producing countries, also had to reduce its oil production benchmark volume following OPEC’s production agreement. The Nigerian president has presented the Petroleum Industry Bill (PIB) to the Nigerian Parliament and it is hoped that the PIB, in creating a clear fiscal and regulatory framework, will attract more foreign investment to the oil and gas industry, drive up production, and increase revenues, albeit a number of International Oil Companies (IOCs) active in Nigeria have questioned this.
The Nigerian Department of Petroleum Resources (DPR), a statutory body that ensures legal and regulatory compliance in the oil and gas industry, came up with a strategic plan and policy actions for the survival and success of participants in the oil and gas industry post-COVID-19. For instance, in mid-2020, the DPR commenced the marginal fields bid round for 2020, opened to indigenous companies and international investors interested in oil exploration and production in Nigeria. The bid round is the first since 2003 and a total of 57 fields were announced. The hope is that the ultimate passage of the PIB and award of marginal fields will kick-start activities in the industry.
Angola, Africa’s second-biggest oil exporter and a country heavily reliant on oil exports, has been experiencing financial and economic crises since 2014 and has been in recession for a couple of years, resulting from a fall in oil prices and a fall in demand (particularly from China).The pandemic and resultant oil price crash added further pressure to Angola’s economy. This recession is being tackled by means of significant diversification of the economy in order to reduce the country’s dependence on oil.
Africa’s next biggest oil exporter, Algeria, has struggled more than Nigeria and Angola as a result of several structural problems, such as perceived mismanagement of accumulated oil rents, an unfriendly business environment – particularly a lack of security and an underdeveloped banking system, and an over-reliance on oil and gas. The fall in oil price exacerbated Algeria’s problems. In addition, the lower demands for oil and gas by Algeria’s key customers, has further depleted Algeria’s foreign exchange reserves. Algeria has tried to adapt by cutting public spending and postponing various economic and social projects. Whilst these policies might sustain the country in the short term, it is likely to hinder future economic growth and necessary infrastructure developments.
THE FUTURE OF THE NIGERIAN ENERGY INDUSTRY
Despite the fall in crude oil prices in 2020 and the increasing volatility in the price of the commodity, Nigeria continues an ambitious plan to reform its energy industry. The elephant in the room is the PIB, which is the first major sector-wide oil and gas reform by Nigeria in over 50 years. Although, in this period, Nigeria has passed laws to promote and incentivize significant investment in frontier areas2, the PIB is an entire industry overhaul.
With concepts such as “drill or drop”, production allowance incentives and a clear framework for gas production and the midstream sector being introduced and/or refined by the PIB, it is evident that Nigeria is looking to exploit its reserves as quickly as possible, with the hopes of channelling the proceeds to diversifying the economy and making it less reliant on hydrocarbon receipts. This has been a recurrent rhetoric not just in Nigeria but across most of Africa’s oil producing countries for decades. It remains to be seen if the 2020 price crash coupled with the higher demand for cleaner energy will trigger a more required urgency to diversify their economies and translate into visible results. Much more than that, as signatories to the Paris Agreement, the need to reduce reliance on receipts from hydrocarbon resources is as relevant to meeting international environmental commitments as it is to longer-term economic stability.
With the PIB, Nigeria employs a logical, even if paradoxical, approach to the immediate future of its energy industry: With one eye on its commitments to reduce emissions under the Paris Agreement, Nigeria seeks to radically minimise gas flaring under the PIB by promoting gas utilization production, while still promoting aggressive crude oil production with a view to receiving as much benefit as possible until such a time of diminished demand for fossil fuels. Nigeria is not isolated in this regard, as various reports tracking the Paris Agreement goals indicate that certain countries plan to more than double their production of fossil fuels by 2030, a situation inconsistent with the 1.5⁰C limit under the Agreement. Nevertheless, there is a clear move globally to reduce reliance on fossil fuels and gravitate towards cleaner energy in the long term.
It is interesting to note that some of the IOCs who are the major investors in Nigeria’s oil and gas industry are reportedly on track to align with the emissions pledges made by state parties to the Paris Agreement while at the same time, we are seeing investments in new fields and a push to add to their production portfolio in Nigeria coupled with the expectation of renewal of a number of their producing assets for at least another 20 years.
In the immediate term, Nigeria needs to achieve a resolution of issues raised by investors regarding the PIB to ensure the proposed new regime kicks off as soon as possible, while balancing investor and State requirements and expectations.
Additionally, several lingering disputes between IOCs and the Government resulting in an impasse over multi-billion-dollar arbitration awards appears to have created an air of distrust which could potentially stall new investments. This will work against Nigeria’s plans to discover new fields and ramp up production to maximize its hydrocarbon resources. Lessons from the price crash of 2020 and rapidly evolving global energy patterns suggest that foot dragging on these negotiations may be disadvantageous to all parties involved.
In the medium term, there must be a shift from the historic lip service paid to economic diversification. The pursuit of an action plan for investing in areas of competitive advantage while ensuring energy sufficiency should be high on the agenda. Finally, a framework for ensuring sustainability of a diversified economy should be put in place to ensure a productive economy able to withstand cyclical price movement in the oil and gas market.
Abimbola Atitebi, Senior Associate, Templars.
Bodunde Ajenifuja, Trainee Solicitor, Hogan Lovells.
*This blog was first published on Africa Legal and is reproduced with kind permission of the publishers.