Nigerian continuity and change
Oil production is picking up and vital legislation affecting the future of the sector looks to be heading for the statute book, but Nigeria is not out of the woods yet
The Nigerian oil and gas sector is in a better place than it has been for some time, but the government must implement sweeping reforms at a time when the president's poor health inevitably raises concerns over political—and policy—continuity, and the economy remains in a precarious state.
Tangible progress towards implementation of legislation crucial to encouraging expansion of upstream development, some encouraging results from efforts to quell violent unrest in the oil-rich Niger Delta region and a related uptick in oil exports have helped lighten the mood among hydrocarbons firms weighing up their next moves.
But Africa's largest economy is still shrinking. GDP fell by 1.5% in 2016 and a further 0.5% in the first quarter 2017, but central bank governor Godwin Emefiele has said he expects Nigeria's recession to be over by the end of the third quarter of this year. He has also said that the bank would work further to reduce the spread between official and black-market foreign exchange rates for the naira, which has been a drag on foreign investment.
However, the continued ill health of 74-year old President Muhammadu Buhari risks becoming a major distraction from policy priorities.
Buhari, who was elected in May 2015, has spent long periods of his presidency in London receiving treatment for an illness whose precise nature has yet to be made clear. As we went to press, he was reportedly still in the UK, having begun his most recent period of treatment on 7 May. His absence and a lack of clarity over his condition have prompted speculation back home about the seriousness of his ailment and his ability to continue as president.
Whatever Buhari's health, the uncertainty does little to improve investor confidence in the political stability of the country. Still, his vice president, Yemi Osinbajo, has been praised for maintaining momentum in the government's reform programme in Buhari's absence—and adding impetus that even a healthy Buhari seemed unable to inject.
On Osinbajo's watch—though doubtless with input from Buhari—a wait of a decade or more for updated petroleum-industry governance and investment legislation looks to be nearing its end.
The Petroleum Industry Governance Bill—the first in a wave of new legislation relating to the sector—was finally passed by the Senate in May and at the time of writing was awaiting lower house confirmation. Passage into law would be a major advance, as scant clarity on the industry's operating framework has long stymied investment in exploration and field development, as well as onshore infrastructure projects.
Osinbajo has also made higher-profile and more successful efforts than Buhari to seek a resolution to Niger Delta unrest, which flared up again last year with attacks on oil and gas infrastructure in the region, after seven years of relative calm. Attacks have been curtailed since talks got under way over compensation payments for local communities that feel they haven't had their fair share of oil revenues.
Bringing sustained peace to the Delta would be a major short-term fix for the hydrocarbons industry. Attacks on pipelines and other infrastructure have severely hampered oil exports, closing export terminals for weeks at a time. Now infrastructure is being repaired and terminals are reopening. In early June, Shell lifted force majeure on deliveries from its Forcados terminal—it had been shut in February 2016 after a pipeline attack.
The return to full output at Forcados, which handles up to 240,000 barrels a day, brought virtually all Nigerian export capacity back on line for the first time in 16 months, making ambitious government talk of getting production up to 2.2m b/d in the near term look more plausible than in the past. According to Opec, Nigerian production was running at around 1.8m b/d in April, already well up on the nadir of mid-2016 when militant disruption caused output to plummet well below 1.4m b/d.
One indicator of success in restoring production—unwelcome in Abuja—has been speculation that Nigeria's exemption from Opec production cuts may now be removed. An increase in loadings scheduled by Shell from Forcados, along with increased production in Libya, put downward pressure on global oil prices in June, as they eroded the impact of cuts made by other Opec members.
2.2m b/d - Nigeria's oil output target
Even so—and with all the usual caveats about thinking the latest peace in the Delta will last—optimism among investors is ticking up. Their squaring of old debts with the government will also have helped. Last November, Nigeria reached a $5.1bn settlement, to be paid via future oil sales, to reimburse ExxonMobil, Shell, Eni and Total for past operating costs they said were owed.
After years of uncertainties characterised by project postponements and the withdrawal of some foreign investors, all this augurs well. But it doesn't mean the sector will suddenly become an investment magnet. Total's Engina field development, due to start in 2018, is the only major oil and gas project lined up for the foreseeable future.
The Nigerian economy—which is heavily dependent on oil and gas for its health—is still struggling and it remains to be seen how effective petroleum industry legislation and other measures, such as the country's Economic Reform and Growth Plan 2017-20, unveiled earlier this year, will be in turning it around.
Perhaps more importantly for those seeking signs of political stability, Buhari's election in May 2015 resulted in a smooth transition of power from his predecessor, Goodluck Jonathan, after a poll that independent observers generally regarded as fair—a rarity in Nigeria. There will be hopes of more of the same next time round.
This article is part of a report series on Nigeria. Next article: Time to Shell out?