Close button
The Guardian
Email YouTube Facebook Instagram Twitter WhatsApp

Oil industry’s challenges in 2016 and hopes for boom in 2017


Oil barrels

Oil barrels

For stakeholders in Nigeria’s oil and gas sector, 2016 ended with hopes that 2017 will be less challenging. The reason for the anticipation is that 2016 was shrouded with uncertainties over crude oil prices, pipeline vandalism and scarcity of foreign exchange, which made the business environment more challenging. In this analysis, Roseline Okere, examined the events that affected the country’s petroleum industry in the past year.

Low oil prices and pipeline vandalism
With Brent price hitting $56.13 on Monday, low crude oil prices have continued to impact negatively on the economy and the oil companies.Crude oil price, which was down to as low as $35 per barrel in 2016, only started its recovery process few weeks ago after member’s of the Organisation of the Petroleum Exporting Countries (OPEC), decided to reduce output in order to balance the market.

This was made worse by the renewed attack on oil facilities in the Niger Delta, which brought Nigeria’s crude oil production down from 2.2 million per barrel to 800,000 in 2016.Virtually all oil companies operating in the country recorded losses in 2016 as a result of low oil prices and pipeline vandalism.

For example, Exxon Mobil Corporation and Royal Dutch Shell Plc last year, reported their lowest quarterly profits since 1999 and 2005, respectively. Chevron Corp.’s third straight losses marked the longest slump in 27 years.

Back home, as a consequence of the shut-in of the Forcados terminal and suspension of exports from mid-February to mid-October, and combined with the effect of lower oil prices, Seplat Production Development Company reported a net loss of $98 million (N24 billion) in the first nine months of 20I6, compared to a net profit of $69 million (N14 billion) in 2015.
Also, Oando Energy Resources (OER) during the nine months ended September 30, 2016 recorded a 20 per cent decrease in total production of 12.0 million barrels oil equivalent (MMboe) (average 43,617 boe/day) ,compared to 15.1 MMboe (average 55,154 boe/day), in comparative period of 2015.
The company’s gross profit decreased by 52 per cent, N28.7 billion compared to N60 billion it recorded in the previous year.The company said it faced operational challenges due to the unrest in the Niger Delta.. Lekoil also recorded a net loss of $8.1 million reported during the first half of 20I6.

Petroleum Industry bill yet to be passed
Despite being drafted in 2007, the Petroleum Industry Bill (PIB) has not been passed into law, consequently creating uncertainties in the sector. 
Since its inception, the PIB has been dogged by lack of political consensus and disagreements between the government and global oil majors over its key terms and, hope that it would have been passed in 20I6 did not materialise. 
PIB in 20I6 was converted to the Petroleum Industry Governance Bill (PIGB), which is expected to split the Nigerian National Petroleum Corporation( NNPC )into two, to help ease a planned stake sale in the coming years.

The inability to pass the bill and uncertainty around fiscal policies and government funds during a slump in oil revenue has stunted investment, particularly in deep water oil and gas fields.

The Senate in November last year, moved forward the first piece of the much-delayed PIB, aiming to agree on details for full consideration in just few months. Stakeholders are however hopeful that the PIB would be passed this year.


Scarcity of foreign exchange bit harder
With 30 per cent of the country’s demand for foreign exchange being spent on fuel importation, the sector’s appetite for forex resulted to scarcity and hike in the price of petroleum products in the course of 2016.

The scarcity of aviation fuel was attributed to the inability of airlines to pay for the product due to lack of forex.
Already, petroleum marketers are yet to offset over $985 million debt overhang to foreign suppliers and this has made it difficult for them to import more products.NNPC has therefore remained the sole importer of petroleum product in the country.

Refineries remained underutilised
The ability of Nigeria’s four state-owned refineries, installed to refine 440,0000 barrels of crude oil daily, remained low throughout 2016 ,on account of poor facilities maintenance and pipelines vandalism to supply crude to the refineries and this prompted the Federal Government to embark on crude oil from Niger Republic for the Kaduna Refinery.

For instance, the four refineries worked at only 8.55 per cent of their combined capacities from January 2015 to September 2016, according to NNPC .NNPC said in its monthly report that consolidated capacity utilisation of the refineries was above 20 per cent only in August 2015 (24.08 per cent).

Frustrated by pipeline vandalism and inability of Nigeria to produce its own fuel, the Federal Government sought to import crude oil from Niger Republic. Justifying the crude import from Niger,, NNPC Group Managing Director, Maikanti Baru, had said: “It is important to explore alternative crude supply to Kaduna Refining and Petrochemical Company, which has been affected by vandalism of pipelines and age.

“Due to challenges with the aged refinery and crude oil pipelines that had been breached severally, the operations of the refinery has been epileptic.
“This, we are determined to resolve through various intervention methods including evaluation of alternative crude oil supply from Niger Republic through building of a pipelines of over 1000 kilometers from Agadem to Kaduna.“That efforts is being championed by Mr. President himself,” he added.

Nigeria loses over 50% oil production
Due to the renewed attack on oil facilities in the Niger Delta, Nigeria’s production dropped to 800,000 barrels per day (bpd) from two million during the year under review.

Analysis from, NNPC showed that crude oil production fluctuated in the period under review, with the highest production per month recorded in October 2015 (69.49 million barrels) and the lowest recorded in August 2016 (46.56 million barrels).

Speaking on the state of Nigeria’s crude oil production, the Minister of State for Petroleum Resources, Ibe Kachikwu stated: “In terms of crude oil output, we are still not where we should be. These days, I am always conscious about giving figures so that I do not attract attention unnecessarily.

“Obviously, the Forcados incident did impact on us. My guess is that we are moving closer to 1.9 million barrels per day at this point. We are still managing the issue.”
Operators prioritise business concerns
Head, Investors Relations, Oando Plc, Tokunboh Akindele, said the Nigerian economic environment continue to impact the company’s business, as it witnessed a further devaluation of the Naira during the first quarter of 2016, from an average exchange rate of N280: $1 in second quarter to an average of N316:$1in third quarter of 2016.
This, he noted, had resulted in a net foreign exchange loss of N5.4 billion in the third quarter. “For the major part of the year we have faced operational challenges due to the unrest in the Niger Delta, however we find comfort in the Nigerian Government’s discussions and engagement in the region, indicating a possible resolution, and thus ,we expect our production levels to stabilise and gradually incline in the coming months,” he added.
“The shut-in and suspension of oil exports at the Forcados terminal since mid-February means we have faced significant challenges in the first half of the year. However, our underlying fundamentals remain strong and we continue to invest to grow our gas business at a rapid rate” said Austin Avuru, Seplat’s Chief Executive Officer.
Lekoil’s Chief Executive Officer,  Lekan Akinyanmi, stated: “In the current low oil price environment, we have prioritised the allocation of our capital to our production and development assets to generate short-term cash flow and compelling economic returns, focusing on extracting value from the ‘stability’ zone of our portfolio.“This means limited expenditure on exploration assets but maintained optionality for the future.”

Ushering investment friendly environment in 2017
Proffering solutions to the challenges of the sector, the President of Nigerian Association of Petroleum Explorationists (NAPE), Nosa Omorodion, said the shortfalls in joint venture funding and the anxieties in the upstream business, were caused by delays in passing the PIB.


According to him, all these factors have directly or indirectly resulted in lower revenues forcing three consecutive negative Gross Domestic Product (GDP) growths and inevitably plunging Nigeria into economic recession.

He therefore called on the Federal Government to urgently finalise the passage of the PIB.Former President, Nigeria Society of Petroleum Engineer, Dr. Emeka Ene, said there is gap in policy alignment on gas, PIB versus Ministry of Environment, and, the security situation in the country. “Until we have an alignment, there may not be substantial investment in the sector. Majority of the investment end up with the service industry, which executes most of the jobs. Right now, the service industry is in a very comatose state because the contractor’s obligations are not being met.  A lot of money is being owed to Nigerian service companies over a very long period of time, which creates uncertainty,” he said.

Ene warned that the effects of the present lack of substantial investments are going to impact negatively on the Nigeria’s oil sector in the future.We are going to be feeling the effects when the oil industry turns around. It is going to be worse. Some service companies are being owed for over two years.  Bear in mind that the companies borrowed from the banks to execute the contracts and they’re not being paid for two years, how will the companies be able to take another loan to service any other business?  This is exactly the uncertainty we are talking about.”

In this article:
Crude oilExxon Mobil
Receive News Alerts on Whatsapp: +2348136370421

No comments yet