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IOCs investment drought: Outlook for Nigeria’s oil economy

International oil companies (IOCs) have hugely cut down investments in oil. Adeola Yusuf, in this report, takes a look at how this may affect outlook for Nigeria’s oil economy

This is obviously not the best of time for oil super majors, particularly those operating in Nigeria’s multi-billion dollars industry. While some have been coerced by reality of the market to cut down their investments, others have declared plans to exit the country while some have also started looking elsewhere to make investments.

 

Nigeria relies on the oil sector for more than half of its budget and 90 per cent of its foreign exchange as it wants to raise revenue but also attract investment. Oil companies, including Royal Dutch Shell, ExxonMobil, Total and Eni, are cutting billions in spending after taking hits to their profits, shifting money to renewable fuels and focusing only on the most cost-effective markets. Shell’s hard look at onshore operations In the same vein,

 

Royal Dutch Shell had declared plans to take a “hard look at its operations onshore Nigeria,” including possible outright exit from the terrain, due to persistent issues with theft and sabotage in the Niger Delta. Chief Executive of the supermajor, Ben van Beurden, who gave this hint, declared that all the company’s efforts to end crude theft and sabotage have been rocked by challenges.

 

“Our onshore oil position, despite all the efforts we put in against theft and sabotage, is under challenge,” van Beurden told reporters after Shell reported another set of weak Big Oil results affected by the pandemic.

 

“But developments like we are still seeing at the moment mean that we have to take another hard look at our position in onshore oil in Nigeria,” Shell’s top executive added.

 

A hard look and its effects

 

The last time the supermajor took a hard decision at its onshore operations, it sold off its stakes in some of its critical oil blocks. Shell has been flagging for years problems with crude oil theft on its pipeline network onshore Nigeria. Penultimate week,

 

The Hague Court of Appeal ordered Shell to compensate Nigerian farmers for two oil spills in the country 13 years ago, in the first lawsuit in which a company has been held liable in the Netherlands for its actions abroad.

 

The ruling of the Dutch court is setting a precedent for future lawsuits brought against oil firms in the countries where they are based, instead of the countries where oil spills or oil pollution has allegedly taken place.

 

Shell, for its part, continues to say that the spills were the result of sabotage, which has been frequent in the Niger Delta in Nigeria. “We continue to believe that the spills in Oruma and Goi were the result of sabotage.

 

We are therefore disappointed that this court has made a different finding on the cause of these  despills and in its finding that” the Nigerian unit of Shell is liable, the Anglo-Dutch major said in a statement, as carried by Bloomberg.

 

“Sabotage, crude oil theft and illegal refining are a major challenge in the Niger Delta,” Shell noted. ExxonMobil, Chevron downgraded Exxon Mobil Corp.,

Chevron Corp. and ConocoPhillips had their credit ratings lowered after S&P Global Ratings followed through on its recent warning and revised the industry’s risk profile due to climate change and weak earnings, Bloomberg has reported.

 

The three oil and gas producers all had their ratings cut one notch, S&P said in separate statements, and comes two weeks after the ratings company published a sector-wide report on the challenges posed by climate change.

 

The ratings decisions reflect “growing risks from energy transition due to climate change and carbon/GHG emissions, weak industry profitability and greater expected volatility in hydrocarbon fundamentals,” S&P said.

 

The downgrades come days after big oil posted its worst earnings in decades due to last year’s record crude-price drop.

 

While the lower ratings won’t immediately affect companies’ access to credit or their cost of capital, it highlights the challenges faced by the industry as crude prices recover, especially concerning its approach to cli mate change.

 

Government frets

The Federal Government is fretting over possible exit of oil super majors from Nigeria and has begun a renegotiation of terms for multi-billion dollars conteacts with them.

 

The Nigerian National Petroleum Corporation (NNPC), which is leading the government side, noted qt he weekend that it was reviewing and renegotiating terms for multi-billion dollars commercial contracts with the major oil firms.

 

This is in a move that it hopes will keep investment flowing into a sector crucial for its economy at a time when spending is being slashed. Kyari on the contracts terms renegotiation Group Managing Director, GMD, of the Corporation, Mele Kyari, said in an interview that new commercial terms were being negotiated and would be finalised before a pending oil overhaul Bill is passed.

“No company will invest where they cannot get the appropriate margin,” Kyari said in a video interview, declining to say specifically what was being renegotiated. “We’re very conscious of the fact that people have choices, companies will make choices to leave countries when they have to.”

 

The National Assembly has promised to pass the longawaited oil overhaul bill by May. It will define the sector for de  clicades to come, but companies have criticized the draft for not doing enough to attract development dollars.

 

They have raised issues over taxation, royalties and local community obligations. Kyari said companies would have the option of the newly negotiated commercial terms or moving to the updated terms outlined under the new law. By the end of June the NNPC is planning to have found $2 billion of financing to overhaul its Warri and Kaduna refineries, Kyari said.

 

Talks are underway on financing repairs to the Port Harcourt refinery after a prefinance bid for more than $1 billion was oversubscribed, he said. The money will be repaid in profits and fuel cargoes from the refineries, rather than in oil cargoes, Kyari said.

 

While the refineries have not operated at full capacity for years, NNPC had to shut all of them completely last year as they await much-needed maintenance, repair and upgrades, leaving it with a hefty fuel import bill.

 

Last line

 

The ongoing effort by NNPC to renegotiate terms of some contracts for IOCs is a hard decision, one of the very few options the country has to take to retain investment and even attract more.

 

The corporation should apply its principles of transparency and accountability to this same renegotiation to secure the support of all and sundry.

 

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