CardinalStone Partners Limited, an investment banking group has said Nigeria’s oil marketers may have to endure another calendar year of tight margins in 2020 due to the strict regulations surrounding the trading of PMS.
In its outlook for 2020, CardinalStone stated that despite persistent calls by downstream stakeholders for deregulation of PMS pricing, current signs protrude to no deregulation insight.
“Further to the current undesirable state for the marketers, they may have to suffer thinner margins from the expected increase in associated shipping costs following the new International Maritime Organisation (IMO) shipping fuel rule,” CardinalStone said.
The outlook report believes the new regulation may likely stoke additional pressures on landing costs in 2020 compared to the previous price of N150.9 as at 15 November 2019.
While Nigeria’s 200 million population requires at least 12,000 megawatts of power daily, the country is barely managing 3,500 megawatts to 4,000 megawatts daily, thanks to infrastructure deficit in power sector which continue to pose a significant challenge for downstream players.
The report noted that relying on alternative sources of power has been expensive for downstream players and it appears that the recent 30 percent hike in electricity tariff and planned tilt to the cost-reflective tariff in July are likely to increase operating cost pressures on downstream oil and gas players in 2020.
On a positive note, CardinalStone said lubricant businesses are likely to continue to taper the impact of thin margins from PMS on profitability in 2020.
“In our view, the size and relevance of domestic lubricants market is also likely to improve in 2020 following the Department of Petroleum Resources (DPR) decision to clamp down on adulterated lubricants, citing the critical negative effects in form of damages to engines and machineries on local consumers,” CardinalStone said.
In the upstream sector, CadinalStone expects Nigeria oil production to increase by 100,000 barrels year on year to 2.1 million barrels which is supported by the expected ramp-up in the output from the 200,000 bpd Egina, other oil fields and Organisation of Petroleum Exporting Countries (OPEC) July 2019 decision to increase Nigeria’s output quota to 1.774 million bopd excluding condensate compared to 1.685 million bopd previously.
“Our output projection still lags the Federal Government’s target of 2.18 million bopd and Nigeria’s capacity of 2.50 million bopd. In addition, we envisage a higher demand for Nigeria’s low sulphur Bonny light crude oil in 2020 due to the new Annex IV rule that prohibits ships from using fuels containing more than 0.5percent Sulphur from 01 January 2020, compared with erstwhile 3.5percent stipulation,” analysts at Cardinal Stone said.
Cardinal Stone admitted that legacy security concerns in oil-producing areas remain the biggest risk to its forecasts despite the strides made by security forces towards neutralizing some threats to oil and gas assets.
Latest data from the Nigerian National Petroleum Corporation (NNPC) revealed an 81.0percent drop in vandalized pipeline points to 35 in October 2019.
Thanks to the amended Deep Offshore and Inland Basin PSC Act which now reflects adjustments to royalty payable on a field basis, mostly for offshore players, CardinalStone believe the increase in royalties payable for IOCs is logically expected to irk some investors while improved clarity is likely to provide slight reprieve with the Managing Director of ExxonMobil in Nigeria, Paul McGrath, stating that the need of most oil players was mainly policy certainty, which the bill provides for.
The new policy effectively reduces royalty payment for offshore players with 200m-500m depth, while increasing that of players exploring greater depths which are largely operated by IOCs.
