A new report by Natural Resource Governance Institute (NRGI) has identified huge economic losses that may be encountered by the Nigerian National Petroleum Corporation (NNPC) as the world shifts away from fossil fuels or if oil price goes back to $40, warning that half of the investments in upcoming oil projects may be at risk.
Oil prices have climbed to around $60 in recent week, after plunging below $20 last year when demand plummeted due to the coronavirus crisis. But the long-term outlook is weakening, as more analysts and energy firms see peak oil demand being reached sooner than the previous forecasts of the early 2030s.
The report by the thinktank group observed that the NNPC and other state-owned oil corporations are signing contracts for key capital projects in the petroleum sector, just as energy transition is expected to affect oil and gas in quite different ways, although it presents a risk to both fuels.
The NRGI estimates that oil prices, now recovering after a slump during the pandemic, would need to be kept above $40 a barrel if countries are to avoid major net losses, citing heavy investments by Azerbaijan’s SOCAR and Nigeria’s NNPC.
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“About half of NNPC’s investments in upcoming oil projects may turn into a loss, especially if the capital expenditure (CAPEX) on the projects fail to break even at a long-term price of $40,” the report noted.
The NRGI projected national oil companies or NOCs, would invest $1.9 trillion in the next 10 years with about a fifth of those investments only breaking even if oil prices stay above $40 a barrel.
The report by the thinktank group observed that the NNPC and other state-owned oil corporations are signing contracts for key capital projects in the petroleum sector, just as energy transition is expected to affect oil and gas in quite different ways, although it presents a risk to both fuels.
Furthermore, the failure of those investments could spark economic crises across the developing world that may require bailouts that will “cost the public dearly” and lead to greater inequalities, warns report co-author David Manley.
NRGI says its report “Risky Bet” is the first to weigh the “major implications” resulting from the spending plans of national oil companies who, it argues, would often be better off investing that money in education, healthcare and diversifying their economies.
Oil companies owned by African and Latin American countries, which have higher poverty rates, were assuming the biggest level of risk, the report found.
The report noted that state-owned entities are not held to the same scrutiny as their publicly listed counterparts, even though they are economic giants that control at least $3 trillion in assets and produce about two-thirds of the world’s oil and gas.
Also, an analysis published by the International Monetary Fund’s journal Finance and Development urged greater transparency in the governance of state oil companies, arguing they are not held to account for their management of vast public resources.
Just like their private counterparts, state oil companies should be made to assess and disclose their plans for the green energy transition, it said.
