A member of the International Maritime Organisation (IMO), Nigeria has a chance to take advantage of higher oil prices in a case where the IMO’s 2020 regulation lowering maximum sulphur content in marine fuel leads a spike in spot prices.
The new sulphur regulation took effect on January 1, 2020. The regulation further lowered the maximum limit of sulphur oxide in marine fuels from 3.50 percent maximum fuel oil sulphur limit to 0.50 percent maximum fuel oil sulphur limit. Experts say this will reduce sulphur emissions by over 80 percent by switching to lower sulphur fuels.
Fuel oil, high in sulphur content has traditionally been used by the shipping industry as bunker fuel, because they are usually cheaper. According to the Shipowners Association of Nigeria (SOAN); Nigerians own about 1,227 vessels and will be under pressure to comply.
Producers, refiners and consumers have different sides of the story to tell. For producers of low sulphur crude oil such as Nigeria’s sweet crude (Bonny Light contains 0.16% of sulphur), this is an opportunity to rake in some windfall.
The marine sector, which consumed 3.8 million barrels per day of fuel oil in 2017, according to a Wood Mackenzie report is responsible for half of global fuel oil demand. IMO sulphur regulations, therefore, have the potential to be highly disruptive to the pricing and availability of compliant fuels.
This is also a boom for refiners as demand for low sulphur refined products soar but Nigeria’s four refineries have produced at below 30 percent of installed capacity. The four state-owned refineries ran at an operating deficit of N90.07 billion in the first seven months of 2019. Dangote Plc’s 650,000 barrels a day refinery comes on-stream next year, so Nigeria currently has extremely limited refining capacity to take advantage of this opportunity.
Nigeria’s oil and gas sector is unfortunately not well-positioned to benefit from this windfall. The country’s production capacity has been capped at 1.7 million barrels of oil per day by the Organisation of Petroleum Exporting Countries (OPEC), 400,000 bpd below Nigeria’s budgeted 2.1 million bpd.
In addition offshore exploration and drilling activities have stalled with only one offshore rig operational in 2019, according to experts, and the Bonga South West Final Investment Decision (FID) suspended.
“Offshore drilling activities in Nigeria have stalled and the USA is putting pressure on Saudi Arabia to pump more oil so that oil prices come down,” said Adewale Ajayi, partner and head, energy and natural resources unit at KPMG. “So, Nigeria may not really benefit. Many projects have been put on hold, which would have increased the volume of oil produced in Nigeria to drive foreign exchange earnings.”
STEPHEN ONYEKWELU
