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Why Nigeria may not automatically benefit from rising oil prices

Investors brace for further sell-off on Coronavirus, oil

Oil prices extended Friday’s gains into the new week but chances that Nigeria will benefit from these gains depend on how Africa’s biggest oil producer deals with factors that are limiting its oil production.

On Monday, oil prices traded higher extending gains following Friday’s more than 3 percent jump. International benchmark Brent crude traded at $69.62 at around 12:15pm London time, up around 1.5 percent, having briefly climbed above $70 a barrel earlier in the session. It was the first time since May that Brent futures had surpassed this psychologically important level.

Oil prices surged on Friday, following the assassination of Iran’s most powerful and visible military leader, Qassem Soleimani, by US forces in Iraq. The attack was carried out following a direct order from US President Donald Trump and was aimed at “deterring future attacks” on US diplomats and service members throughout the region.

Nigeria’s oil and gas sector is unfortunately not well-positioned to benefit from this windfall. First off, 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, with the new Finance Bill, 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.”

The new Finance Bill proposes to repeal section 60 of the Petroleum Profit Tax Act (PPTA) and Section 43 of CITA, which means the dividend distributed from profits already charged to Petroleum Profits Tax would be subject to withholding (WHT) up to 10 percent. This could be quite adverse for the upstream oil and gas exploration and production sector which is chargeable to the highest tax rate (up to 85 percent in some instances).

This will affect the valuation of oil and gas assets’ global competitiveness and investment appraisals going forward. Upstream oil and gas companies with significant retained earnings may consider distribution before the Finance Bill is passed into law as there are no grandfathering rules in the proposed Bill.

Brent crude, which is the international benchmark for buyers and sellers of oil, was down already by 1.1 percent on Tuesday at $68.14 a barrel and West Texas Intermediate is off 1 percent at $62.61.

“It is not a given that any potential retaliation by Iran would target oil-producing assets,” Goldman Sachs analysts said in their note dated January 6. This means the risen oil prices are unsustainable.

Nigeria is also not attracting the needed foreign direct investments to boost production in its oil and gas sector. Foreign investment into the sector is still at its lowest ebb as inflow hit a low of $38.66 million in third-quarter 2019, a sharp decline compared to $171.63 million recorded in Q3 2016.

Despite Nigeria running an economy mostly dependent on crude oil earnings, figures obtained from public data agency, National Bureau of Statistics (NBS), show foreign capital inflow into the oil and gas sector accounts for 0.72 percent of total foreign investments into the Nigerian economy compared to other sectors like the telecoms contributing 16.49 percent in the third quarter of 2019.

 

STEPHEN ONYEKWELU