Nigerian Independents Tackle Market Volatility

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Since the Federal Government of Nigeria enacted its Local Content Law in 2010, several indigenous operators – Atlas Petroleum International and Oranto Petroleum, Shoreline, Aiteo Group, Eroton Exploration & Production Company and Seplat Petroleum Development Company, among others – have made substantial contributions to the country’s hydrocarbon output.

Pre-COVID-19, independent firms were producing 400,000 barrels per day (bpd), accounting for about one fifth of the country’s crude oil production. By 2020, independents were aiming to add 250,000 bpd of additional output, and in July 2019, Nigeria’s largest independent oil producer, Aiteo Eastern E&P, was preparing to invest $5 billion over the next five years to drill new oil wells and re-open existing ones, in a bid to boost its oil and natural gas production.  

Moreover, several Nigerian independents were set to take investment decisions aimed at developing Nigeria’s onshore and marginal assets. In October 2019, Seplat Petroleum Development acquired independent Eland Oil & Gas, with plans to increase production by 30% to 64,000 bpd. Meanwhile, a joint venture led by Green Energy approved the second development phase of its shallow-water Otakikpo oil field in the Niger Delta. In the fourth quarter of 2019, Eroton Exploration & Production Company, Nigeria’s fifth-largest independent operator, was also preparing to drill the Akaso field in onshore OML 18.

While scheduled drilling programs now face delay due to COVID-19 – for example, Eroton suspended a planned $1.5 billion, 50-well campaign that sought to increase production to 100,000 bpd by 2021 – some firms have managed to re-start non-essential activities and even increase liquidity. Atlas Petroleum International, one of Africa’s largest privately held exploration and production groups, resumed development of OML 109 in July 2020 to boost production from the Ejulebe marginal field and support the industry’s recovery. With more than 500 million potential barrels of recoverable resources and 14 identified and mapped prospects and leads, OML 109 remains one of the most promising assets in the Niger Delta, positioned in close proximity to existing oil and gas infrastructure.

In the same month, Seplat Petroleum Development Company announced that its cash reserves had increased to $343 million, despite lower revenues from diminished oil demand. The firm has attributed the increase to oil hedging, gas revenues and a judicious approach to risk management and capital allocation, resulting in substantial cost reductions from its suppliers and an increase in capital expenditure to include two gas wells and related infrastructure.

Oil hedging remains a distinct advantage held by independents against multinationals in times of economic volatility: independent international producers typically hedge about half of their output 12 to 18 months in advance to offset potential losses, while majors do not. Other protections taken against price volatility include cost control mechanisms, such as the deployment of technology and automation of processes and operations to adapt to a new, low price environment.

To further mitigate the impact of COVID-19 on liquidity, operators are turning to financial institutions to be proactive in restructuring oil and gas facilities and leverage the regulatory forbearance provided by the Central Bank of Nigeria (CBN). Since March 2020, the CBN has implemented several measures to help companies fight the financial effects of COVID-19, including a one-year extension of a moratorium on principal repayments for CBN intervention facilities; a reduction of the interest rate on intervention loans from 9% to 5%; the provision of regulatory forbearance to banks to restructure terms of facilities in affected sectors, including oil and gas; and instruction to oil and gas companies and service providers to sell foreign currency to the CBN to increase foreign exchange supply.

While lower oil prices and a temporary market glut have impacted independents and majors alike, independents have been uniquely impacted due to their recent acquisition of capital heavy assets within the last decade. In fact, independents account for 90% of the $8 billion of debt accumulated by oil and gas producers in Nigeria, most of which is owed to local banks. According to data from the CBN, approximately one-third of loans issued by Nigerian banks were issued to oil companies, with only a small portion borrowed against a benchmark $50 barrel price.

Independents are estimated to require a $35 and $40 barrel price to meet debt obligations, while majors carry an average production cost of around $22 per barrel. Earlier this year, Brent crude saw a drop to a sub-$20 barrel, while Nigeria’s benchmark crude, Bonny Light, slid to $16 per barrel. Nigeria’s 2020 national budget used a crude price benchmark of $57 per barrel, and has since been revised to $30.

While OPEC-led calls to cut global oil production have limited Nigeria’s production to 1.41 million bpd between May and June 2020, 1.50 million bpd between July and December 2020, and 1.58 million bpd between January 2021 and April 2022, new output from untapped resources remains a priority. The country’s 2020 marginal field bidding round, for example, will put over 50 marginal fields on offer and seeks to attract a range of operators, from multinational majors to African NOCs. As a result, Nigerian independents will continue to represent a key catalyst for growth in terms of contributions to domestic production, potential development of marginal assets and diversification of Nigeria’s exploration landscape.

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