Elections likely to delay oil sector reforms

The forth-coming federal and state elections in Nigeria will add another layer of risk and uncertainty to the many existing challenges facing the country’s oil sector, according to a new report from IHS Inc. (NYSE: IHS).

The closely fought presidential contest between incumbent President Goodluck Jonathan and main challenger Muhammadu Buhari is split along ethno-regional lines, the report says, and the likely disputed results will threaten the state’s political legitimacy and structure. As a result, long-overdue oil sector reform, especially via the Petroleum Industry Bill (PIB), first proposed in 2008, is likely to be further delayed.

“Elections will be yet another disruptive force for Nigeria,” said Roderick Bruce, principal analyst at IHS Energy and one of the report’s authors. “Regardless of the election’s outcome, energy investors will continue to face fiscal and regulatory uncertainty as a result of ongoing challenges to the passage of the Petroleum Industry Bill (PIB). That uncertainty has already constrained deepwater exploration and development.”

According to the report, “the elections are likely to destabilize Nigeria’s federal structure, triggering further economic headwinds, violence, and disorder; the outcome will define the future landscape for oil and gas investment in the country”.

The eventual winner of the election, the report say will face serious fiscal challenges; lower crude prices and falling production will reduce oil revenues, which have traditionally fed the country’s patronage system. In addition, there is little prospect of oil sector reform before mid-2016; should Goodluck Jonathan retain power, the current oil sector policy inertia will likely continue. Meanwhile, a Buhari election win would bring more reforming impetus, yet Jonathan would still face significant challenges in implementing change.

“A Buhari victory could also unleash significant unrest in the oil-producing Niger Delta, Jonathan’s home region, with the potential to disrupt oil and gas operations and exports; Competition for political control is likely to obstruct the passage of the PIB, further delaying deepwater oil exploration; Local content will continue as a government priority, offering partnership opportunities for foreign investors, but pressuring the economics of upstream projects”, the report said.

Elections are likely to aggravate the security situation

The new IHS report finds that, regardless of who wins, the closely run and highly contentious nature of the elections increases the risk that the polls will stoke related violence and disorder. The high probability of disputed results will limit the state’s ability to implement energy policy effectively.

The elections are likely to aggravate the security situation in the oil sector with implications for political violence in the Niger Delta and northeast. Disgruntled groups from the Niger Delta region have a history of blockading and disrupting oil and gas facilities in order to gain political attention and concessions for the region in the elections. Depending on the likelihood of a Jonathan victory, these groups could seek to disrupt production again either before or after the first round of the elections.

If Jonathan loses, there is a high risk of a return to militancy as the region would no longer preserve the same level of political power or patronage as before. Renewed militancy would not only imperil oil production but would also severely test the capacity of the military, which is already preoccupied with the fight against northern militancy in the form of Boko Haram.

Nigeria’s government estimates combined crude and natural gas liquid (NGL) output will fall from a yearly average of 2.38 million b/d in 2014 to 2.27 million b/d in 2015, mainly due to crude theft and sabotage of pipeline infrastructure in the Niger Delta. According to the IHS report, oil production in Rivers state (estimated around 330,000 b/d on average) is most at risk of disruption during the elections, while production in Bayelsa and Delta states is at high risk should Buhari win.

Uncertainty constrains upstream investment

After the elections, one of the new administration’s priorities will be to address the challenge of falling revenues as a result of the recent drop in oil prices. The plunge in oil prices is putting a huge strain on Nigeria’s economy, with the government budget’s 2015 reference price for oil cut from an initial USD78/bl to USD52/bl. IHS forecasts Nigeria’s real GDP for 2015 to be 4.1 percent. Falling oil revenues due to output declines and lower prices in turn reduce funds that support political stability.

The elections are expected to divide the political elite further, making the approval of the PIB more challenging. “The only certainty for Nigeria’s oil sector is even more uncertainty,” Bruce said. “If Goodluck Jonathan wins, it is unlikely that we will see any significant change in oil sector policy or structure in the next two years. However, if Buhari wins, he will have more impetus to implement some changes. But deep reform will still be elusive, and we should not expect any substantial changes until after mid-2016.”

Years of regulatory uncertainty due to delay in approval and enactment of the PIB has caused a significant reduction in foreign investment in Nigeria’s upstream and has reduced deepwater exploration and development activity. “Uncertainty over the future fiscal framework, and therefore project economics, has pushed upstream investors to take a ‘wait and see’ approach. They have limited new project sanctions and in some cases are divesting less profitable and riskier onshore fields,” Bruce said.

According to IHS, deepwater exploration and appraisal drilling in Nigeria has fallen sharply in recent years due to concerns over the PIB. The average number of wells drilled per year had dropped 72 percent since the 2004-2008 period before the first PIB draft emerged. IHS forecasts that Nigerian crude output will drop below 1.5 million b/d by 2020 from around 2 million b/d in 2011 without significant deepwater investment.

FRANK UZUEGBUNAM