Nigeria’s economic recovery plan has modest oil & gas ambitions but needs clarity, Says Ecobank

LAGOS (Capital Markets in Africa) – The government of Nigeria rolled out its Economic Recovery and Growth Plan yesterday. The plan, which is expected to enable the country borrow funds from both the World Bank and African Development Bank, is targeted at quickly pushing the country out of recession back into a stable growth path between 2017 and 2020. A cardinal aspect of the plan is fixing the oil and gas sector to enable output rise to 2.5mbd by 2020 and passing the Petroleum Industry Bill with the aim of using the revenues that accrue to further diversify the economy.

• The Oil and Gas section of the plan essentially builds on the Roadmap for the Petroleum Sector (a.k.a. 7 Big Wins) launched last year by the Ministry of Petroleum Resources. Thus, the new ERGP plan essentially re-echoes plans to achieve the objectives already set out under the 7 Big Wins however as it relates to the economy.

• In our opinion, the plan to increase output to 2.5mbd is quite modest. In light of the country’s offline capacity, estimated at nearly 500kbd, current output of c. 1.8mbd (including c 350kbd of condensates), and expected production from new fields such as Egina, the country could easily achieve 2.5mbd by 2018. We suspect avoiding disruptions to production is therefore the real objective here.

• Furthermore upstream, the government intends to improve gas production but doesn’t set any specific targets. However, a key element that has been missing in the gas sector, the gas production sharing contract terms, are to be finalized. This could potentially mean better gas terms that would attract investments in gas production even with current commercial terms. However, we expect the planned implementation of a gas commercial framework to allow for higher gas prices but more clarity from the government will be required.

• The government intends to reduce its stakes in the Joint Ventures with the International Oil Companies, refineries, fuel depots and oil pipelines, allowing more private ownership. This is potentially a good move as it will enable the government raise some revenue from the sale. Furthermore, the expected transfer of operatorship as government stake is reduced below 50%, could unlock private capital if the right regulations are in place to protect investors.

• In our view, the plans for the refineries are largely dependent on getting capital to invest, security in the Niger Delta and liberalization of the downstream market. These aspects however require amendments to key laws of the federation, as well as passage of the Petroleum Industry Bill. Attracting private investment in the refineries will also require significant level of investor protection due to the history of such partnerships in Africa.

• Creating additional channels to monetize the country’s gas reserves by fast-tracking the penetration of LPG and CNG is another positive aspect of the plan for the oil and gas sector. Nigeria’s gas potential is highly under-utilized. These channels could contribute to reducing the vulnerability of NLNG to shocks in the export market for its LPG, while improving supply to industrial gas users via CNG.

• However, unlike the Petroleum Sector Roadmap, the oil and gas segment (and much of the plan document) doesn’t not have specifics on how these objectives will be achieved. Specifics regarding timelines within which these objectives are to be achieved and what steps would precede the other. Thus further clarity might be required from the government going forward, in the form of an implementation plan.

• More importantly, all though the plan suggests that the foreign exchange market will likely to fully liberalized and the items banned from accessing the foreign exchange market will be given access again, it remains largely vague on timelines or how it intends to achieve this. Perhaps in a bid not to interfere with the workings of the CBN, the intent is only spelt out in the plan but the eventual decision is left with the Central Bank Governor.