January 14, 2022/CardinalStone Research
We expect the oil and gas sector to leap forward in 2022, aided by progress across the upstream, midstream, and downstream sub-sectors. In the upstream, oil production is likely to be positively impacted by increased drilling activities and sturdy oil prices.
Refinery projects are also slated to reach key milestones in the midstream, headlined by the expected launch of Dangote Refinery in mid-2022. Elsewhere, the likely extension of PMS price regulation could keep margins mostly flat for downstream marketers. Thus, players in unregulated petroleum product markets are likely to remain clear winners.
Oil price – Journey to a century dollars?
The short answer is that a $100/bbl looks unlikely in the near term while the longer answer lies in an assessment of primary drivers of global demand and supply. We believe the upside to oil price is capped by the emergence of the COVID-19 Omicron variant and expected increases in global supply, particularly from the US and other non-OPEC countries. According to IEA, US oil output is projected to rebound from Q4’21, wherein Hurricane Ida hampered oil production between August and September 2021. US supply could also be boosted by the 50 million barrels of crude oil released from the Strategic Petroleum Reserve (SPR) to drive prices lower. This move will effectively add 416.7 kb/d monthly between January and April 2022. The supply addition will also be higher than the 400kb/d monthly output easing planned by OPEC+ for the same period.
That said, the downside to current oil prices may also be limited in the near term, primarily because a large part of the current demand pressures could extend into 2022. The view on sustained demand is strengthened by news that the Omicron variant is not as deadly as first feared and the increasing switch to diesel due to global LNG shortages. There are also talks that OPEC+ may backtrack from its current easing schedule in the wake of the US’s plan to release oil from its crude reserves. Overall, we expect growth in global supply to outpace the rise in oil consumption, leading to a moderation in Brent prices to an annual average of $70/bbl in 2022. Our base case is mostly aligned with EIA’s $71/bbl forecast.
Domestic production to rise by 4.9% YoY in 2022
We expect Nigeria’s crude oil production to gradually recover from the setbacks experienced in the first nine months of 2021, reaching 2021 and 2022 average production (incl. condensates) of 1.64 mb/d (-10.7%) and 1.72 mb/d (+4.9%), respectively. Domestic oil output has notably been hit by several production challenges ranging from power failure on several terminals, pipeline downtime due to vandalization and prolonged repairs, as well as industrial actions over non-payment of salaries. In Shell’s last annual report, its management highlighted domestic security issues affecting the safety of its people and operations, including sabotage, theft, and its weakening ability to enforce existing contractual rights.
Production has also been affected by the lagging effect of the 2020 oil price crash that saw a few marginal players (such as Lekoil) suspend drilling activities when they became economically unviable. Nonetheless, we expect the sector to rebound in 2022. This view is premised on the expected impact of elevated oil prices, which is incentivizing drilling activities across board as evinced by the gradual increase in rig count since the end of June 2021. Our optimism is also strengthened by the improving bank credit allocation to oil and gas sector1 .
Elsewhere, the imminent launch of the 160,000 bpd Amukpe-Escravos export terminal could support production as it offers an alternative to the inefficient Trans Forcados pipeline, which had a 74.0% uptime in the first nine months of 2021. According to Seplat Energy, the construction of the entire pipeline system is effectively complete, and hydrocarbons lifting through the pipeline should commence soon.