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Fitch Ratings Expresses Doubts about Nigeria’s Oil Industry

In a recent presentation, global rating agency Fitch Ratings stated that Nigeria’s oil and gas sectors continues to be plagued by security issues and weak oil prices, as well as a weak infrastructure being in place to tackle the current oil crisis.

It noted that the fall in oil prices will have a negative effect on the ratings of companies in those sectors, and also mentioned that oversupply in oil and a rise in oil inventories contributed to the collapse in prices, with OPEC (which Nigeria is a member of) shouldering part of the blame.

Most companies have been adapting to a $50 per barrel environment by bolstering existing operations though an improvement in efficiency. Despite western oil companies (such as Shell, Exxon and Total) being involved in a $5bn settlement to cover exploration and production costs in Nigeria,  a delay in President Buhari’s Petroleum Industry Bill will hamper the sector further. The African nation’s poor domestic refining abilities also leaves it further susceptible to price fluctuations in the future.

Fitch highlighted its doubts about Nigeria’s crude-for-loans deals with India and China. The Minister of State for Petroleum, Dr Ibe Kachikwu, recently announced that Nigeria had negotiated a an oil deal with India worth over $80bn, as well as deals with China totaling $35bn.  The senate is in the process of probing these deals and will summon Kachikwu for further questioning.

Recently, Fitch downgraded the Support Rating Floors of 10 Nigerian banks – including First Bank of Nigeria, Diamond Bank and Union Bank of Nigeria – and it remains to be seen if companies within the oil and gas sectors will also be subject to a similar fate in the near future.

An extract of the agency’s thoughts are below (courtesy of Nigeria Today):

“Nigeria remains Africa’s largest oil producer, but its production has dropped by 25 per cent in 2016 due to security issues and the closure of a number of export pipelines. Nigeria has a healthy proved reserve life of 43 years, but its future oil production will be driven by the resolution of security issues and infrastructure constrains.”

“We view positively Nigeria’s recent ‘Seven Big Wins’ programme, which covers sector regulation, upstream and downstream projects, security, as well as transparency and corporate governance. The list of proposals includes disclosing fiscal rules and contract terms, promoting energy affordability and constructing another Nigeria LNG train.”

“Another welcome sign is Nigeria’s reported $5billion settlement with western oil majors to cover their exploration and production costs since 2010. On the other hand, the long-overdue Petroleum Industry Bill, a cornerstone of President Buhari’s oil sector reform, is still far from final, and the recent rebel activity in the Niger Delta region is only delaying the bill’s passing.”

“Proposed de-consolidation and partial privation of the Nigerian National Petroleum Company would likely promote investment and hence benefit the country’s oil sector. We also remain sceptical that the multi-billion crude-for-loans prepayment deals with India and China will achieve the announced targets.”

“Furthermore, Nigeria’s dependence on oil product imports and the low use of natural gas hamper its oil & gas sector. Without developing domestic refining and natural gas capabilities, Nigerian oil and gas companies remain exposed to oil price fluctuations, thus capping their ratings.”

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About James Eugene (41 Articles)
Interested in many (maybe too many) things. Football, Politics and Emerging & Frontier Markets, to name a few. Twitter: @James_Eugene

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