Corporate Information

Unravelling
Nigeria’s Oil & Gas
Tapestry
Nigerian Oil and Gas Sector report 2024

NIGERIAN OIL AND GAS SECTOR REPORT arm.com.ng 1

Executive
Summary
Nigeria, a member of OPEC since 1971, boasts domestic companies like Ardova, Conoil,
of substantial crude oil reserves of 37.1 billion Eterna, and MRS. Noteworthy efforts, including
barrels at the start of 2023, with a production those by the Nigerian Content Development
capacity of 2.5 million barrels per day. and Monitoring Board, have resulted in
a notable surge in local involvement in
The country heavily relies on crude oil Upstream activities.
production as a cornerstone of its economy,
constituting a significant source of foreign Since the early days of Exploration in the Niger
exchange. Nigeria primarily exports light low- Delta region, Nigeria has faced challenges of
sulphur (sweet) crude oil, with 79.63% of total crude oil theft and pipeline vandalism, leading
exports in Q1:2023 attributed to crude oil. to disruptions in production. These issues
have significantly impacted Nigeria’s ability
The Nigerian Oil and Gas industry comprises to produce crude oil to its maximum potential,
three main sectors: Upstream, Downstream, resulting in consecutive contractions in the
and Midstream. The Upstream sector, sector’s growth rate.
primarily led by international oil giants such
as Shell, Chevron, and Total, accounts for over Despite being the 13th largest crude oil
80% of global crude oil production. producer in the world, Nigeria’s downstream
sector faces challenges including mispriced
Meanwhile, the Downstream and Midstream products, security concerns, and dilapidated
sectors are predominantly controlled by

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Executive
Summary Cont’d
infrastructure. Efforts by the government to The PIA, enacted in 2021, aims to overhaul the
revitalize this sector involve removing PMS petroleum sector in Nigeria. It establishes new
subsidies, deregulating the downstream regulatory bodies, commercializes the NNPC,
sector, and implementing progressive and introduces a fresh tax system. The Act
regulatory and taxation frameworks through addresses tensions with host communities,
the PIA. emphasizing community development, and
introduces a national grid system for land
Nigeria’s refining capacity, although rights.
substantial, has been hindered by outdated
infrastructure and mismanagement. Recent The global energy transition towards
efforts to establish modular refineries have renewable sources is impacting Nigeria’s
increased refining capacity, but it still falls oil and gas sector. Major companies are
short of meeting domestic demand. The divesting from fossil fuels, prompting
commissioning of the Dangote Refinery questions about the sector’s attractiveness
with a capacity of 650,000 bpd presents amid the transition. The Nigerian government
a significant milestone, potentially has enacted long-term policies towards
transforming the downstream sector. energy transition, with commitments to
reduce emissions and ambitious plans for
Nigeria holds vast natural gas reserves, yet renewable energy generation.
significant quantities are either flared or re-
injected due to lack of infrastructure and In conclusion, Nigeria’s oil and gas industry
demand constraints. stands at a critical juncture, with challenges
and opportunities intersecting, amid a
Through its Gas Master Plan, the government rapidly changing global energy landscape.
aims to become a Liquified Natural gas (LNG) Adapting to this transition will require
export hub in Africa, with plans to expand strategic policies, technological innovation,
infrastructure, including the Ajaokuta- and collaborative efforts from stakeholders
Kaduna-Kano pipeline, to increase natural across the sector.
gas exports.

Despite being the 13th largest crude oil producer in the world, Nigeria’s
downstream sector faces challenges including mispriced products,
security concerns, and dilapidated infrastructure.

Efforts by the government to revitalize this sector involve removing PMS

subsidies, deregulating the downstream sector, and implementing
progressive regulatory and taxation frameworks through the PIA.

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 Table of Contents
Executive Summary 2
The Global Oil Market 5
Industry Landscape: OPEC, Reserves, and Geopolitical Dynamics 5

Oil Price Rollercoaster: The Impact of Russia-Ukraine Conflict and OPEC

Decisions 6

Nigerian Crude Oil Sector: 8

Brief History 8

Upstream sector dominated by IOC’s 10

Nigeria Oil and Gas Sector Marred by Crude oil Theft and Vandalism 11

Downstream Oil and Gas Sector 12

A New Dawn for Local Refining 13

Natural Gas: Tapping into Industry Potentials 15

Nigeria’s LNG Export Ambitions: Expanding Infrastructure 15

Industry Regulatory Framework 17

Key Provisions of the Act 18

The Fiscal Implications of the Petroleum Industry Act (PIA) of Nigeria 19

Energy Transitioning 20
Company Analysis 22
A Mixed Bag of Revenue Growth and Profit Declines 22

Cost Of Sales: Inventory Accumulation Drives Up Cost 23

Operating Profit Eroded by FX Revaluation 23

Net Finance Costs Soar as Naira Devaluation and Monetary Policy Bite 24

Bottom Line Remains Resilient Amidst Elevated Cost 25

Cost of Sales Surges Amidst Asset Acquisitions and Inflation 26

Surging Expenses Offset Production Gains 26

Surge In Net Finance Costs Driven by High Interest Rates 27

ARM Ratings and Recommendations 28

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The Global Oil Market
Industry Landscape: OPEC, Reserves,
and Geopolitical Dynamics

In the intricate tapestry of the global oil market, Counterbalancing this influence is the
the Organization of the Petroleum Exporting Organization for Economic Co-operation and
Countries (OPEC) and its collaborative alliance, Development (OECD), a group of thirty-eight
OPEC+, stand as pivotal players. advanced economies.

These entities, comprising thirteen major While holding a modest 4% of global reserves,
oil-exporting nations including Nigeria, exert the OECD’s impact on consumption patterns
substantial control over global oil supply and and energy policies significantly shapes the
pricing dynamics. market.

OPEC holds a staggering 80.4% of global crude

oil reserves, conferring unparalleled influence
over market stability and pricing.

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 Figure 1: OPEC Global Production Share

OPEC OECD OTHERS

16%
4.08%

80.37%

Source: EIA STEO, ARM Research

Oil Price Rollercoaster: The Impact of Russia-Ukraine

Conflict and OPEC Decisions

Following the COVID-19 pandemic, which These actions significantly hindered Russia’s
led to a drop in Brent Crude, an international ability to export oil, creating a strain on the
benchmark, to an average of USD 41.76 per global supply chain and causing oil prices to
barrel in the fiscal year (FY) 2020, there was a surge to their highest levels since 2012.
noteworthy rebound in the fiscal year 2021.
In the month following Russia’s invasion, crude
This resurgence occurred as major economies oil prices skyrocketed to USD117.25pb, the
began easing lockdown restrictions and highest figure recorded since April 2012, and
returning to full economic activity, resulting in reached USD122.71pb by June 2022.
oil prices reaching an average of USD 70.68pb
in 2021. The average oil price for 2022FY stood at USD
100.78pb, representing a significant increase of
However, in February 2022, Russia invaded 42.59% compared to the previous fiscal year.
Ukraine. In response to Russia’s invasion, the
United States, and several European countries However, oil prices started to decline in
imposed trade sanctions on Russia. August 2022, eventually reaching USD80.9pb

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by December of the same year. This drop in a total of 1.1mbpd. Russia, an ally of OPEC,
oil prices was primarily attributed to a more also volunteered to reduce production by
hawkish monetary policy stance adopted 500,000bpd until the end of 2024.
by major central banks globally, concerns
about a global economic recession, and a More recently, on the 5th of September,2023,
strengthening US dollar. despite a rally in oil prices, Saudi Arabia and
Russia, as part of their alliance with OPEC,
In October 2022, the OPEC+ group of nations agreed to implement additional oil production
announced a substantial supply cut of 2.00 cuts of 1.0mbpd and 300,000bpd, respectively,
million barrels per day (mmbpd), marking until the end of 2023.
their most extensive supply reduction since
the onset of the pandemic. These decisions have come much to the
dismay of the US, who have been in opposition
This move was aimed at stimulating a recovery since the initial cuts in October 2022.
in oil prices or at least stabilizing them amidst
the ongoing declines.

In April 2023, the OPEC group, led by Saudi

Arabia, the largest producer within the group,
reached an agreement to cut oil supply by

Figure 2: Crude Oil Price Trend from 2019-2023 (USD)

140

120
Impact of Covid19
100

80

60

40 Impact of Russia-Ukraine
crisis
20

0
Jul

Jul

Jul

Jul

Jul
Mar

Mar

Mar

Mar

Mar
Jan

Jan

Jan

Jan

Jan
Sep

Sep

Sep

Sep
May

May

May

May

May
Nov

Nov

Nov

Nov

2019 2020 2021 2022 2023

Source: EIA, ARM Research

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Nigerian Crude Oil Sector:
A Strong Hold of The
Nigerian Economy
Brief History
Nigeria entered the ranks of oil-producing The oil uncovered was a high-value light
nations in 1956 upon discovering its first sweet crude, benchmarked against Brent
commercially viable reserve in Oloibiri, crude.
Bayelsa State.
Notably, it possesses a lower sulfur content
This significant finding was attributed to Shell- than Brent, resulting in a higher pricing.
BP, the sole concessionaire at the time, with a Following this, in the 1960s, licenses for
production capacity of 5,100 Barrels per Day exploration were granted by the Federal
(BPD). Government of Nigeria (FGN) to other non-
British firms such as Mobil (1955), Tenneco

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(1960), Gulf Oil and Chevron (1961), Agip and barrels at the outset of 2023 and an estimated
Elf (1962). production capacity of 2.5 million barrels per
day (MMbpd).
Nigeria became a member of OPEC in 1971,
subsequently establishing the Nigerian Nigeria relies heavily on crude oil production
National Petroleum Corporation (NNPC) in as a cornerstone of its economy. Crude oil
1977. In July 2022, this entity transformed into serves as Nigeria’s primary source of foreign
a limited liability company in implementation exchange (FX); thus, the country’s economic
of the Petroleum industry Act (PIA). stability is significantly impacted by price
fluctuations and its production capacity.
The NNPC holds the exclusive rights to exploit
Nigeria’s oil and gas reserves but can engage Nigeria predominantly produces light low-
in partnerships with multinational and sulfur (sweet) crude oil, much of which is
indigenous oil companies for this purpose. exported to global markets. In Q1: 2023, 79.63%
of total exports recorded was from crude oil
Nigeria has earned its position as the Export.
largest hydrocarbons producer in Africa
with substantial reserves totaling 37.1 billion

Figure 3: Total Oil Production and Exports (Mbpd)

Total liquid fuels production Total crude oil exports

3.00

2.50

2.00

1.50 1.51

1.00
1.3
0.50

0.00
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Source: EIA, Bloomberg, ARM Research

The Nigerian Oil and Gas Industry is With complex infrastructure, and intricate
categorized into three major subsectors: regulatory frameworks, this industry has
Upstream, Downstream, and Midstream. significantly influenced Nigeria's economic
trajectory.
The upstream sector currently accounts
for the highest share of revenue, capital
expenditure, and overall economic growth.

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Upstream sector
dominated by IOC’s

The oil and gas industry in Nigeria is largely assets. For example, in 2014, Seplat Petroleum
controlled by international oil companies Development Company acquired a 40% stake
(IOCs), such as Shell, Chevron, Mobil, Agip in four oil and gas blocks from Shell and Total.
(Eni), Addax, and Total energies.
This deal made Seplat the largest indigenous
These companies account for over 80% oil and gas producer in Nigeria. The increasing
of the country's crude oil production. IOCs use of technology is also helping Nigerian
operate in Nigeria under various contractual companies to compete more effectively in
arrangements with the Nigerian National the upstream sector. For example, Nigerian
Petroleum Corporation (NNPC), including companies are now using advanced
Joint Ventures (JVs) and Production Sharing technologies such as three-dimensional
Contracts (PSCs). seismic imaging and horizontal drilling to
explore and produce oil from difficult-to-
Other contractual arrangements include reach reservoirs.
sole risk contracts and risk service contracts.
IOCs also hold more than 90% of Nigeria's oil As a result of these factors, local participation
reserves and operating assets. in upstream activities in Nigeria has increased
significantly in recent years. In 2010, Nigerian
However, in recent years, there has been a companies accounted for only 5% of oil
growing trend of increased local participation production in the country.
in upstream activities in Nigeria.
By 2022, this figure had risen to over 20%. The
This is due to a number of factors, including increase in local participation in upstream
the Nigerian Content Development and activities has a number of benefits for Nigeria.
Monitoring Board (NCDMB)'s initiatives to It helps to create jobs, boost the economy,
promote local content, the recent divestment and reduce the country's reliance on foreign
of assets by IOCs, and the increasing use of oil companies.
technology by Nigerian companies.
It also helps to transfer knowledge and
The NCDMB has played a key role in driving technology to Nigerian companies, which can
the increase in local participation in upstream then be used to develop other sectors of the
activities. The NCDMB has implemented a economy.
number of initiatives, including requiring IOCs
to use a certain percentage of Nigerian goods However, there are still some challenges
and services in their operations, supporting that need to be addressed in order to further
the development of Nigerian companies increase local participation in upstream
through training and capacity building activities.
programs, and providing financial assistance
to Nigerian companies to bid for and execute
oil and gas contracts.

The recent divestment of assets by IOCs

has also created opportunities for Nigerian
companies to acquire and operate upstream

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Nigeria Oil and Gas Sector Marred by
Crude oil Theft and Vandalism

For many years, more crude oil was produced in September 2023) due to short falls in
in Nigeria than in any other country in Africa. Nigeria’s production, on the back of oil theft
and pipeline vandalism.
However, unplanned production outages or
disruptions in Nigeria have, at times, resulted The problem has progressed to the extent that
in its crude oil production falling below that Nigeria is unable to meet its increased OPEC
of Angola, the second-highest producing quota at 1.74 million barrels per day (MMbpd).
country in Africa. Furthermore, the country has been unable to
capitalize on the rising energy prices following
Currently, Angola produces nearly the same Russia’s invasion of Ukraine.
amount of crude oil as Nigeria (at 1.13mbpd
Figure 4: Nigerian Crude oil production to OPEC Quota (Mbpd)

OPEC Quota Crude Oil Production

2.00
1.80
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
Jan

Jan
Jan

Jan

Jan

Jul

Jul

Jul
Jul

Jul

Sep
Sep

Sep

Sep

May

May
May

May

May

Nov
Nov

Nov

Nov

Mar

Mar
Mar

Mar

Mar

2019 2020 2021 2022 2023

Source: EIA STEO, Bloomberg, ARM research

Figure 5: Top four Oil Exporters in Africa (Mbpd)

Algeria Angola Libya Nigeria

2.00
1.80
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
Jul

Jul

Jul

Jul

Jul
Sep

Sep

Sep

Sep
May

May

May

May

May
Mar

Mar

Mar

Mar

Mar
Jan

Jan

Jan

Jan

Jan
Nov

Nov

Nov

Nov

2019 2020 2021 2022 2023

Source: EIA STEO, ARM Research

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Nigeria has faced unprecedented adverse an average of 1.24MMbpd, but an oil workers’
economic challenges stemming from the strike disrupted production again in April 2023
impact of theft of large volumes of crude oil, driving down production to 1.06MMbpd.
pipeline vandalism, and minimal upstream
infrastructural development. These disruptions reduced production of
Nigeria's major crude oil grades, such as
These challenges have led to sporadic supply Bonny Light, Brass River, and Forcados.
chain disruptions and have greatly affected
the country's ability to produce crude oil to its Furthermore, Data released by the National
maximum potential. Bureau of Statistics (NBS) show that, the
Nigerian crude oil sector has contracted
In the third quarter of 2022, operators of the thirteen (13) times consecutively since Q1:2020.
Trans Niger pipeline and the Forcados export In Q2:2023, the oil sector contracted by 13.43%
terminal closed their facilities for repairs. (up from -4.21% in Q1:2023) underpinning
lackluster performance of the Oil sector
The closure triggered a sharp drop in Nigeria's because of persistent disruptions.
crude oil output, from an average of 1.11MMbpd
in Q2:2022 to below 0.96MMbpd in Q3:2022.
Nigeria’s production recovered in Q1:2023 to

Figure 6: Domestic Oil production (Mbpd) vs. Sector Growth Rate (%)

Nigeria Crude Production Oil and Gas Sector Growth

2 .00 10.00
1.80
5.00
1.60
1.40 -
1.20
(5.00)
1.00
0.80 (10.00)

0.60 (15.00)
0.40
(20.00)
0.20
0.00 (25.00)
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2 02 0 2 02 1 2 02 2 2 02 3

Source: NBS, EIA, ARM Research

Downstream Oil and Gas Sector

The downstream segment of the Oil and International Oil Company (IOC) operating
Gas industry encompasses activities like in Nigeria's downstream sector and holds a
refining, marketing, transportation, logistics, significant market share.
distribution, and retailing. This sector is
primarily dominated by local enterprises Despite being the 13th largest global producer
such as Ardova, Conoil, Eterna, and MRS. It's of crude oil, with an estimated daily output of
worth noting that Total Energies is the sole 2 million barrels, one might expect a thriving

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downstream sector in the Nigerian oil and gas However, the current Nigerian government
industry. Unfortunately, this is not the reality. administration has taken decisive steps to
revitalize this sector and attract foreign and
The sector grapples with various challenges, local investments. These initiatives involve
including mispriced products, inadequate removing PMS Subsidies, deregulating
supply chain, security concerns around the downstream sector, and establishing
pipelines, inconsistent supply due to a progressive regulatory and taxation
vandalism, outdated pipeline infrastructure, framework through the implementation of the
malfunctioning refineries, and logistics PIA.
challenges.

Figure 7: Market Share of Down Stream Companies as of June 2023

MRS ConOil Eterna Total

12%

18%

56%

14%

Source: NGX ARM Research

A New Dawn for Local Refining

Refining in Nigeria commenced a decade Despite boasting a nameplate capacity of
after the discovery of oil in the oil-rich Niger 445,000 bpd spread across four refineries
Delta region in the 1950s. It began in 1965 with strategically located in Port Harcourt (150,000
an initial refining capacity of 38,000 barrels & 60,000 bpd), Warri (125,000 bpd), and
per day (bpd). Kaduna (110,000 bpd), Nigeria has struggled
for years to refine enough oil to meet its
Since then, Nigeria’s refining capacity domestic demands. Over 80% of crude oil
has grown to be the fourth-largest refined products consumed in Nigeria is
in Africa. However, the operations of being imported.
these refineries have been impeded by
outdated infrastructure, vandalism, and As of 2021, Nigerian refineries were completely
mismanagement, among other issues. shut down due to minimal to no output. The

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Nigerian government has invested trillions of on the revitalization of three dormant
Naira in revamping these refineries over the refineries revealed an expenditure of about
years, with little to show for it. A report calling NGN11.35 trillion over the past decade.
for a forensic audit of government spending

Figure 8: Total Crude Oil Refining

25,000

20,000

15,000

10,000

5,000

0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2020 2021 2022 2023

Source: NBS, ARM Research

Recognizing these challenges, the domestic demand, the country still imports
Department of Petroleum Resources (DPR), 80% of total petroleum products consumed.
under the Nigerian Upstream Regulatory
Commission (NUPRC), granted licenses In May 2023, the commissioning of the
in 2018 for the establishment of modular Dangote Refinery marked a historic milestone
refineries to 25 investors. in the oil and gas refining sector.

However, only a few were able to bring these Located in the Lekki Free Zone, the Dangote
projects to fruition. Among them are Niger Refinery boasts a total nameplate capacity
Delta Petroleum Resources (River state), of 650,000 bpd, making it the largest single-
Niger Delta Refinery (Ogbele), Waltersmith train refinery in Africa.
Petroman Oil (Ibigwe), Edo Refinery and
Petrochemicals (Benin), Opac Refinery It plans to produce 53 million liters of
(Kwale), and Azikel Refinery (Obunagha- petroleum products a day, which is sufficient
Gbarain, Bayalsa), with nameplate capacities to meet domestic consumption and even
of 1,000 bpd, 10,000 bpd, 5,000 bpd, 6,000 allow for exports.
bpd, 7,000 bpd, and 12,000 bpd, respectively.
This recent development has brought a
The introduction of these new modular newfound optimism to the downstream oil
refineries marked a positive development, and gas sector, presenting the potential for
increasing Nigeria’s refining capacity to increased productivity and investments.
486,000 bpd in 2021 from 446,000 bpd in 2019.

However, despite holding a name plate

capacity that is capable of meeting Nigeria’s

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Natural Gas: Tapping into
Industry Potentials

Nigeria holds the largest natural gas reserves which could be exported or used for power
in Africa and is ranked 6th globally among generation, is either flared of re-injected.
exporters of liquefied Natural gas (LNG).
This is on the back of the lack of infrastructure
According to the US Energy Information to capture natural gas produced during oil
Administration (EIA), Nigeria held an estimated production alongside demand constraints.
206.5 trillion cubic feet (tcf) of proved natural
gas reserves at the beginning of 2023 and In 2022, Nigeria flared 5.32 billion cubic meters
exported an average of 903.31 billion cubic (Bcm) of natural gas, which is equivalent to
feet(Bcf) of natural gas from 2012-2021. 188 billion cubic feet (Bcf) making Nigeria the
ninth-highest natural gas-flaring country
However, it’s been observed that significant in the world in terms of annual gas flaring
amounts of Natural Gas produced in Nigeria volume.

Figure 9: Nigerian Natural Gas Production (BCF), Consumption and Exports (Mbpd)

Natural Gas Production Natural Gas Consumption

Natural Gas Exports

2000.00

1567.55
1500.00
807.44

1000.00 777.40

500.00

0.00
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Source: EIA, ARM Research

Nigeria’s LNG Export Ambitions:

Expanding Infrastructure

The Nigerian government has indicted its crude oil export hub. This Nigerian LNG (NLNG)
plans to become an export hub for Liquefied terminal started its operations in 1999 and
Natural Gas (LNG) in Africa by exporting to has six liquefaction trains developed over the
regional countries and other Asian countries, years, with a total capacity of 1.10 trillion cubic
like India and China. Currently, the country feet (Tcf) per year.
has only one LNG export terminal in operation
located at the Bonny Island, which is also a Construction of the seventh (7) train began in
2021 and is due for completion by 2026.
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Other deals like the UTM Offshore partnership The pipeline project forms phase one of the
with NNPC, which will take feedstock from the Trans-Nigeria gas pipeline (TNGP) project
Yoho natural gas field owned by ExxonMobil which also includes a proposed pipeline that
and NNPC, are also in the works, underpinning aims to connect the Qua Iboe Terminal on the
the government’s dedication to growing this coast of southern Nigeria to Ajaokuta.
sector and achieving its export targets.
The TNGP initiative is a component of a broader
Domestic consumption of LNG has also regional natural gas pipeline endeavor known
witnessed substantial increase to an average as the Trans-Saharan Gas Pipeline (TSGP)
of 649 Bcf between 2012 and 2021. project.

This demand mainly stems from the power The TSGP’s objective is to convey natural
sector although, there has been growing gas from Nigeria to Algeria through Niger.
demand from the commercial, residential, This would create an alternative pathway
and industrial sectors. for Nigeria to export natural gas to Europe,
utilizing Algeria’s established international
The Nigerian government seek to tap into pipeline network.
this potential by expanding its gas pipeline
capacity country wide and even across The development of gas infrastructure
borders to increase destination and volumes in Nigeria is poised to facilitate the
of natural gas exports. commercialization of currently flared gas
while also likely to draw investments towards
One of such striking projects, is the Ajaokuta the untapped gas reserves.
–Kaduna-Kano (AKK) pipeline currently being
developed by NNPC.

This is a 614km- long LNG pipeline that will

run from Ajaokuta to Kano Nigeria, at an
estimated cost of USD2.8bn.

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Industry Regulatory
Framework
To overhaul the petroleum sector in The implementation of the PIA is expected
Nigeria, the administration led by President to create a more conducive environment
Muhamadu Buhari in 2021 signed into law the for growth, by attending to legal and fiscal
Petroleum industry Act (PIA). encumbrances as well as attract and create
investment opportunities for local and
Despite being a major source of revenue and international investors
foreign exchange, the Oil sector performance
has been dismal compared to other sectors
in terms of GDP contribution (from 13% in 2013
to 5.67% in 2022).

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Key Provisions of the Act

■ PIA dissolves multiple petroleum ■ PIA imposes fines for gas flaring in
regulatory agencies into two bodies: midstream operations; proceeds
NURC and NMDPRA. go to Midstream and Downstream
Infrastructure Fund for infrastructure
■ NNPC is commercialized and becomes
investment.
NNPCL, a limited liability company.
■ PIA introduces national grid for land rights
■ Petroleum minister retains power
management, defining license areas, well
in formulating, monitoring, and
locations, and regulatory measures.
administering government policy.
■ Three new licenses for upstream activities:
■ 30% of NNPC Ltd.'s profits go to Frontier
PEL for exploration, PPL for drilling, and PML
Exploration Fund for basin exploration.
for extraction and sales, administered by
■ 10% of revenue from licenses and leases the Commission.
directed to the Frontier Exploration Fund.
■ PEL granted at Commission's discretion;
■ PIA addresses tensions between oil PPL and PML obtained through competitive
companies and host communities bidding.
through HCDTF.
■ Existing OPL or OML holders can convert
■ HCDTF aims to provide social and to PPL or PML, with certain adjustments;
economic benefits to host communities, conversions finalized within 18 months of
with existing projects transferred under it. Act's effective date.

■ Oil license holders must contribute 3% of ■ Non-converting OPL or OML holders

operating expenditure annually to HCDTF. operate under current rules until licenses
expire, then new regime applies.
■ Penalties, including license revocation, for
non-compliance with host community ■ All existing Marginal Fields receive
obligations. separate PMLs; Fields declared before Jan
1, 2021, not in production or development,
■ Host communities are responsible for convert to PPLs with Act's terms.
protecting oil and gas assets and held
accountable for repairs. PIA replaces
petroleum profits tax with a hydrocarbon
tax, covering various hydrocarbons
except deep offshore crude oil.

■ Provision in PIA allows only companies

with refining licenses or history in crude
oil trading to import products during
shortages, sparking controversy over
potential monopolies.

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The Fiscal Implications of the Petroleum
Industry Act (PIA) of Nigeria

The new fiscal framework introduced by the Increased transparency:

Petroleum Industry Act (PIA) of Nigeria has The PIA is intended to increase transparency
significant implications for the country's oil in the oil and gas industry.
and gas industry. These implications include:
This is due to the new requirements for
Increased government revenue: oil companies to disclose their financial
The PIA is expected to increase government information and to make their contracts with
revenue from the oil and gas industry by an the government public.
average of 30% over the next five years.
The increased transparency will help to ensure
This is due to the new royalty regime, the new that the government is getting a fair share of
profit-sharing formula, and the new PIT rate. the profits from the oil and gas industry.

The increased revenue will allow the More sustainable development:

government to invest in infrastructure, The PIA includes several provisions that are
education, and healthcare, as well as to designed to promote more sustainable
provide social safety nets for its citizens. development in the oil and gas industry.

Increased investment: These provisions include requirements for oil

The PIA is designed to make Nigeria a more companies to invest in local communities, to
attractive investment destination for the oil protect the environment, and to reduce their
and gas industry. emissions.

This is due to the new fiscal framework, The more sustainable development will help
which is more transparent and predictable to ensure that the benefits of the oil and gas
than the previous framework. The increased industry are shared more equitably, and
investment will lead to the development of that the environment is protected for future
new oil and gas fields and the creation of new generations.
jobs.

NIGERIAN OIL AND GAS SECTOR REPORT arm.com.ng 19

Energy Transitioning
The global energy transition is underway, with The company is divesting entirely from its
a shift from fossil fuels to renewable energy onshore and shallow water holdings in Nigeria
sources to mitigate climate change. as part of its global strategy to have 55% gas
in its portfolio by 2030.
This is affecting the oil and gas sector in
Nigeria, as major oil and gas companies Similarly, other International Oil Companies
are reducing investments in fossil fuels and (IOCs) such as ExxonMobil and, more recently,
divesting from their onshore assets in Nigeria. Eni have expressed their desire to divest their
onshore assets in Nigeria.
Shell’s new strategy, launched in 2021, aims
to decrease total oil production by 1-2% However, regulatory factors and other
annually, with a complete cessation of new encumbrances have hindered progress in
frontier exploration investments by 2025. this regard.

Shell, responsible for a significant portion of Notably, the Petroleum Industry Act (PIA),
Nigeria’s oil and gas production, is aligning enacted in 2021, primarily revolves around
its upstream petroleum business to generate hydrocarbons and does not extensively
funds for the growth of its low-carbon address the sector’s adaptation to the energy
ventures. transition.
NIGERIAN OIL AND GAS SECTOR REPORT arm.com.ng 20
This raises questions about the level of generation mix. More recently in its 2022
investment Nigeria can attract into the oil Energy transition plan, which aims to achieve
and gas sector amid the ongoing energy carbon neutrality by 2060 the government
transition. outlines its strategy to reduce its carbon
emissions across five key sectors; Power,
However, the Nigerian government have Cooking, Oil and Gas, Transport and Industry
enacted long term policies towards energy
transitioning. In 2015, the country committed Nigeria remains one of the most densely
unconditionally through its Intended populated countries in the world.
Nationally Determined Contribution (INDC),
to reduce greenhouse gas emissions by In the most recently released demographic
20% compared to the Business-as-Usual statistics by the National Bureau of statistics,
Scenario (BAU) and 45% compared to BAU we observed that working people represents
with international support by 2030. the bulk of the population. Meaning, the
population with the wherewithal to pay for
Furthermore, in its National Renewable Energy telecommunications service is enormous
and Energy Efficiency Policy, the government and with an outlook for a growing population,
envision the generation of 30,000 megawatts that can only mean well for patronage of
(MW) of electricity from renewable sources telecommunication services.
by 2030, contributing 30% of electricity

NIGERIAN OIL AND GAS SECTOR REPORT arm.com.ng 21

 Company
Analysis
A Mixed Bag of Revenue
Growth and Profit Declines

Based on Total Energies’ unaudited financial results

for the fiscal year 2023, the company demonstrated
a robust revenue growth of 31.81% year-on-year (YoY),
reaching NGN635.95bn.
Price NGN346 This marked a significant increase compared to the
52-week range NGN207-395 41.36% YoY growth to NGN362.73bn in the corresponding
period of 2022.
TP NGN299.7

Rating Sell
The noteworthy progress was fueled by elevated
performance across all revenue streams. Particularly,
Market Cap NGN117,644.3MN petroleum products played a pivotal role, contributing
the most with a 40.41% YoY increase to NGN509.31bn.

500
On the other hand, Lubricants and other segments
showed a more moderate single-digit growth of 5.00%
400
to reach NGN96.20bn. The surge in petroleum revenue
300
was attributed to the rise in pump prices following the
200
removal of the premium motor spirit (PMS) subsidy in
100
the first half of 2023.
0
Nov-22 Mar-23 Jul-23 Nov-23
Despite the impressive revenue growth, the operating
profit experienced a decline of 13.55% YoY in 2023, in
contrast to the growth of 7.35% in 2022. This downturn
was primarily driven by a surge in other expenses for
the period, totaling NGN11.50bn.

Additionally, administrative expenses witnessed a

substantial increase of 37.39% YoY, amounting to
NGN44.43bn, while Selling and Distribution costs rose
by 80.00% YoY to reach NGN6.66bn. Furthermore, net
finance costs also saw a significant uptick, rising by
101.11% YoY to NGN6.31bn.

These cost increases resulted in negative growth for

both Profit before tax (PBT) and Profit after tax (PAT)
over the period. For the second consecutive year, PBT

NIGERIAN OIL AND GAS SECTOR REPORT arm.com.ng 22

declined by 28.20% to NGN17.61bn, and PAT Operating Profit Eroded by FX
experienced a 44.34% decrease, reaching
NGN12.93bn. Consequently, the net profit
Revaluation
margin declined from 3.34% in 2022 to 2.03% in Higher expenses took a toll on the operating
2023. However, it’s noteworthy that the gross profit for the period, causing a 13.55% year-
profit margin increased to 12.87% in 2023 from on-year decline to NGN23.92bn.
12.47% in 2022.
This contrasts with the 7.35% increase to
Total Energies maintains a robust top line as NGN27.67 billion seen in the 2022 fiscal year.
government policies aimed at stimulating The main driver behind this decline was
growth within the sector gains traction. foreign exchange losses recorded as other
However, cost pressures stemming from the expenses, attributed to the Naira’s downward
current inflationary environment continue to revaluation after the unification of foreign
hinder bottom-line performance. exchange markets earlier in the year.

Our analysis reveals a lack of concrete Administrative expenses also experienced

measures to address these challenges, a significant uptick, rising by 37.39% year-
particularly the burden of foreign exchange on-year to NGN44.43bn. This increase was
revaluation. fueled by various factors, including a 23.30%
year-on-year surge in staff expenses due to
Consequently, we’ve revised our target price an increase in short-term employee benefits,
down to NGN299.7, representing a potential and a whopping 232.27% year-on-year surge
downside of 13.51% compared to the current in technical assistance and management
closing price of NGN346.5 (as of February 2nd, fees.
2023). Based on our assessment, we assign a
SELL recommendation on this stock. Moreover, selling and distribution costs,
reflecting the cost of transportation on sales,
Cost Of Sales: Inventory soared by 80.00% year-on-year to NGN6.66bn
Accumulation Drives Up Cost during the period, influenced by the country’s
soaring inflation impacting transportation.
Sales costs surged by 31.22% year-on-year For context, inflation rose by a total of 7.58%,
(YoY) in 2023FY, a notable increase from the reaching 28.92% by the end of the 2023 fiscal
47.49% YoY in 2022FY, reaching NGN554.13bn. year.

This uptick was mainly fueled by a significant On a brighter note, the company experienced
boost in inventory across all product a significant expansion in other income
categories, with net changes soaring by sources, with a 24.44% increase to NGN4.33
32.08% YoY to NGN539.59bn. billion.

The mounting expenses can be traced back This growth was primarily driven by
to persistent disruptions in the supply chain contributions from Minimart stations (Bonjour
due to the Russia-Ukraine crisis and the stores), rent, and vendor management fees.
heightened volatility in crude oil prices. The segment saw substantial growth of 25.65%
year-on-year, reaching NGN4.09 billion in the
These factors have resulted in a substantial
2023 fiscal year.
accumulation of inventory, consequently
exerting upward pressure on the overall cost Additionally, gains from the disposal of
of sales. property, plant, and equipment surged by
56.94% year-on-year to NGN241.02 million

NIGERIAN OIL AND GAS SECTOR REPORT arm.com.ng 23

during the period. Unfortunately, these gains As a result, the overall finance cost experienced
were not sufficient to offset the elevated an 87.55% YoY uptick, reaching NGN10.11bn
expenses. (compared to a 204.70% YoY increase to
NGN5.39bn in 2022FY).
Net Finance Costs Soar as Naira
The substantial rise in net finance costs is
Devaluation and Monetary attributed to the devaluation of the naira and
Policy Bite the consistently high interest rates maintained
In 2023FY, there was a notable 101.11% YoY due to a hawkish monetary policy stance.
increase in net finance costs, reaching
Anticipating a continued environment of
NGN6.31bn.
persistently high interest rates, we foresee
This contrasts with the 234.03% rise to the Net Finance cost to maintain its elevated
NGN3.14bn in the same period of 2022. The position.
significant surge was mainly driven by a
Nevertheless, our expectations point towards
spike in interest on other loans (129.40% YoY
a positive bottom-line performance.
to NGN4.53bn) and interest on lease liabilities
(39.80% to NGN94.27mn).

Total - 2023FY Financial Highlights

N'Millions 9m:2022 9m 2023 YoY

Revenue 482,470,780. 635,951,600. 31.81%

Cost of sales (422,286,679.) (554,131,894.) 31.22%

Gross profit 60,184,101. 81,819,706. 35.95%

Other income 3,482,059. 4,333,092. 24.44%

Selling & distribution costs 0. (11,501,118.)

Administrative expenses (32,337,293.) (44,428,211.) 37.39%

Impairment write-back/ (loss) on

40,189. 358,570. 792.21%
financial assets

Operating profit 27,667,540. 23,919,356. -13.55%

Finance income 2,256,941. 3,807,580. 68.71%

Finance costs (5,392,201.) (10,112,925.) 87.55%

Net finance costs (3,135,260.) (6,305,345.) 101.11%

Profit before income taxation 24,532,280. 17,614,011. -28.20%

Income taxation (8,413,904.) (4,682,829.) -44.34%

Profit for the period 16,118,376. 12,931,182. -19.77%

Basic and diluted earnings per share 47.47 38.09 -19.76%

NIGERIAN OIL AND GAS SECTOR REPORT arm.com.ng 24

 Balance sheet Extract N'Millions 2022FY 2023FY YOY

Total Assets 307,815,723 426,583,441 38.58%

Share holders Equity 50,286,810 53,977,551 7.34%

Current Liability 247,960,348 364,510,668 47.00%

Non Current Liability 9,568,565 8,095,222 -15.40%

Balance sheet Extract N'Millions 2022FY 2023FY YOY

Gross Profit margin 12.47% 12.87% 0.39%

Operating profit/loss margin 5.73% 3.76% -1.97%

Liquidity Ratio : Current Ratio 103.18% 102.00% -1.17%

Solvency Ratio: Debt to Equity Ratio 512.12% 779.95% 267.83%

ROA 5.24% 2.62% -2.62%

ROE 32.05% 23.05% -9.00%

Bottom Line Remains Resilient

Amidst Elevated Cost

Seplat Energy’s revenue surged by an impressive 84.81%

year-over-year (YoY) to NGN478.130bn in the first nine
months of 2023, compared to a 41.62% YoY increase to
NGN258.71bn in the same period of 2022.

Price NGN 3,074.60

This robust growth was fueled by substantial gains in
both crude oil and gas revenue streams, which rose by
52-week
range
NGN 1,056.12– 3,382.00 88.93% and 58.41%, respectively.

TP NGN 3,224.00 The strong performance across revenue streams is

Rating BUY attributed to improved uptime at the Forcados Oil
Terminal and the availability of the Amukpe-Escravos
Market Cap NGN 1,809.2bn pipeline, which supported robust revenue generation.
Consequently, gross earnings soared by 107.20% YoY
3500
to NGN245.61 bn, compared to a 103.94% increase to
3000
NGN118.54 bn in the first nine months of 2022.
2500
2000 Despite the impressive revenue growth, operating
1500
profits declined by 7.42% YoY to NGN91.32bn, compared
1000
to a 57.55% increase to NGN98.64bn in the first nine
500
months of 2022.
0
Nov-22 Jun-23 Jan-24
This decline was primarily driven by substantial
increases in administrative expenses, which surged by
85.72% to NGN61.67bn, along with other losses incurred
NIGERIAN OIL AND GAS SECTOR REPORT arm.com.ng 25
from operating activities. Net finance cost These increases were attributed to the
also grew by 33.70% YoY to NGN28.37bn. As a company’s acquisition of new assets,
result, profit before tax (PBT) for the period fell reduction in the 1P reserves, increased
by 18.87% YoY to NGN62.85 bn (vs 100.46% to productivity across revenue streams, and
NGN77.47bn), reflecting the impact of higher persistent inflationary pressures.
operating costs.
Surging Expenses Offset
However, profit after tax (PAT) emerged
stronger, posting a 38.60% YoY to NGN46.93bn
Production Gains
(vs 143.65% to NGN33.86bn in 9m:2023) Operating profit for the period declined by
increase, driven by the company’s deferred 7.42% YoY to NGN 91.32 billion in the first nine
tax assets. months of 2023 (compared to a 57.55%
increase to NGN 98.64bn in 9m:2023).
Seplat Energy holds a promising outlook for the
future, driven by its acquisition of assets in OML This decline was primarily driven by a surge in
40. This expansion has significantly bolstered general and administrative expenses (85.72%
the company’s production capacity, paving increase to NGN 61.67bn) and other expenses
the way for enhanced revenue generation arising from operating activities.
across all revenue streams.
The growth in administrative expenses
Additionally, increased activity across export was fueled by a jump in professional and
lines is poised to further boost Seplat Energy’s administrative charges (439.32%) and
top-line performance. employee benefits (63.72%).

Considering these positive developments, we Additionally, the rise in other losses was
have revised our target price to NGN 3224.00, attributed to a production overlift amounting
representing a compelling upside potential of to NGN 75.43bn and losses on foreign
4.86% compared to the current closing price exchange revaluation (NGN 16.38 billion),
of NGN 3074,60 as of February 2nd, 2023. which stemmed from the unification of the
foreign exchange windows.
Given these factors, we assign a Buy rating to
Seplat Energy. It’s important to note that overlifts, while
representing a surplus of crude oil lifted
Cost of Sales Surges Amidst above the share production, are accounted
for as deferred revenue, and recognized
Asset Acquisitions and Inflation
on the income statement as “other loss”
In 9m:2023, Seplat’s cost of sales surged in accordance with accounting standards
by 65.88% year-on-year to NGN232.51bn, (OT02190).
compared to a 12.54% increase to NGN140.17bn
in 2022. We foresee a resurgence in operating profit
for Seplat Energy, fueled by a robust topline
This surge was primarily driven by increases in performance stemming from increased
royalties (+50.63% to NGN83.30bn), depletion, output across revenue streams and further
depreciation, and amortization (+86.49% bolstered by higher crude oil prices as OPEC
to NGN68.96bn), crude handling fees maintains its commitment to keeping prices
(+138.71% to NGN27.55bn), and operational above USD80 per barrel.
and maintenance expenses (+42.83% to
NGN40.63bn).

NIGERIAN OIL AND GAS SECTOR REPORT arm.com.ng 26

Surge In Net Finance Costs This significant growth can be attributed to
the Central Bank of Nigeria’s (CBN) Monetary
Driven by High Interest Rates Policy Committee’s (MPC) hawkish stance,
Net finance cost witnessed a substantial which has kept interest rates elevated.
33.70% year-over-year (YoY) hike, reaching
NGN28.36bn in 9m:2023 compared to Looking ahead, we expect interest rates to
NGN21.22bn in 9m:2022. remain elevated amidst persistent inflationary
pressures.
This surge was primarily driven by a 49.76%
YoY increase in finance cost to NGN32.08bn, Consequently, we anticipate that net finance
which in turn stemmed from a 39.00% YoY costs will continue to exert upward pressure.
increase in interest paid on bank loans to However, we do not expect these increased
NGN28.61bn. costs to materially hinder bottom-line
performance.

SEPLAT- 9M:2023 Financial Highlights

N'Millions 9m:2022 9m 2023 YoY

Revenue from contracts with

258,716. 478,130. 84.81%
customers

Cost of sales (140,173.) (232,514.) 65.88%

Gross profit 118,543. 245,616. 107.20%

Other (loss)/income 22,279. (89,762.) -502.90%

General and administrative expenses (33,207.) (61,673.) 85.72%

Impairment reversal/(loss) on
(1,619.) (633.) -60.90%
financial assets

Impairment loss on non-financial

(3,512.) 0.
assets

Fair value loss (526.) (25.) -95.25%

Operating profit 98,644. 91,321. -7.42%

Finance income 202. 3,709. 1736.14%

Finance cost (21,420.) (32,078.) 49.76%

Finance cost-net (21,218.) (28,369.) 33.70%

Share of profit from joint venture

accounted for using the equity 170. 170. 0.00%
method

Profit before taxation 77,474. 62,854. -18.87%

Income tax (expense)/credit (43,616.) (15,926.) -63.49%

NIGERIAN OIL AND GAS SECTOR REPORT arm.com.ng 27

 Profit for the period 33,858. 46,928. 38.60%

Basic earnings/(loss) per share ₦ 59.3 40.58 -31.57%

N'Millions 9m:2022 9m 2023 QoQ

Total Assets 1,581,612 2,745,367 73.58%

Share holders Equity 786,894 1,340,592 70.37%

Current Liability 794,718 1,404,775 76.76%

Non Current Liability 527,361 901,984 71.04%

Balance sheet Extract N'Millions 9m 2022 9m 2023 QoQ

Gross Profit margin 45.82% 51.37% 5.55%

Operating profit/loss margin -0.20% -0.01% 0.20%

Liquidity Ratio : Current Ratio 49.67% 48.48% -1.19%

Solvency Ratio: Debt to Equity Ratio 100.99% 104.79% 3.79%

ROA 2.14% 1.71% -0.43%

ROE 4.30% 3.50% -0.80%

ARM Ratings and

Recommendations
ARM now employs a two-tier rating system The choice of top 20 stocks arises from
which is based on systemic importance of the the consideration that this group of
security under review and the deviation of our stocks constitutes >75% of overall market
target price for the stock from current market capitalization and stocks outside this group
price. are generally less liquid and individually
account for <<1% of market capitalization.
We characterize systemic importance as a
function of a stock’s ranking among the group For stocks in both categories, the basis for
of top 20 stocks by NSE market capitalization ratings subject to target price deviation is
over a trailing 6-month period (minimum) to outlined below:
the review date. We adopt a 5-point rating
system for this category of stocks and a
3-point rating system for stocks outside this
group.

NIGERIAN OIL AND GAS SECTOR REPORT arm.com.ng 28

 TOP 20 NON-TOP 20

Rating Deviation Rating Deviation

STRONG BUY >20% BUY >20%

OVERWEIGHT 10% — 20 % NEUTRAL 5% — 20 %

NEUTRAL 0% — 10 % SELL <5%

UNDERWEIGHT -5% — 0% N/A

SELL <-5%

RECOMMENDATION KEY

Rating Recommendation

Accumulate security to a substantial extent

BUY constrained only by portfolio diversification
considerations

Accumulate security to an extent moderated

OVERWEIGHT
by cognizance of its benchmark weight

Maintain status quo for security with respect

to current holding —i.e. keep if already
NEUTRAL
holding and don’t buy otherwise—subject to
reasonable portfolio constraints

Minimize exposure to security taking

UNDERWEIGHT
cognizance of its index weighting

SELL Sell-off security completely from portfolio

ARM Securities Contact

Research 234 (1) 270 1653 [email protected]

Institutional Sales & Trading 234 (1) 448 8833 [email protected]

Customer Service 234 (1) 448 8282 [email protected]

Analyst
David Gwatau [email protected]

Creative Direction
Oluwatayo Oshanimi [email protected]

NIGERIAN OIL AND GAS SECTOR REPORT arm.com.ng 29

Copyright © 2024 Asset & The investments and strategies discussed
Resource Management Company here may not be suitable for all investors;
Limited (“ARM”). counsel of investment advisor should be
obtained with regard to such investments
All rights reserved. Unauthorized use, and or strategies.
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NIGERIAN OIL AND GAS SECTOR REPORT arm.com.ng 30

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NIGERIAN OIL AND GAS SECTOR REPORT arm.com.ng 31