Why Exxon Mobil is leaving Nigeria
Oil is no longer the gem it was once and everyone except Nigeria knows
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Today, we’re starting with some talk of our beloved dollars…
More Yo-yoing over Dollars
It’s been one month since Godwin Emefiele got on national Television to blame the rates aggregation website, Aboki FX, for the madness going on in Nigeria’s FX market. In that time, a lot has happened; the CBN has secured some $4 billion in Eurobonds to stabilise the markets, and it has tightened the BTA/PTA process at the banks. At some point, UBA even published the names of “PTA defaulters,” people who bought flight tickets to access FX and cancelled said tickets right after. The long and short of it is that today, your bank contacts know that it has become difficult to rig the game to access $1 at ₦414. So, all is well with the market now, and we should begin to see the impact on the FX market.
Not so fast, says Nigeria’s Vice-President, Yemi Osinbajo. In what has become a custom, Osinbajo spoke as though he’s a helpless private citizen and not the VP. It’s often pretty confusing, but something-something about the message and not the messenger:
“As for the exchange rate, I think we need to move our rates to [be] as reflective of the market as possible. This, in my respective view, is the only way to improve supply,” the Vice President said. We can’t get new dollars into the system where the exchange rate is artificially low. And everyone knows by how much our reserves can grow. I’m convinced that the demand management strategy currently being adopted by the CBN needs a rethink, and that is just my view.”
There’s no need to read between the lines to know that the VP is essentially asking the CBN to devalue the Naira because the official rates of ₦414 are so far from the parallel market rates. On the parallel market, the rates are somewhere around ₦570, which makes it the most significant currency divergence we’ve seen in a long time.
Per SBM Intelligence, the difference between the official rates and the BDCs is around ₦169. It means that one of the easiest ways to make a ton of money in Nigeria today is to source $$ at official prices and sell it to BDCs. It’ll be like taking money from a m̶e̶f̶f̶y̶ baby.
But let’s pan back to Osinbajo for a minute because two minutes after calling for a devaluation, he released a statement to “clarify” his stance. “Prof. Osinbajo is not calling for the devaluation of the Naira. He has at all times argued against a willy-nilly devaluation of the Naira.”
“For context, the Vice President’s point was that currently, the Naira exchange rate benefits only those who can obtain the dollar at N410, some of who simply turn round and sell to the parallel market at N570. It is stopping this huge arbitrage of over N160 per dollar that the Vice President was talking about. Such a massive difference discourages doing proper business when selling the dollar can bring in 40% profit!”
The last time Osinbajo criticised any decision to devalue was in October 2015, and his thinking was that a devaluation “would not help the local economy.” In June 2016, the CBN devalued the Naira; make of that what you will.
And while we’re still on the subject of the Naira, FX and its value, let’s talk about something that’s a big source of foreign earnings for Nigeria: oil production. According to the Guardian, “Nigeria’s oil production volume rose to 1.45 million barrels a day last month, up from the 1.29 million barrels it recorded in August, latest data from the Organisation of Petroleum Exporting Countries (OPEC) have shown. Indeed, Nigeria’s production remains undermined by disruptions and maintenance challenges.”
The beginning of the end?
In the middle of production challenges, oil majors like Exxon Mobil are reportedly trying to sell off their oil and gas fields. It’s a move that looks to have begun in 2019 and one that has left people wondering why an oil major that makes a lot of money in Nigeria is selling off prized assets. So, I talked to someone within Nigeria’s oil sector and got some answers on Exxon’s planned sale.
“What Exxon Mobil is doing is simple; they’re selling parts of their business that is giving them the most challenges. Nigeria is profitable for them, but operating here comes with a lot of challenges: insecurity, community problems, persistent pipeline leaks,” my source, who asked to be anonymous, told me. But these problems have always been here, especially at the peak of the Niger Delta agitations. Yet, the difference between then and now is that many oil fields are now in decline. “At the peak of the Niger Delta crises, these fields were producing insane volumes, but times have changed.”
Today, one of such fields produces 40,000 barrels per day, down from 160,000 barrels a few years ago. The decline isn’t about volumes alone; it means that a field that produces 40k barrels has to deal with 120k barrels of water. “When the fields started, it was only oil; now, barely 25% of what is produced is oil. But that’s not all; some other fields just stop producing oil entirely.” It points to the fact that because an asset was fantastic ten years ago doesn’t mean that it’ll remain that way forever.
So oil companies review their assets every year and consider the associated costs. When fields are near peak production, and you get reasonable oil prices, you’ll be okay to fight any battle. But when production starts declining, companies make projections for the future and may decide to sell assets.
These decisions are becoming more critical because oil companies know that they’re at the beginning of the end of the oil era. In some countries, they’re at the middle of the end, and in Canada, they’re at the end; many countries are moving on from oil. Before, oil majors had the luxury of doing anything and braving Nigeria’s difficult business conditions because they had such a long runway. Today, there are environmental concerns, renewable energy, and more challenges to contend with. The whole game has changed, and it means they have to get the maximum value for their assets or cut their losses.
But getting maximum value is difficult in Nigeria, as it is tough to do business here. Getting approvals for projects can take years of speaking to several government agencies. When you get these approvals, oil-producing companies have to consider the risk of pollution. It comes with the territory when you’re doing shallow water exploration, mainly because pipes get damaged. For many of these oil fields, oil majors do not think that their production value is sufficient.
While 40k barrels per day from an oil field is a goldmine for smaller oil players, the bigger companies will likely see it as small fry that’s not worth the trouble. Instead, the oil majors are focusing on their deep offshore efforts in areas where the water depth is in thousands and where the pipes are on seabeds. Deep offshore activities don’t have to deal with the community or state governments as deepwater operations are within the remit of the Federal Government.
TL;DR: The potential exit of the oil majors signals a transition from the oil era. Will the shift last 30, 50 or 100 years? No one is sure. But the smart thing to do is to ensure that it’s easy to invest and exploit oil in Nigeria now because we have limited time left to sell oil. Our entire oil strategy should be ensuring that big players can extract value safely with minimal cost instead of acting like our oil is some hidden gem. We’re in for a shock, and no one in government is paying any attention.
What else I’m reading
Dave Chapelle’s Netflix special, “The Closer”, has generated a lot of debate for his jokes on the Trans community. Here are two of the better articles on Chapelle’s special and some of the uproar at Netflix.
The Nigerian fintech company, Flutterwave reportedly talks to raise funding at a new valuation of $3 billion. My sources say that the company’s CEO, Olugbenga Agboola, has dismissed the reports as “mere speculation,” but there ain’t no smoke without fire.
While we’re on the subject of Flutterwave, here’s a video of Iyin Aboyeji pitching the startup way back in 2016.
New data from the NBS shows that headline inflation and food inflation are 16.63% and 19.57% for September, highlighting that more Nigerians need to be talking about these price increases.
Before you run off, please take a minute to tell me what you think of today’s newsletter: the good, the bad, and the ugly.
And as to what I’m doing this weekend, I’m still undecided; I’m trying to figure out if I have the energy for a night out. But if any venue in Accra promises to play Sess and Falz’s thunda, which I’m now addicted to, I might just show face.
See you all on Sunday!