THE Nigerian National Petroleum Corporation (NNPC) is in a precarious situation as major investments could turn into huge losses unless the oil price remains above 40 dollars per barrel, according to a report. 

The report  said that other national oil companies (NOCs) across the world, including the NNPC, might lose as much as 400 billion dollars to expensive oil and gas projects if the global energy needs transitioned speedily from crude oil to other sources.

This new report titled ‘Risky Bet’  was published by the Natural Resource Governance Institute (NRGI) . It estimated that investments by several state-run oil companies over the next 10 years could amount to 1.9 trillion dollars, but one-fifth of those investments would be unviable unless the oil price remained above 40 dollars a barrel.

Nigeria’s NNPC and Azerbaijan’s SOCAR were considered to be in serious distress, with half of NNPC’s investments in its upcoming oil projects risking losses if the global energy transition moved rapidly.

The report examined operating projects and the anticipated new projects of 30 state-run oil companies, calculating their post-tax break-even prices, and comparing them with their base case demand and price scenarios.

It projected that if the nominal price of oil was maintained at 62 dollars per barrel in 2025, and 70 dollars per barrel in 2030, the oil industry was likely to find ways of becoming more efficient and the costs of oil companies would fall. However, if the next generation of projects depended on less than 40 dollars per barrel, then oil companies would experience catastrophic losses.

Some of Nigeria’s biggest oil and gas projects currently embarked on by the NNPC include Ogidigben Gas Revolution Industrial Park (GRIP) which is worth 20 billion dollars; a downstream refinery and petrochemical complex located in Forcados, Delta State; and Etan & Zabazaba fields worth 13.5 billion dollars located offshore the OPL 245 block.

Timipre Sylva, state minister for petroleum resources, in an interview, said the Ogidigben Gas Project, which had stalled for several years, was not abandoned but would be completed within a short time.

“The Ogidigben Gas Project isn’t abandoned at all…If you listened to me while I was in Riyadh last year, the Ogidigben Project was in the front burners and it is a project that we really hope to achieve,” he said.

Major oil companies like BP, Total and Royal Dutch Shell have already progressively lowered their long-term price estimates, now in the 50-60 dollars per barrel range, anticipating the energy transition scenario.

The result could worsen inequalities as the invested funds could have been better spent on healthcare, education or diversifying the economy. Many of the NOCs are based in countries where  millions live below the poverty line.

However, global oil prices have climbed to a 13-month high since the outbreak of the coronavirus last year, as Brent crude, Nigeria’s oil equivalent, is currently sold at 61.04 dollars per barrel while US West Texas Intermediate settled at 58.41 dollars per barrel as of Tuesday.

David Manley, senior economic analyst at NRGI and co-author of the report, said the huge expenditure by the state-run oil companies into oil and gas projects was an improbable ‘gamble.’

“State oil companies’ expenditures are a highly uncertain gamble. They could pay off, or they could pave the way for economic crises across the emerging and developing world and necessitate future bailouts that cost the public dearly,” he said.

According to the report, these projects would only generate a return if fossil fuel consumption remained high enough for global emissions to exceed the world’s carbon budget which was the level required to meet the Paris Agreement and keep the global temperature below 2°C.

Oil companies in Nigeria namely Shell, ExxonMobil, Total and Eni, are cutting billions in spending after taking hits to their profits, shifting money to renewable fuels and focusing only on the most cost-effective markets.

Mele Kyari, group managing director of the NNPC, told Reuters in an interview that the oil companies shift from Nigeria was based on their own choices.

“No company will invest where they cannot get the appropriate margin. We’re very conscious of the fact that people have choices, companies will make choices to leave countries when they have to,” he said.

The NNPC 2018 annual financial accounts showed that Nigeria’s three major refineries reported a combined loss of 154.4 billion naira which made the NNPC shut all of them completely last year as they awaited much-needed maintenance, repair and upgrades, leaving the country with a hefty fuel import bill.

According to the NRGI report, oil producers in the Middle East, such as Saudi Arabia, would be less impacted as their break-even levels were much lower, but African and Latin American countries would have more trouble.

Other countries where investments should be reviewed include Algeria, China, Russia, India, Mozambique, Venezuela, Colombia and Suriname.