Oil and Gas
The global oil and gas industry is yet to fully recover to the pre-pandemic level despite a year-to-date (YTD) gain of over 50% in oil prices and a little less than a 100million barrel per day (mb/d) of global oil demand in 2021. The emergence of Covid-19 variants and their associated restrictions hit oil demand and benchmark prices in 2021.
The oil market also witnessed supply disruptions on Hurricane Ida and Hurricane Nicolas in the U.S. Gulf of Mexico. Over 17.5m barrels were lost to the market with Hurricane Ida alone. Overall, underinvestment in the oil industry also fueled oil supply shortages.
Meanwhile, the industry saw increased calls and commitments to net-zero emission by 2050, particularly during the G7 summits and UN COP26 summit in Glasgow. Whereas most advanced economies, non-governmental agencies, and international financial institutions made immediate commitments to end investment in fossil fuels, the Organization of Petroleum Exporting Countries (OPEC) and its allies, a group jointly called OPEC+ maintained that the global oil and gas industry needs more investment in fossil fuels to avoid energy crisis.
In Nigeria assets divestment by the International Oil Companies (IOCs), passage of the Petroleum Industry Act (PIA, 2021), and the Gas Expansion Programme of the government dominate activities in the industry in 2021. The global transition to cleaner energy and the operational issues across onshore and shallow water facilities prompted moves by the IOCs to divest their assets from Nigeria. In turn, the Federal Government hastened the ratification of the Petroleum Industry Bill to clarify the legal, regulatory and fiscal framework of the Nigerian petroleum industry. The government has said it expects the PIA to discourage the divestment of the IOCs from Nigeria, attract new investors, and promote gas development as a transition fuel for the country. Notwithstanding the PIA, several activities kept the global and domestic oil markets active in 2021.
Global Oil Market in 2021
In 2021, the global oil demand recovered from its record low in 2020 but remained below the pre-pandemic level of 100mb/d. The recovery was supported by stimulus packages and progressive vaccination across the globe, which led to considerable growth in consumption and international travel as more economies eased their restrictions.
Although demand sustained its positive growth in the major part of the year, there were waves of the existing Covid-19 variants in the second and third quarters and a new variant in the fourth quarter. Essentially, waves of the Delta Covid-19 variant reported in Europe and Asia as well as the weak industrial activities in those regions weigh in on the global oil demand in mid-year 2021. The emergence of a new variant- Omicron disrupted demand between November and early December. However, with continued progress and discoveries in vaccines and antibody therapies, as well as the seasonal winter oil demand, the average oil demand for 2021 settled at about 96.6mb/d, 3.4mb/d below the 2019 level (see chart 22 below).
* OPEC’s Predictions
In the OECD countries, there were larger-than-expected oil demands in H1 2021. However, oil demand struggled to recover to the pre-pandemic level due to lower demand for industrial and transportation fuels for the rest of the year. Oil demand within the OECD for 2021 mirrored the slow phase of economic growth due to supply chain disruptions and the uptick in COVID-19 cases.
Meanwhile, non-OECD’s oil demand in 2021 fluctuated for the better part of the year on demand swings from China and India. China’s crude imports started the year relatively high but fell to an average of 8.9 mb/d in October, the lowest since February, as refiners lacked import quotas and mobility remained limited on the back of the Zero-Covid-19 policy implemented in the country. Indiaâ€™s crude imports also fell to an average of 4.0 mb/d in October, following 2 months of successive gains. Thus, the Covid-19 and supply chain induced soft patches in H2 2021 across Asia impacted considerably on the global oil demand in 2021.
Oil demand also suffered some setbacks in the Middle East and Russia on mobility restrictions to curtail the spread of the Covid-19. While Russia has returned to the pre-pandemic level, Middle East countries are yet to recover to the pre-pandemic level.
In Africa, the slow vaccination campaign and the emergence of a new variant hindered the full recovery of economic activities in the continent. They tightened the expected growth in oil demand.
Despite the divergence in recovery efforts, several factors influenced the global oil demand in 2021.
The global oil supply for the year 2021 was driven mainly by the decision of OPEC+, which strived to achieve balance in the oil market.
The share of OPEC in global oil production stood at about 27.7% in 2021, with an average production of about 26.32 mb/d.
* OPEC’s Predictions
To balance the market, OPEC+ agreed and maintained its plan to gradually ease its 2020 production cut to the market in 2021. Although the cartel agreed to release 400,000 b/d of crude oil to the market from August 2021 based on prevailing market conditions, outputs from the cartel struggled to measure up with targets. OPEC+ compliance with oil production cuts stood at about 117% in Q4 2021, an indication that the cartel struggled to meet up with agreed targets.
Overall, oil production increased in Saudi Arabia, Iraq, Iran, Algeria, Kuwait, and UAE, while production in Angola, Nigeria, Libya, Congo, and other member countries remained diminished in 2021.OPEC allies pumped more oil to the market as planned. Russia’s crude oil production in 2021 increased by 0.2 mb/d year-on-year to an average of 10.79mb/d in 2021.
On the other hand, non-OPEC production grew by 0.7 mb/d in 2021 impacted by significant production outages in H2 2021 due to weather and accidents, prolonged and unexpected maintenance processes, and COVID-19 precautionary measures. Canada, China, the US, Norway, Guyana, and Qatar were significant contributors to non-OPEC supply growth in 2021.
The tightness in the market kept oil prices elevated in 2021. Despite the lingering Covid-19 pandemic, demand had more robust fundamentals while supply was constrained by underinvestment, low spare capacity, and outages. The global oil market began the new year 2021 with a price rally above the 2020 average, and both benchmark contracts reached their 2021 highest in October, with Brent at US$86.70 and WTI at US$85.41 per barrel. Brent price averaged US$71.2 per barrel in 2021, up by 63.3% Y-o-Y above the US$43.6 per barrel average in 2020. Brent increased from about US$51 per barrel in January 2021 to about US$79 per barrel in December 2021, representing a gain of about +55% YTD.
WTI gained a higher return at 58% YTD. The 2021 performance marked the strongest performance of both contracts since 2009.
The rally in crude oil prices was predicated on increased demand buoyed by improved vaccination across Europe, Asia, and North America. An increase in coal and natural gas prices also added support to oil demand which translated to oil prices. On the flip side, supply constraints on the part of OPEC and non-OPEC producers exacerbated the market situation.
The price gap between Brent and WTI also narrowed earlier in the year, indicating the U.S. output tightness, which also supported the rally in oil prices.
The natural gas market remained tightened for the better part of 2021 as a strong recovery in demand met with lower-than-average inventory levels during the summer and winter seasons. Europe battled with a persistent energy crisis buoyed by limited gas supply from Russia and other gas-producing nations, especially in H2 2021.
Essentially, the tightening of the gas markets was driven by a combination of robust demand growth as the global economies recover from the Covid-19 lockdowns, several extreme weather conditions that generated additional gas consumption, and tighter-than-expected gas supply as successive outages hindered gas production and export capacity.
International Oil Company Performance
International Oil Companies (IOCs) posted their record quarterly profit in 2021 on the back of surging oil and gas prices, higher outputs, and a significant recovery in fuel demand that boosted refining margins.
Chevron beat top-and bottom-line estimates in Q3 2021, earning US$3.19 per share on an adjusted basis while total earning for the 9M 2021 jumped by a +316% Y-on-Y to US$10.57billion.
Royal Dutch Shell recorded a more robust +190% Y-o-Y improvement in adjusted earnings in 9M 2021 from US$4.45bn in 2020 to US$12.90bn in 2021, earning US$1.11 per share.
African Oil Market
The energy transition campaign, which manifested in the divestment of oil majors’ assets and growth of renewable energy, dominated the African oil and gas industry in 2021.
On the one hand, IOCs have in principle divested from the African market. For instance, Shell, Chevron, ExxonMobil, and Eni have either divested or planning to divest from the Nigerian oil market while BP and Equinor have decided against new fundings for oil and gas prospects in Angola. TotalEnergies had also suspended its US$20billion LNG project in Mozambique although there is the likelihood of a restart in 2022.
On the flip side, some local and international green energy firms have expanded their operation in Africa’s renewable market. ACWA- a Saudi own energy company has invested heavily into Moroccan Solar Energy. Green energy companies such as Engie Energy Access, Enel Green Power, Scatec ASA, and French EDF have also invested in green energy across Africa.
More recently, the African Development Bank (AfDB) and the International Renewable Energy Agency (IRENA) agreed to support investment in low-carbon energy projects on the continent. The duo expects the move to advance Africa’s energy transition.
In the latter part of 2021, the continent signed a few oil and gas-related deals at the second Intra-African Trade Fair (IATF 2021) held in Durban, South Africa. One such deal is Nigeria’s state-own enterprise’s (the NNPC) US$1.04billion deal with the African Export-Import Bank (Afreximbank) to finance petroleum exploration in Nigeria. The target is to boost foreign currency receipts and create jobs along Africa’s oil and gas refining value chain.