Commodities 2024: West African oil producers hope for brighter 2024 after year to forget

Sub-Saharan Africa's biggest oil producer began 2023 with lofty aims.

In a January speech, Mele Kyari, head of state-owned Nigerian National Petroleum Corp, said the country would boost crude production to 2.2 million b/d by year-end, rousing its fragile economy. Domestic refineries, shuttered for years, would reopen at 450,000 b/d capacity. Nigeria would finally exploit its considerable gas resources. And the long-awaited Dangote refinery would come online "mid-year".

After 12 months of outages, underinvestment, own goals and oil theft, none of these objectives has been achieved. In November, OPEC+ trimmed Nigeria's production quota from 1.74 million b/d to 1.5 million b/d. Only Angola's cut was larger.

From production to marketing, West Africa's biggest producers have struggled, despite Europe's hunt for alternatives to Russian energy. Without significant action in 2024, their crude sectors could remain in the doldrums, analysts said.

Production challenge

Despite concerted efforts to boost 2023 production, both Nigeria and Angola succeeded only in stabilizing it. Nigeria pumped 1.43 million b/d of crude in November and 1.4 million b/d on average across the year, according to the Platts OPEC Survey from S&P Global Commodity Insights. Angola produced 1.10 million b/d on average across the four quarters and 1.13 million b/d in November.

Core to the malaise was underinvestment, particularly in exploration, with oil majors leaving mature West African basins in favor of frontiers like Namibia and Guyana.

Angola has nevertheless won plaudits for improving its investment climate and welcoming smaller players, such as Afentra, which acquired Blocks 3/05 and 3/05A in the Lower Congo Basin this year. By contrast in Nigeria, local firms Oando and Seplat are trying to purchase upstream assets from Eni and ExxonMobil respectively but have faced opposition and legal challenges.

NJ Ayuk, chairman of the Africa Energy Chamber, said approvals have been too slow.

"You have fields that are lying around but they are not approving. The approvals have been bad in not just Nigeria but a lot of African countries," he said. "When you are not approving deals and permits, no one comes in and financing comes down."

Without investment in new fields, technical issues at ageing oil fields can hammer output.

Meanwhile, gangs of thieves in the restive Delta region continue to cost Nigeria 400,000 b/d, a government security adviser said in August. And the risk level for investors is rising following a string of regional coups.

In June OPEC+, the Saudi-Russia led producing alliance, gave Nigeria, Angola and Republic of Congo five months to demonstrate higher 2024 production capacity to avert quota cuts, before eventually trimming them 240,000 b/d, 350,000 b/d and 33,000 b/d respectively in November.

"The Saudis are not trying to hurt us, OPEC are not trying to hurt us, we are hurting ourselves," Ayuk said of poor planning and slow approvals.

"Angola and Nigeria have repeatedly failed to meet their OPEC quotas in recent years," said Mucahid Durmaz, senior Africa analyst at Verisk Maplecroft. "Oil production in Nigeria is being depressed by creaking infrastructure and insecurity, while Angola's output is suffering from a lack of greenfield investment."

The implications extend beyond oil, Durmaz said. Pumping more crude would allow Nigeria and Angola to "offset their mounting fiscal and political challenges," alleviate heavy debt burdens and "ease growing public discontent that is fueled by skyrocketing prices."

Differentials

West African producers have not only struggled with production, but at times offloading their crude as well. Nigeria produces light, sweet crude sold to a range of buyers, while Angola's heavy, slightly sweet grades are popular in China.

A price cap imposed by the West on Russian crude after the invasion of Ukraine continued to undercut African crude. In the month before the war, India imported 366,500 b/d of Nigerian crude, according to S&P Global Commodities at Sea data, but that fell to 93,000 b/d by January 2023.

Nigerian crude has generally found new buyers, but flagship grade Bonny Light has often traded at a discount Dated Brent. Platts last assessed Bonny Light at a $0.80/b premium to Dated Brent on Dec. 12.

A West African crude trader said 2023 had been marked by "the usual terminal unreliability of many grades, increasing competition from increased US exports and a slight shift in demand from the East to Europe and Canada."

Angola's exports to main customer China also fell following the invasion. In Q1 2023, Angola exported less crude than any quarter in seven years, sending 530,000 b/d to China. By Q3, that had recovered to 690,000 b/d. With Chinese demand still below pre-pandemic levels, though, Chinese-focused Angolan barrels underperformed more versatile grades in December.

Added pressure has been piled on Nigerian crude by a tax row, with the authorities demanding millions of dollars in backdated taxes from shippers, causing them to temporarily avoid Nigeria. And NNPC spooked traders on Dec. 5 when it opted to change its crude pricing structure, which "the market clearly sees as devaluing their crude," one trader said.

These issues -- and scant natural gas investment -- have seen West African producers squander their chance to replace Russian hydrocarbons in Europe and set up potential compliance issues with OPEC+.

The NNPC and representatives of Angola's energy ministry and national oil company Sonangol did not respond to requests for comment.

2024 priorities

Olufola Wusu, an energy expert and partner at Lagos-based Megathos Law Practice, said Nigeria could reverse production declines in 2024, but only by reducing theft, investing in infrastructure and gas and implementing investor-friendly reforms.

Ayuk said project approvals must be streamlined, adding: "Sign, baby, sign."

Increased refining capacity would also reduce dependence on volatile fuel imports. Currently Angola and Nigeria have one functioning refinery between them -- the 65,000 b/d Luanda refinery.

There, Nigeria had a recent ray of light, with the long-delayed 650,000 b/d Dangote refinery receiving its first crude cargo on Dec. 8. However, S&P Global analysts do not expect commercial-scale refinery runs before Q3 2024, "turning the nation...into a net [refined products] exporter by 2025-end."

The refinery is therefore unlikely to come to Nigeria's rescue in 2024, which looks to be another vital year for its faltering oil sector.