March 24, 2022/United Capital Research

Following the ongoing conflict between Ukraine and Eastern Europe, western countries and international companies have responded with severe sanctions on Russia, which has begun to shrink their economy and negatively impact the global economy. Sanctions imposed includes freezing Russian central bank assets and major state-owned banks assets abroad, partial access restriction to the international payments system SWIFT, hold on Germany-Russian gas pipeline project, and a ban on Russian oil and non-oil products in the U.S market, among others. We review the potential impact of these actions on the Nigerian Oil and Gas sector.

Although production constraints will remain a significant concern for the Oil and Gas sector, increased prices will continue to bolster margins and Gross Profits, especially for firms listed in the upstream Oil and Gas. The potential acquisition of other NNPC JVS also means that the potential sale of assets and take over effects also boosts the valuation of our upstream listed companies. The U.S. and U.K have recently banned Russian oil and gas products. Although the U.S. and U.K. imports into Russia are primarily insignificant, there are potential production gaps for other OPEC+ countries to fulfil. 

For the downstream segment of the Oil and Gas sector, the continuance of fuel subsidies, and higher crude prices provides the FGN with a net loss. Our PMS price model currently estimates true retail pump price of PMS to be around N361 per litre, using the I &E window exchange rate and the most recent publicly available PPPRA template. This essentially indicates an N200 subsidy per litre charged to the government. These costs continue to burn a massive hole in the FGN’s finances at the current crude price. As the increased cost of crude translates into higher landing cost of crude which was not then transferred to the pump price of PMS, due to the ongoing subsidy program. Data from the NNPC shows that the NOC has spent N1.6trn on subsidising the shortfall in PMS vs N545.bn remittance to the federation account in the last thirteen (13) months.