$15.0B Upfront Crude Oil Purchase Agreement: What’s in it for Nigeria?

India and Nigeria continue to share a thriving relationship in the Oil & Gas space as India remains one of the top importers of Nigeria’s crude. According to Nigeria’s Ministry of Petroleum Resources, India imported circa 23.7MMT (169.2m barrels) between 2015 and 2016, accounting for about 12.0% of the country’s total import. Most recent annual export data from the NNPC also ranked India as the top export destination of Nigerian crude, with 17.6% of total crude exports sold to India in 2014.

Leveraging on this relationship, the Minister of State for Petroleum Resources, Dr Ibe Kachikwu during his 3-day working visit to India, negotiated a deal for investments in the Nigerian Oil & Gas sector by India with terms to be agreed in the interim and the possibility of signing an MOU by December 2016. The deal includes an upfront payment of US$15.0bn by India for crude purchase in addition to investments in the Upstream and Midstream sectors (particularly refining) by Indian public Sector Companies.

This upfront payment provides the Indian Government an opportunity to hedge against commodity price risks peradventure the proposed production cut/cap agreement by the OPEC holds up; an agreement expected to result in a rally in oil prices. Also, Mr Dharmendra Pradhan (Indian Minister of State for Petroleum and Natural Gas) and his team may be able to negotiate a discounted price in per/barrel terms, another incentive to ensure the completion of this transaction on the part of the Indian counterparts.

We view the agreement as positive for Nigeria on many fronts. First, the deal (if eventually consummated) will guarantee off-take of Nigerian crude in a market already oversupplied and with active explorations on-going in various regions set to add to supply, while the industry still faces competition from alternative energy sources. Second, with Nigeria’s external reserves at US$24.0bn (as at 18th October), an inflow of US$15.0bn in upfront payment for crude purchase will not only provide dollar earnings to shore up the external reserves, it will also provide the Federal/Sub-National Governments with the needed funds that the economy earnestly requires to stabilize domestic fiscal conditions and current account deficits. The impact of the upfront payment on the external reserves will result in additional 3 months of import cover (at the prevailing average import levels), which might also reduce speculative tendencies in the FX market.

Furthermore, the proposed investments in the midstream sector by the Indian public sector companies (if harnessed properly) coupled with the coming on board of Dangote refineries has the potential to end the supply/demand gap for petroleum products in the country. At completion, the Dangote refineries, with a refining capacity of about 650,000 b/d (103.4m litres), will be able to cater for the daily PMS demand in the country with enough to spare for export given that daily PMS  consumption is approximately 50.0m litres. The investments by Indian companies in the refineries as well as the completion of Dangote refineries will further boost operations in the midstream sector and ultimately the supply of refined products.

However, the militancy activities in the Niger Delta region which has impacted daily oil production numbers over the course of the year may be a bottleneck in the completion of the transaction as an upfront payment by India would be predicated by an assurance of crude supply when required. Nevertheless, we believe this is a good move by the Petroleum Ministry and await the signing of the MOU which is scheduled to occur during the PETROTECH conference holding in New Delhi, India in December.

September Inflation Report
The September Inflation report released last week confirmed inflationary pressure to be gradually subsiding, even faster than we estimated, with the Consumer Price Index (CPI) Month on Month (M-o-M) growth moderating for the 4th consecutive month to 0.8% in September. However, Headline Index was still up 17.9% Y-o-Y in the month (primarily due to low base factor), lower than our forecast of 18.0%, while Core and Food inflation were estimated at 17.7% Y-o-Y and 16.6% Y-o-Y respectively.

Although we expect the impact of weaker exchange rate to continue to pressure core prices in the interim, the resumption of harvest should moderate the feedback on overall CPI in 4th Quarter, hence we expect M-o-M growth to stay below 1.0%. Consequently, we project inflation rate to average 18.5% by Q4:2016.