Nigeria: oil sector should see growth soon

Medium-term outlook: promising

We maintain our real GDP growth forecast at 3.0% y/y for 2023 and 3.2% y/y for 2024. As oil production improves, the oil sector should start posting growth during H2:23.

Indeed, the new administration has reiterated its commitment to improving pipeline surveillance and security to improve oil production. The government has targeted 2.6mbpd by 2027 and 4.0mbpd by 2030. On a q/q basis, while oil production has been improving, from 1.49mbpd in Q4:22, to 1.51mbpd in Q1:23, it has been declining more recently given a pipeline explosion and force majeure declared at some terminals. Nonetheless, the Tompolo contract has shown promising signs, with room for further improvement in the coming months.

The operations commencing at the Dangote refinery too should support growth given the impact on auxiliary economic activity as well as providing jobs. The oil refining sub-sector too should post growth after a decade-long contraction. Refining capacity at the Dangote refinery is 650,000mbpd, likely gradually reaching full capacity over the medium term. As operations commence around Q4:23/Q1:24, there should also be spill-over effects to the services sector, further supporting economic growth.

Q1:23 growth was 2.3% y/y, undershooting 3.5% y/y in Q4:22, due to the cash crunch in Q1 which had a broad negative impact on key sectors. The Stanbic IBTC PMI fell into contraction in Feb and Mar 23. The agricultural sector was the worst hit, contracting for the first time (-0.9%y/y in Q1:23) in decades as farmers had little access to cash (the major means for transactions in the retail segment).

Agricultural productivity also faces climate change, such as flooding. According to the National Emergency Management Agency (NEMA), over 676,000 hectares of farmlands were damaged by flooding in the 2022 rainy season. Crops were largely destroyed. This will heighten the risk of less food supply this year.

Medium-term growth prospects though appear promising due to the new administration’s reform focus as well as pending full operations at Dangote. We are also likely to see more private sector participation in driving growth, particularly if the recent FX reforms are durable. Faster implementation of the Petroleum Industry Act (PIA), and the deregulation of the power sector, too should spur investment.