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Nigeria Oil & Gas: The four billion-barrel question

Article - April 4, 2016

With the aim of doubling daily oil production to four billion barrels by 2020, can the long-anticipated Petroleum Industry Bill finally be passed to make this goal a reality?


For decades oil has coursed through the veins of Nigeria’s economy. And with reserves of more than 37 billion barrels, it is not going to stop flowing anytime soon. The West African nation, which overtook South Africa to become the continent’s largest economy following a rebasing of its GDP last year, is Africa’s top oil producer, pumping out more than two million barrels per day. It is also amongst the world’s top five producers of liquefied natural gas (LNG) and boasts proven gas reserves of 181 trillion cubic feet. By 2020 the industry aims to hit crude oil production levels of four million barrels per day (bpd), while analysts claim that daily gas production will increase five-fold from the current four billion cubic feet, by which time gas reserves are forecasted to increase to 300 trillion cubic feet and oil reserves to 40 billion barrels. With hydrocarbons making up 80% of government revenues and 14% of GDP, Nigeria, like other OPEC member countries, has been hit hard by the recent oil-price plunge. Longer-term problems in the oil industry include widespread corruption and a lack of transparency and accountability that has led to the squandering of billions of dollars in revenues.
Oil theft and violence plague the oil-rich Niger Delta region, problems that are symptomatic of the anger amongst ordinary Nigerians that feel they have benefitted little from their country’s oil wealth. But now there are fresh hopes for change.

Elected in March on an anticorruption platform, the new president Muhammadu Buhari and his All Progressives Congress (APC) party have vowed to clean up the industry and to ensure that oil revenues are rechanneled to fuel sustainable economic development to a degree that is tangibly felt by ordinary Nigerians. Mr. Buhari served as petroleum minister in 1976-78 and military ruler between 1983-1985. He is seen as one of the few leaders to have taken a tough stance on corruption.

“At home we face enormous challenges. Insecurity, pervasive corruption, the hitherto unending and seemingly impossible fuel and power shortages are the immediate concerns,” Mr. Buhari said at his inauguration. “We are going to tackle them head on. Nigerians will not regret that they have entrusted national responsibility to us. We must not succumb to hopelessness and defeatism. We can fix our problems.”

By creating a transparent and well-governed oil industry, Mr. Buhari could entice greater investment by international oil companies (IOCs), many of which have divested in onshore fields in recent years because of the difficult operating environment. Since taking office, Mr. Buhari has taken a number of measures that signal his willingness to change the way the government does business. His administration has halted several public projects in order to review the contracts for irregularities. In a bid for greater transparency, Mr. Buhari’s government ordered various branches of the government to simplify and consolidate their finances so that they can be more easily monitored and reported. But in perhaps the biggest move of all aimed at rooting out corruption, Mr. Buhari has replaced the chief of the state-owned Nigerian National Petroleum Corporation (NNPC), while pursuing efforts to recover some of the billions of dollars of state funds that have allegedly been stolen.

In many ways, NNPC embodies both the vast wealth and the troubled history of Nigeria’s oil sector. NNPC oversees the sale of nearly half of all of Nigeria’s two million bpd of oil output, making it the government’s single largest source of revenue. With 24,000 employees, NNPC represents one of the country’s largest employers, and is also charged with regulating and taxing the oil industry, in addition to the active role it directly has in production and sales of petroleum products. Oil provides more than 70% of the federal government’s entire operating budget, giving NNPC a reach that extends to virtually all corners of the economy and into the highest levels of Nigeria’s government. In recent years, allegations of corruption and misallocation of funds have proliferated. Even as the price of oil peaked from 2011 to 2014, the NNPC’s contributions to the government fell, and its leaders have failed to account for a series of financial discrepancies that run into the billions of dollars. An audit by PricewaterhouseCoopers found that the state oil company owed the central government as much as $4.3 billion for a 19-month period from January 2012. That is probably conservative. Lamido Sanusi, a former Central Bank of Nigeria Governor, reckons that $12.5 billion was “diverted,” according to the Economist.

After taking office, Mr. Buhari fired NNPC’s board and named a new leader for the troubled agency: Emmanuel Kachikwu, a Harvard-educated attorney and former Exxon Mobil executive. Under the new administration, a group consisting of state and central bank governors has established an independent committee to investigate the NNPC’s finances. In an effort to boost revenue amidst the collapse in oil prices, NNPC’s new leadership has expressed a desire to review its production sharing contracts with Royal Dutch Shell, Chevron, Eni and ExxonMobil. Mr. Buhari has also sought to strengthen the government’s anti-corruption mechanisms outside of the NNPC. Weeks after taking office, the president replaced the chief of the country’s main anti-corruption agency. In the six months that followed, the agency investigated more people than in the previous three years, according to a report by the Associated Press.

“There will be no confusion as to where I stand,” Mr. Buhari said at a speech at Chatham House in February. “Corruption will have no place and the corrupt will not be appointed into my administration. First and foremost, we will plug the holes in the budgetary process. Revenue producing entities such as NNPC and Customs and Excise will have one set of books only. Their revenues will be publicly disclosed and regularly audited. The institutions of state dedicated to fighting corruption will be given independence and prosecutorial authority without political interference.”

Another crucial factor for foreign investors will be the passing of the long-anticipated Petroleum Industry Bill (PIB). Introduced in 2008 by the incumbent People’s Democratic Party, which had been in power from 1999 until May this year, the PIB aims to overhaul the country’s decades old petroleum legislation. During its tenure the PDP failed to get the bill passed, leaving it now in the hands of the new president and his government, which has been urged to expedite the process.

Investors and industry insiders have also urged Mr. Buhari to speed up the privatization of the country’s four oil refineries, which, as a result of neglect and lack of investment, are running well below their full capacity. According to OPEC figures, the total production capacity of the four refineries is 445,000 bpd; however their current combined output is just 88,500bpd.

This leaves Nigeria having to import three quarters of its requirements for refined petroleum products. Private investors plan to build other refineries, such as the Dangote Group, headed up by Africa’s richest man Aliko Dangote, whose mega refinery being constructed outside Lagos will have the capacity to process 650,000 bpd, making it the largest of its kind in the world. Commentators say that privatization of the refining industry will lead to increased production that will end the country’s dependence on fuel imports, as well as the creation of thousands of jobs.

Local content
The wave of divestment by international oil companies in recent years has had its upside for indigenous oil firms, who now contribute 10% to total oil production. Local E&P (exploration and production) companies such as Energia, Atlantic Energy, Platform Petroleum and Seplat have stepped up production and generated increasing interest from foreign investors. In fact Seplat’s $1.9 billion IPO on the London Stock Exchange was the largest of any E&P firm in Europe since the financial crisis.

Outside of E&P, local operators growing in size and sophistication have taken a large slice of $20 billion dollar oil services sector. Service providers such as Oilserv, a pipeline and facilities company that is run entirely by Nigerians, and PEECO, an engineering and technical consultancy company that specializes in oil and gas research, have benefitted from the Local Content Act (LCA) that was introduced by the previous government of Goodluck Jonathan in 2010, which gives preference to local firms in the petroleum services industry. As a result of the LCA, indigenous participation in the provision of goods and services for the upstream sector has risen from 10% to 60%. Meanwhile international firms in the oil services sector such as Schlumberger have driven local content through its commitment to hiring Nigerians and transferring its expertise to allow Nigeria’s domestic companies to develop.

With the rise and growing sophistication of Nigeria’s indigenous oil and gas companies, coupled with a fresh impetus created by President Buhari to speed up the passing of the PIB and stamp out corruption, Nigeria’s decades old oil industry could finally move into the 21st century. •