Nigeria@59: Appraisals, Threats, Opportunities, in the Petroleum Industry

By Jerome Onoja & Ike Amos

26 Majorwaves Energy Report OCTOBER 2019, Vol 2 No 7 N igeria’s petroleum i n d u s t r y h a s had a chequered history. Despite the massive revenue accrued to the country from the petroleum industry, the country is still battling with dilapidated infrastructure, declining foreign reserves and a struggling economy. This article highlights the journey of the Nigerian petroleum industry, underscores the various opportunities and threats, while emphasizing the inherent opportunities going forward. Nigeria has come a long way in crude oil and gas exploration since the discovery in commercial quantity at Oloibiri, in present-day Bayelsa State. In the early days of exploration and production, Nigeria’s crude oil output and export was about 5,100 barrels per day, today however, it has risen to about 2.3 million barrels of oil per day. Before the commencement of production in Oloibiri, a German compa ny, Nigeria n Bitumen Corporation, NBC, had explored for oil in Ondo State, the South-Western area of Nigeria in 1908. However, it stopped its exploration activities in 1914 during the period of World War 1. Crude oil exploration resumed in 1937 by Shell-D’Arcy, a consortium of Shell and Royal Dutch Company. The companies explored for crude oil in Owerri, South-Eastern Nigeria. World War II broke out in 1939, effectively bringing oil exploration in Nigeria to a halt.

At the end of the war, Shell resumed exploration in partnership with British Petroleum, BP, concentrating its renewed exploration efforts on onshore western Niger Delta. Their efforts eventually paid off in 1956, as they made the first commercial discovery at Oloibiri.

Since the discovery of crude oil till date, Nigeria has awarded 185 oil blocks to several companies, including the Nigerian National Petroleum Corporation, NNPC. The awarded oil blocks comprised 76 Oil Prospecting Licences, OPL, and 109 Oil Mining License, OML.

www.majorwavesenergyreport.com “ However, out of the country’s total of 393 oil blocks, 208 oil blocks are yet to be allocated”. In the early days of exploration and production, activities were mainly onshore, due to absence of requisite manpower and low technological knowhow at the time.

Today, the majority of Nigeria’s crude oil and gas output is from deep offshore oil fields and due to technological advancements”

and availability of skilled labour, companies are deploying advanced information and communication technology in oil production. Specifically, documents obtained from the NNPC disclosed that the from the very beginning of oil exploration in Nigeria in 1937, till early 1993, vir tually all exploration and production activities were restricted to land and swamps, noting that where prospecting ventured offshore, it was in areas not greater than 200 metres water depth. “But then in 1993, the Federal Government opened up a new frontier in oil and gas exploration, heralding the bright prospects of a promising future, by allocating some offshore blocks in water depths reaching 2500 metres. These deepwater depth and plans for even greater depths than 2500 metres will undoubtedly impact positively the country’s production and reserve blueprint. “Though these deepwater operations are technically challenging and massively capital intensive, experienced multinational companies have been awarded some deep offshore blocks, as well as ultradeep concessions. “By the end of 1998, the deepwater operators in Nigeria had achieved the following: acquisition of 21,000 kilometres, KM, 2D seismic lines; acquisition of 21,500 km 3D seismic lines and drilling of 33 exploration/appraisal wells in depths ranging from 300- 1460 metres,” NNPC stated.

To this end, it had been stated that investments in deepwater exploration had risen to $1.3 billion as of 1998, as against $864 million recorded in the first six years of deepwater prospecting. However, despite the immense opportunities and benefits presented by crude oil and gas exploration, the Nigerian economy is still at a state of despondency, as the majority of the country’s population wallows in abject poverty.

“F r o m 1 9 5 9 , w h e n commercial crude oil was discovered in Nigeria, till date, the country has earned about $2 trillion from crude oil and gas sales”

frittered away by state actors, oil thieves and saboteurs. Today, about 60 years since the country began selling crude oil and gas, Nigeria is still lacking in basic infrastructure, failed to establish a proper linkage between the petroleum industry and the economy; failed to institutionalize the excess crude revenue account and is currently struggling with low foreign exchange reserve. Today, while Nigeria’s sovereign wealth fund is hovering around $1.5 billion, Norway’s equivalent of the sovereign wealth fund is around $1.1 trillion. Nigeria’s sovereign wealth fund is also a far cry from the oil savings of the majority of the oil-producing Arab nations.

In addition, while Brazil and many other oil-producing countries of the world have aggressively pursued manpower development and building of critical infrastructure, Nigeria still relies on infrastructure built in the 1970s and 1980s, while the country still relies on manpower from advanced countries to drive critical segments of its petroleum industry. However, despite the inability of the country to get the best from petroleum industry,

“the years ahead appear even brighter, especially with the numerous measures put in place by the Federal Government, mostly in the area of local content development”

review of existing contractual structures, planned big-ticket projects among others. Specifically, the proposed ban on the importation of certain categories of vessels into the country from December 2020 and 2024 is expected to grow local capacity in shipbuilding and catalyze the growth and development of the transportation sector, not leaving its ancillary sectors behind. It is also expected to create employment opportunities, engender the development of inland waterway depot and technology transfer in the areas of repair and building of vessels in the country. Also, the Nigerian Content Development Monitoring Board’s (NCDMB) target to achieve 70 per cent local content by 2027 would see a massive increase in local participation in the Nigerian petroleum and bring the much-needed linkage between the industry and the Nigerian economy. Already, indigenous service companies under the aegis of Petroleum Technology Association of Nigeria

Bank Anthony-Okoroafor

“(PETAN) annually record a cumulative average of $2 billion dollars in contracts they deliver to IOCs and independents”.

PETAN members are also reputed to spend an average of $10 million in training its workforce yearly, to acquire the requisite skillset to stay relevant in the rapidly innovating industry. Again, the same body expends a minimum of $3 million on international trade shows annually to showcase developed skill sets and domesticated technologies, while forging new partnerships with more advanced technology firms. The investments and positioning by PETAN members are hinged on the opportunities the local content law, Nigeria oil and gas industry content development (NOGICD) Act presents before indigenous players. The regulatory body of this Act, NCDMB has set a target of achieving 70 per cent local content through the implementation of its 10-year roadmap 10-year roadmap, would lead to the creation of 300,000 jobs from industrial activities, and the retention of $14 billion in-country out of the $20 billion annual industry spend. Another initiative that would drive activities in the Nigerian petroleum industry in the years ahead is the government’s adoption of the Incorporated Joint Venture (IJV) model. The model, according to Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Mallam Mele Kyari, is expected to make oil and gas business more productive and beneficial to investors, create a robust business system that allows for projects selffinancing and guarantees a win-win situation for all stakeholders. He added that

In addition to the taxes, levies, rents, royalties, and bonuses that are usually imposed on companies operating in the oil and gas sector, Kyari said the Federal Government stands to gain from dividends that would be distributed to shareholders by each IJV.

Mallam kyari

“the incorporation element of IJV allows it to operate as an independent entity that can source capital to fund its projects and deliver dividends to shareholders at the end of each financial year, as the IJV model would aid the financing of joint venture projects”.

The benefits of incorporation of a company include having a separate legal personality from its owners and the ability of the IJVs to independently raise finance for funding petroleum operations without reliance on, and/ or recourse to, its shareholders.

Furthermore, the NCDMB-promoted Nigerian Oil and Gas Parks Scheme (NOGAPS), planned across the oilproducing region of the country, would lead to the emergence of a vibrant oil and gas hub that would attract businesses that would want to set up facilities and take advantage of the incentives that are obtainable there. The NOGAPS aims to establish a regional low-cost manufacturing hub that would produce equipment components and spare parts that would be utilized in the Nigerian oil and gas industry. When the parks become fully operational, millions of jobs would be created in the areas where they are established, while the citizens of the host community and environs will benefit from on-thejob training opportunities. Executive Secretary of the NCDMB, Engr. Simbi Wabote had explained that NOGAPS sites are planned to be sited close to existing power plants while provisions are also made to generate captive power in a bid to address the electricity challenge that faces most Nigerian manufacturers and businesses. Other opportunities that would reposition the petroleum sector in the years ahead included the Nigerian Gas Flare Commercialisation Programme, NGFCP, which is envisaged to attract about $3.5 billion worth of investments into the Nigerian economy. Specifically, Project Manager of the NGFCP, Mr. Justice Derefaka, noted that assuming an average project size ranging from $10 million to $40 million, the NGFCP has a potential of triggering 70 to 89 projects, adding that over oneand-a-half to two-year period, the NGFCP could generate approximately 300,000 direct and indirect jobs. He added that once operational, projects launched under the NGFCP would reduce Nigeria’s emissions by 13 million tonnes of carbon dioxide per year. Other forthcoming opportunities included the new oil and gas finds, Indorama Petrochemical project, Dangote Refineries and some modular refineries, which are expected to address Nigeria’s fuel supply challenges, help conserve the country’s foreign exchange,

Justice Derefaka

strengthen the country’s currency and create employment opportunities among others. Furthermore, the Nigerian Liquefied Natural Gas (NLNG) Train 7 project, which is expected to commence before the end of this year, would ramp up NLNG’s production capacity by 35 per cent from 22 million tonnes per annum (MTPA) to around 30 MTPA. Managing Director of the NLNG, Engr. Tony Attah, said the Train 7 project would form part of the investment of over $10 billion including the upstream scope of the LNG value chain, thereby boosting the much needed Foreign Direct Investment (FDI) profile of Nigeria. Attah noted that the project is anticipated to create about 10,000 new jobs during the construction stage, and on completion, help to further diversify the revenue portfolio of the Federal Government and increase its tax base. The construction period after taking the Final Investment Decision, FID, would last approximately four to five years. In his view, the Executive Secretary of the NCDMB, Simbi Wabote, said the NLNG Train-7 would deliver 100 per cent engineering of all non-cryogenic areas in-country.

He said “ the total in-country engineering man-hours is set at 55 per cent which exceeds the minimum level stipulated in the NOGICD Act in line with the country’s resolve to push beyond the boundary of limitations”.

According to him, on fabrication, the Train-7 scope will bring many of the country’s fabrication yards roaring back into life with over 70,000 tonnes of in-country fabrication covering condensate stabilization units, tanks, pipe-racks, flare system, non-cryogenic vessels, and many other spools and fittings. The benefits, according to him, would extend to site civil works on roads, piling, and jetties, 100 per cent local procurement of all LV and HV cables, non-cryogenic valves, protective paints and coatings, sacrificial anodes and many other direct procurement from our local manufacturing plants.

He said, “Those in the service industry are not left out with the target to assemble over 70 per cent of all non-cryogenic pumps and control valves in-country. Other spin-off opportunities include logistics, equipment leasing, insurance, hotels, office supplies, aviation, haulage, and many more. “The target job numbers are very exciting. At its peak, the project will provide over 40,000 direct jobs and over 100,000 indirect and induced employment of over 100,000 workers.

“Beyond the project, there is also a huge scope for local businesses to build capabilities in the maintenance of LNG plants especially in the area of cryogenics.”

While the opportunities listed above are expected to buoy activities in the Nigerian petroleum industry, the country is expected to introduce measures that would enable it navigate a number of challenges, ranging from the renewed global shift towards renewable and nonfossil fuel commodities and attractive fiscals in neighbouring African states and far away Guyana with attractive fiscals which could lure investments away from the country.

Engr. Simbi Wabote

Marvin Dekil

Operators and the Nigerian petroleum industry would continue to be faced with inadequate finance and a growing state’s debt profile, which poses some level of uncertainty. It is compounded by the worrisome possibility that its creditors, like the Chinese with penchant of seizure of infrastructure/ assets, could take advantage of these shortcomings. The non-viability of the country’s downstream sector and the inadequate electricity infrastructure across the entire value chain continue to pose a

challenge to the industry, while the widespread insecurity in the Chad basin and the delayed explorations could affect the country’s quest to grow its crude oil and gas reserves in a timely fashion, knowing crude is projected to become unpopular in a few decades. Some experts have decried the painfully slow pace of the Hydrocarbon Pollution Remediation Project (HYPREP) programme, warning it could degenerate to heightened tension in the region. This has the potential to hinder production a n d s c u t t l e activities in the region. O ther challenges before t h e i n d u s t r y include the delay in the passage of the variants of the Petroleum I ndu s t r y Bill (PIB), decaying infrastructure, pipeline vandalism and crude oil theft. Going forward, PriceWaterhouse Coopers (PWC) in its review of t he Ni ge r i a n petroleum industry, titled, ‘Nigeria: Looking b eyo n d O i l ,’ di sclosed that significant reforms across the labour market, business environment a n d f i s c a l

management would be required to grow the petroleum industry and make it possible for the industry to make meaningful contribution to the economy.

According to the global consultancy firm, a skilled workforce is critical to improving Nigeria’s productivity and efficiency. It noted that because the services sector is projected to be the key driver of the Nigerian economy going forward, measures have to be implemented to improve the value-add of labour in this sector. Though the PETAN companies are pulling their weight behind training of their workforce, the industry is in dire need of increased numbers of entrepreneurs, with a spread across the entire value chain, offering more sophisticated services to actualise the local content aspirations. PWC explained that Nigeria needs to ensure sustainable fiscal management that is resilient to global oil price cycles, noting that improving tax collection and administration had become imperative for achieving national growth objectives. It said, “Nigeria is a low-taxed economy compared to its peers; besides, challenges with arbitrary exemptions and enforcement have further constrained tax receipts. The framework for tax exemptions should be reviewed and approvals targeted at growth-inducing sectors as the government improves collection.

“Efficiency in government spending has to improve; there is room for substantial savings in capital outlays and operating expenditure across the three tiers of government. Also, the government needs to be deliberate about increasing fiscal savings through a higher accretion to the Sovereign Wealth Fund which has investment objectives of diversification and improving long term economic prospects.” Stakeholders are unanimous in their views that there is an urgent need for the implementation of the various developmental programmes in the Nigerian petroleum, while managing the threats. The speedy passage of the different parts of the PIB and the urgent reform of the downstream petroleum sector would attract investments, and lead to the growth and development of the petroleum industry and the economy in general.