The discovery and subsequent production of crude oil for exports in Nigeria could be traced to the first decade of the twentieth century when a German company, the Nigerian Bitumen Corporation first sighted oil at Araromi in the present Ondo State. Excited by the development, the company was said to have started exploration in that area in 1908 in the very first attempt to search for hydrocarbons in Nigeria. Unfortunately, this pioneering effort did not last long, and the company terminated its operations at the outbreak of the First World War in 1914.
However, two decades after, another major exploration journey was embarked upon by an Anglo –Dutch consortium, which came to Nigeria as Shell D’ Arcy (the forerunner of the present Shell Petroleum Development Company of Nigeria) to start exploration activities in 1937 after being awarded the sole concession rights covering the whole territory of Nigeria.
Again, Shell D’Arcy’s activities were interrupted by the Second World War and exploration did not resume until 1947. After many years of search, and investment of over £30 million, petroleum was discovered at Oloibiri in the present day Bayelsa State of the Niger Delta region in 1956.
But it was not until 1958 that SPDC started oil production and export from the Oloibiri field at a rate of 5,100 barrels per day. This quantity doubled the following year, and, crude oil production in Nigeria attained its all time peak in January 1979 at the rate of 2.44 million barrels per day.
However, this fit was only achieved due to a change in policy direction as the government in 1959 while preparing for attainment of Nigeria’s Independent, revoked the sole concession rights over the whole country granted to SPDC and subsequently granted companies of other nationalities the right of exploration of crude oil.
Interestingly, the successes of SPDC encouraged other companies to join in the exploration, and by 1961, Mobil, Gulf, Agip, Safrap (now ELF), Tenneco and Amoseas (now Texaco/Chevron) had joined the explorers, for oil in the onshore and offshore area of Nigeria.
The first offshore discovery of petroleum was by Gulf on the Okan structure of present day, Delta State in 1964 and many of the new comers also made significant discoveries.
Today, license have been granted to indigenous companies in the country to explore, produce and market petroleum products. However, no significant progress have been made in the area of the local refining of the commodity in country as importation of bye products such as petrol and diesel has become the order of the day, 63 years after oil was first struck in 1957.
Undoubtably, crude oil exploration and production in Nigeria has witnessed many vicissitudes. From being a marginal player at the dawn of its nationhood, the hydrocarbon industry rose to become the dominant sector from the immediate post-civil war era, contributing over 75 per cent of the nation’s foreign income for the longest period of the country’s economic history. Unfortunately, this has also created the negative unintended consequence of turning Nigeria from being an essentially agro-state into a petro-state, with the attendant consequences of neglect of agriculture and the nonoil sector.
Prior to discovery of crude oil Nigeria’s economy survived and flourished on agriculture. Available records show that 72 percent of the total national output of the nation’s economy came from agriculture in 1950, as against 1.1 per cent from mining and crude oil. The dominant role of agriculture in the country’s fortune continued in 1960 when it contributed 66 per cent compared with 1.2 per cent from minerals. Also, at independence in 1960 more than 70 per cent of exports came from agriculture while 95 per cent of the nation’s food needs were locally produced.
However, after the discovery and subsequent production of crude oil for exports in 1957, the story changed and today Nigeria relies solely on crude oil exports. As the country recorded a quantum leap in the contribution of crude oil to total export from 2.7 per cent in 1960 to 73.7 per cent in 1971, when the country became a member of the oil cartel–Organisation of Petroleum Exporting Countries (OPEC). Since then, the contribution of oil to total export has always been on the increase (except minor fluctuations in 1978, 1982, 1984 and 1986) respectively.
At first government was more concerned about provision of a conducive environment via regulations but with time became a participant.
Beginning from the colonial era petroleum matters were handled by the Hydrocarbon Section of the Ministry of Lagos Affairs, which reported directly to the Governor-General.
The Unit kept records on matters relating to exploration, and importation of petroleum products. It also enforced safety and other regulations on matters which were then mostly products importation and distribution. As the activities of the petroleum industry expanded, the Unit was upgraded to a Petroleum Division within the Ministry of Mines and Power.
However, in 1971 government birthed a new idea of participation when the Nigerian National Oil Corporation (NNOC) was created to handle direct commercial operational activities in the oil industry on behalf of the Federal Government, while the Department of Petroleum Resources in the Federal Ministry of Mines and Power continued to exercise statutory supervision and control of the industry.
Emergence of NNPC
The NNOC in 1977 transformed into the Nigerian National Petroleum Corporation (NNPC) established by a special Act which gave it autonomy as a Corporation. Established as a state owned and controlled company, the NNPC became a major player in both the upstream and downstream sectors. Though it was run by professionals who had come mainly from the private sector, the Corporation was allowed to operate under governance by a Board appointed by Government with professionals and a representative from the Ministry of Finance Incorporated (MOFI). MOFI was the investment arm of the government, and hence had an eye for profitability and efficiency. The minister of Petroleum was the chairman of the Board. Thus, the corporation was allowed autonomy to run its affairs, maintain assets and run these government investments to a large extent without political interference, except to obtain approvals as needed from time to time from the minister of Petroleum. The Petroleum Act gave the minister the necessary authority to exercise these powers.
As at today Nigeria has four major existing refineries which includes the Old Port Harcourt Refinery with 60,000 bpsd capacity, inaugurated in 1965. The Warri Refining and Petrochemical Company which has a capacity 125,000 bpsd was inaugurated in 1978. There is also the Kaduna Refining and Petrochemical Company with production capacity of 110,000 bpsd, inaugurated in 1980 and lastly, the new Port Harcourt Refinery having a capacity of 150,000 bpsd inaugurated in 1989. Thus, the total installed capacity of the refineries is 445,000 bpsd. But unfortunately these plants in the last 20 years or more had a poor operating record with average capacity utilization hovering between 15 and 25 per cent per annum. As a result, 70–80 per cent of the national petroleum products demand is met through import. The situation became worst in 2018 when country became solely dependent on importation to meet local demand of petroleum products estimated to be 750,000 bpsd. Hence, there is ample scope for investment in new plants and revamp of the existing ones to make them more efficient. This paper traces the history of refining in Nigeria, highlights the current poor record of capacity utilisation, proffers solutions for improving their viability, and presents prospects for growth of the industry in Nigeria.
The Need For Reforms
At the inception of the current democratic dispensation, government deemed it necessary to initiate the replacement of the Petroleum Act of 1969 which has become obsolete. A key part of the Petroleum Industry Bill (PIB) became aware of the need for a holistic review of the rules guiding activities of operators in the sector. Bearing in mind that the replacement of the obsolete Petroleum Act of 1969.
Consequently, a presidential committee was set up in 2007 to look into the sector and came up with an idea bill, which aims to increase transparency in the industry as well as to increase country’s share of oil revenue. By December 2008, a drafted bill titled, ‘Petroleum Industry Bill’ (PIB) was first introduced to the Nigeria National Assembly.
The PIB amongst others things looked into the ownership and management of petroleum resources, functions and powers of the minister of Petroleum, the establishment of the Nigerian Petroleum Regulatory Commission (NPRC) which was to act as a regulator for the entire petroleum industry (upstream, midstream and downstream) and the restructuring of the NNPC.
Unfortunately, the bill became very contentious due to objections from the international oil companies (IOCs) and the Nigerian National Petroleum Corporation (NNPC). Consequently, the bill was never passed into law.
But by 2015, the government opted to amend the PIB, thus it was broken into four different bills, one of which was the Petroleum Industry Governance Bill (PIGB) which was passed by the House of Representatives (HoR) on 15 January 2018, seven months after its passage by the Senate in May 2017.
Again, the bill failed to get the assent of President Muhammadu Buhari and hence could not become a law. Therefore, after about 17 years of struggling to replace the obsolete Petroleum Act of 1969, the attempt was frustrated and the country has be worst for it as expert says it has deprived it of investment opportunities.
Meanwhile, as part of effort to transform the sector, the federal government in October 2016, launched the 7 Big Wins Agenda with the overriding objective of creating a stable and enabling environment. The expectation is that it will maximise investment opportunities in the sector and generate increased and sustainable growth in the economy.
Consequently, the government aspired to increase daily oil production to 2.8 million barrels (reduced from the 4 million barrels the government had previously set as its 2010 vision). The government also resolved to transform the country from an oil-based economy to a gas-based economy by developing gas infrastructure, commercialising gas flare, implementing a gas commercial framework and maximising the use of gas to power economic development.
Amendment of the Petroleum (Drilling and Production) Regulations.
In his capacity as the minister of Petroleum Resources (MPR), President Muhammadu Buhari recently amended the Petroleum (Drilling and Production) Regulations, 1969 (“the 1969 Regulations”). The 1969 Regulations provide, among others, guidance on the implementation of provisions of the Petroleum Act regarding applications for oil exploration licences and oil prospecting licences and guidelines on oil drilling and extraction operations.
The Petroleum (Drilling and Production) (Amendment) Regulations, 2019 (the Amended Regulations), which has a commencement date of 9 October 2019 as stated in the official gazette, amended the 1969 Regulations in order to “review certain fees payable under the Regulations and to introduce new fees for certain applications and approvals under the Petroleum Act.”
The Amended Regulations revised several fees in the 1969 Regulations that were no longer reflective of current economic realities by increasing some by as much as three hundred percent (300 per cent). For instance, the fees payable for the application for a permit to carry out geophysical or geotechnical data survey in any concession area and those for the approval to commence the drilling of a borehole or well were increased from N5,000 per the 1969 Regulations to N1,500,000 per the Amended Regulations. In addition, Regulation 59 of the 1969 Regulations that provided for the payment of fees for a total of eleven (11) types of permit, lease or licence applications was replaced with a new Regulation 59 that provides for the payment of fees for about sixty-three (63) different types of permit, lease, approval or licence applications as well as renewals of some of these permits, leases and licenses.
Furthermore, the Amended Regulations stipulates a maximum penalty of $250,000 to be issued by the DPR to any person (which includes a body corporate or unincorporated entity) that fails to comply with any of the provisions of the revised Regulations. In addition, any permit, license or lease granted to that person may be withdrawn or cancelled by the DPR. It is, therefore, important that operators and stakeholders review the provisions of the Amended Regulations to ensure full compliance and avoid the imposition of such stiff penalties.
Impact of COVID-19 on the Sector Vis-a-vis national economy
The global oil and gas industry has had a rocky start to 2020, having been hit by several challenges – the most significant of which is the effect of the COVID-19 pandemic on crude oil demand and the sharp decline in its prices. Nigeria, with an oil-dependent economy, is highly vulnerable to the impact of these external shocks due to the country’s increased dependency on global economies for fiscal revenues, foreign exchange inflows, fiscal deficit funding and capital flows required to sustain the country’s economic activities.
According to Nigerian Oil and Gas Industry Update Quarterly Newsletter Edition: 2020 – Q1, a publication of KPMG, the COVID-19 pandemic did not only present a severe health crisis for Nigeria, its impact reaches far beyond the health sector to other critical sectors of the country.
The report noted that the country’s upstream oil and gas sector, which provides a significant portion of government revenue and foreign exchange earnings, is one such critical sector that has felt the ripple effect of the pandemic.
It listed some key impacts of the COVID-19 pandemic to this sector are as follows: Reduction of the budget benchmark price of crude oil; Global and local crude oil production cuts; Reduced crude oil demand and unsold cargoes; and Failure of government to achieve its proposed oil licensing and marginal field bids rounds.
Prof. Omowumi O. Iledare, a Professor of Petroleum Economics and Policy Research, believes that Nigeria has failed to benefit maximally from the huge potentials offered by the discovery of crude oil and gas in the country due to government failure to properly regulated the industry.
In a telephone chat with LEADERSHIP, he stated that since 1960 successive governments have only focused on immediate benefits but failed to convert same to a medium of transformation of the whole economy.
He noted that the oil and gas industry is critical to the country’s economy and must be managed appropriately to ensure continuity of operations. Stressing that stakeholders such as operators, contractors and service providers, must work with government to ensure the passage of the PIB. Adding that the COVID-19 pandemic has made it imperative for the nation to fast tract its efforts to urgently put regulations that will attract investor in place.
On his part, Dr. Olanrewaju Aladeitan, a lecturer of law with the University of Abuja while reviewing the sector’s performance stress the need for a reform of the legal system.
“The need for a comprehensive reform legislation for the oil and gas industry has become much more important than ever before.
“Therefore, the 9th National Assembly needs to ensure that the much delayed Petroleum Industry Bill (PIB) in whole or as was split into smaller Bills is passed sooner than later. However, robust engagements with the operators will help manage any potential dispute or controversy,” he told our reporter.
Some Historical Landmarks In Nigeria’s Oil and Gas Evolution
Nigerian Bitumen Co. & British Colonial Petroleum commenced operations around Okitipupa.
1938 Shell D’ Arcy granted Exploration license to prospect for oil throughout Nigeria.
1955 Mobil Oil Corporation started operations in Nigeria.
1956 First successful well drilled at Oloibiri by Shell D’Arcy
1956 Changed name to Shell-BP Petroleum Development Company of Nigeria Limited.
First shipment of oil from Nigeria. – February 17.
1961 Shell’s Bonny Terminal was commissioned. Shell’s official opening of Port Harcourt office Texaco Overseas started operations in Nigeria.
1962 Elf started operations in Nigeria. (As Safrap) Nigeria Agip Oil Company started operations in Nigeria
1963 Elf discovered Obagi field and Ubata gas field Gulf’s first production
1965 Agip found its first oil at Ebocha Phillips Oil Company started operations in Bendel State Nigeria’s First Refinery in Port Harcourt ( 60,000 bpd) commissioned by Shell-BP
1966 Elf started production in Rivers State with 12,000 b/d
1967 Phillips drilled its first well (Dry) at Osari –I Phillips first oil discovery at Gilli-Gilli -I
1968 Mobil Producing Nigeria Limited) was formed. Gulf’s Terminal at Escravos was commissioned
1970 Mobil started production from 4 wells at Idoho Field Agip started production Department of Petroleum Resources Inspectorate started.
1971 Shell’s Forcados Terminal Commissioned Mobil’s terminal at Qua Iboe commissioned
Creation of the Nigerian National Oil Corporation (NNOC)
1973 First Participation Agreement; Federal Government acquires 35% shares in the Oil Companies Ashland started PSC with then NNOC (NNPC) Pan Ocean Corporation drilled its first discovery well at Ogharefe –I
Second Participation Agreement, Federal Government increases equity to 55%. Elf formally changed its name from “Safrap” Ashland’s first oil discovery at Ossu –I
1975 First Oil lifting from Brass Terminal by Agip DPR upgraded to Ministry of Petroleum Resources
1976 MPE renamed Ministry of Petroleum Resources (MPR) Pan Ocean commenced production via Shell-BP’s pipeline at a rate of 10,800 b/d
1977 Government established Nigerian National Petroleum Corporation (NNPC) by Decree 33, (NNOC & MPR extinguished).
1979 Third Participation Agreement (throughout NNPC) increases equity to 60% Fourth Participation Agreement; BP’s shareholding nationalised, leaving NNPC with 80% equity and Shell 20% in the joint Venture. Changed name from Shell-BP to The Shell Petroleum Development Company of Nigeria (SPDC)
1984 Agreement consolidating NNPC/Shel1 joint Venture.
1986 Signing of Memorandum of Understanding (MOU)
1989 Fifth Participation Agreement; (NNPC=60%, Shell = 30%, Elf=5%, Agip=5%). Utorogu Gas Plant Commissioned LNG Shareholders Agreement signed
1991 Signing of Memorandum of Understanding & joint Venture Operating Agreement (JOA)
1993 Production Sharing Contracts signed –SNEPCO Established Sixth Participation Agreement; (NNPC=55%, Shell=30%, Elf= 10%, Agip=5%). The coming on-stream of Elf’s Odudu blend, offshore OML 100.
1995 SNEPCO starts drilling first Exploration well. NLNG’s Final Investment Decision taken
NLNG’s First shipment of Gas out of Bonny Terminal.
2000 NPDC/NAOC Service Contract signed Inauguration of Special Committee on the Review of Petroleum Products Supply and Distribution (SCRPPSD)
2001 Production of Okono offshore field. Inauguration of Petroleum Products Pricing Regulatory Committee
2002 New PSCs agreement signed. Liberalization of the Downstream Oil sector. NNPC commences retail outlet scheme Inauguration of 28-members EITI National Stakeholders’ Working Group
2003 Total Liberalization of the Downstream Oil sector. Shell Achievement of 1 million Barrels per day Petroleum Products Pricing Regulatory Bill passed and signed into law.
2004 Shell Restructuring Exercise that change business approach and place Nigerian on Top positions
2005 Jan.-Basil Omiyi appointed as first Nigerian Managing Director and Headquarters of SPDC moved from Lagos to Port Harcourt. Sept.-Basil Omiyi appointed Country Chair Shell Companies in Nigeria
Oando became the first African company to be listed on the Johannesburg Stock Exchange 2007 Government set-up a presidential committee to draft a bill replace Petroleum Act of 1969.
2008 .A drafted bill titled, ‘Petroleum Industry Bill’ (PIB) was first introduced to the Nigeria National Assembly.
2010 Enactment of Local Content Act
2016 In October 2016, the Federal Government (FG) launched the 7 Big Wins Agenda