With estimated 37.2 billion barrels of proven oil reserves and over 188 trillion standard cubic feet of natural gas, Nigeria holds the largest hydrocarbon deposits in Africa. Oil exploitation has become central to the economy, accounting for some 80 percent of government revenue, 95 percent of foreign exchange earnings, and 40 percent of gross domestic product.
Because of her over reliance on oil as major source of revenue and owing to unchecked corruption in the sector, the country has suffered rampant inflation, stalled investment and mass layoffs, worst of all and for the first time, government is gripped by one of the worst economic crises in its history.
For the first time in months, government is finally looking to exit its first recession in decades, pushing to restore stability in the oil and gas sector. But then again, Nigeria’s oil and gas sector is not immune to the dynamic of international politics and market shock often played up by over supply that causes price fluctuation.
The Niger Delta that holds the country’s hydrocarbon deposit is fraught with insecurity that threatens critical oil infrastructure. On assumption of office in May 2015, by President Muhammadu Buhari, there was a resurgence of militancy which became a major security concern to Nigerians, the federal government, regional shipping companies, and international oil interests.
Attacks on oil infrastructure by new militant groups such as the Niger Delta Avengers (NDA) reduced Nigeria’s output to a 22-year low. Government faced multiple challenges of dealing with the insurgency which coincided with sharp decline in oil prices thus crashing government revenue.
Buhari responded by directing the military to “crush” the NDA, resulting in a heightened military presence across the Delta region. A major decision by government to extend the amnesty program to December 2017 which was intended to end in December 2015 by President Buhari was a landmark decision that helped to reduce tension in the volatile region.
In June 2015, President Buhari terminated the ex-militants’ pipeline security contracts and the government began prosecution against the former militant leader, Tompolo, for contract fraud, and at the same time, government cut funding for the amnesty program by around 70 percent in the 2016 budget, citing corruption.
The country again faced further attacks on oil installation in January 2016, by unknown criminal elements leading to the blowing up of the Bonny Soku Gas Line, which carries natural gas to the Nigeria Liquefied Natural Gas plant, and an independent power plant at Gbaran.
The devastating attack on one of the most strategic pipelines in the nation’s energy network, the Trans Forcados Pipeline (TFP), which transports oil, water, and associated gas from fields in the western Delta to the 400,000 bpd Forcados oil terminal, dipped the country’s production capacity. Owing to these attacks on critical infrastructure, Nigeria’s oil production plummeted from 2.2 million bpd to about 1.4 million bpd.
Figures estimate that Nigeria is losing about N2.79 billion ($14 billion) daily to the closure of the ExxonMobil-operated Qua Iboe terminal, following the evacuation of Exxon-Mobil’s workers over insecurity, thus compounding government revenue losses caused by the fall in global oil prices since mid-2014.
In addition to crippling oil exports, the new wave of militancy in the Delta has also choked the supply of gas to local power plants, thus hobbling Nigeria’s power grid. Electricity generation in Nigeria has declined from about 4,800 megawatts in August 2015 to 1,000 megawatts in May 2016, seriously undermining overall productivity and service delivery in the economy.
But analysts say that in the context of the petroleum sector, for the first time in many years, the Nigerian government, under the present dispensation, is boldly and in an openly sincere manner confronting challenges, which cut across the Nigerian upstream and downstream oil and gas sectors.
These challenges stem from legacy and unresolved systemic problems, which have been addressed at varying levels of success in the past and which have now been exposed and exacerbated by the global downturn of oil prices. Nigeria’s production cut in 2016 is partly blamed on the political challenges and security threat in the Niger Delta.
The Nigerian National Petroleum Corporation group (NNPC), according to the managing director, Dr. Maikanti Baru, lost more than 1.5 trillion naira (US$4.8bn) as a result of the attacks on pipelines and facilities in the region. As part of efforts to restore production, the Royal Dutch Shell is conducting tests on its Trans Forcados oil export pipeline, which has been offline for the better part of a year.
In early 2016, the Niger Delta Avengers successfully pulled off a seemingly endless string of attacks on Nigeria’s oil infrastructure, knocking more than a half million barrels per day offline. Forcados was one of the most critical targets, a pipeline that is responsible for 200,000 to 240,000 bpd of exports when operational.
With concerted efforts to stabilise the sector, the country recorded a major production lift this year. Figures showed that oil production moved significantly high in April compared with previous months when the sector saw a major production drop as a result of militant attacks on oil infrastructure in the Niger Delta.
During the month, crude oil production rose by 274,000 barrels per day. The increase, the Organisation of Petroleum Exporting Countries (OPEC) said, represents the biggest increase among countries within the oil producers’ group. According to OPEC’s latest Monthly Oil Market Report for the month of May, Nigeria’s output was put at 1.484 million barrels per day, bpd, for April, from 1.21 million bpd in March, which was based on direct communication.
Though seen as a prolonged debate, the National Assembly approved the government’s ambitious seven-trillion-naira ($23-billion) budget to “pull the economy out of recession as quickly as possible”. The plan, bolstered by improved output in oil production and a potential billion-dollar World Bank loan, aims to kick-start growth through rail, ports and power projects.
In January, the International Monetary Fund (IMF) said it expected Nigerian growth to hit 0.8 percent for 2017 and 2.8 percent in 2018.
Oil Output Up
The new figures are far from the boom time in Nigeria, which, over the past decade, had enjoyed average annual growth of eight percent. “Compared to other oil powers like Qatar, Nigeria didn’t prepare for rainy days,” said Douglas Rowlings, an analyst with Moody’s.
Saving for a worldwide crash in commodity prices wasn’t under the control of President Muhammadu Buhari, who only came into power in 2015. But his tough talk towards rebel groups in the Niger Delta only served to deepen the recession, said emerging market analysis firm, BMI Research.
As a result of attacks on oil and gas infrastructure in the oil-producing swamplands, last year’s production fell to a low of 1.4 million barrels per day (bpd) and Nigeria’s growth contracted to 1.5 percent in 2016.
Ongoing talks with the rebels and money in the form of amnesty payments solved the problem.
Minister of state on petroleum, Emmanuel Ibe Kachikwu succeeded in securing an exemption for Nigeria from a global agreement to reduce oil production which was a big feat secured by Buhari’s government. Now production has once again risen over two million bpd, giving government access to foreign currency and supplying banks and businesses who were unable to pay suppliers for much of 2016.
The Central Bank of Nigeria has eased a dollar shortage by creating a market-determined rate for investors, even though a black market for dollars persists. “Many investors are waiting to reinvest in the country but as long as there’s a parallel market, they will be hesitant,” said Moody’s Mali.
Structural reforms will be needed to improve the business climate.
Analysts say that compared to 2016, it won’t take much for Nigeria to rebound, but how much it grows depends on the price of oil, which the country depends on for the bulk of its foreign exchange.
The government is steadily making concerted effort to rebuild confidence in the sector.
The release of 400 million dollars this May to settle outstanding Joint Venture cash call debts owed International Oil Companies (IOCs) is a restoration pact which government is pleased to re-enter with oil majors.
Ibe Kachikwu, said the money was paid to the IOCs and that the balance would be defrayed within a year. He explained that the payment was part of a 1.2 billion dollar cash call debt owed the IOCs in 2016. The difference was from the discounted 5.1 billion dollars cash call arrears it negotiated in December, 2016 with the IOCs.
“At the time that we did the joint venture review that we came up with, we had two components to it. The first was the 6.8 billion dollars arrears covering about six years which were owed the oil companies. In our negotiations, we were able to trim that down to about 5.1 billion dollars; so, we knocked off 1.7 billion dollars out of it and then spread the 5.1 billion dollars over the next five years. This is to be paid from incremental production, not from existing production.”
“In other words, they will have to go and find new oil and from that new oil, we pay that money because we didn’t want to imperil the 2.2 million barrels that everybody was already used to,” he said. The minister also said that the second tranche of the money which was not in the 6.8 billion dollars or the 5.1 billion dollars, “depending on where you land, was a figure of about 1.2 billion dollars which represented only 2016 arrears’’.
He, however, said that the oil companies insisted that the money needed to be paid out completely because they couldn’t begin to add that to the 5.1 billion dollars. “We eventually agreed to pay several tranches; 400 million dollars out of that for the first tranche and then, the remaining 700 million dollars paid on monthly instalments for a period of one year.”
“In other words, that will roughly be about 60 or 70 million dollars every month after the first 400 million dollars.” Kachikwu said that the payment was a milestone that would redeem investor’s confidence in Nigeria’s abilities to keep to her word.
According to him, the payment of the first 400 million dollars will jump-start the whole process of crystallising agreements that have been reached on Joint Venture funding. “We have made provisions through the Central Bank for the payment of the balance on a monthly basis. This will stimulate IOCs to pick up their appetite to invest in existing and new projects in the country.”
The IOCs involved are ExxonMobil, Shell, Nigeria Agip Oil Company (NAOC), Chevron and Total. Kachikwu also disclosed that the country’s oil production could increase by 700,000 barrels per day (bpd) by 2018 from this development.
He said that the structure of the joint venture cash call previously was that all income went back to the Federation Account and from there budget was made. He, however, stated that “even with the budget, monies were not remitted hence the cost and revenue were squandered’’.
“What this has done now is to skew that to the other direction that from production, after royalty, you take away the cost of production on a budgeted basis. Then, the balance goes back to the federation account. Hopefully, going forward we shouldn’t have that problem again. What we cannot cover in terms of budget, the oil companies will go out to raise a loan from third parties to enable them continue their much more aggressive exploration and production.”
“We have today cumulative number of projects that are coming back which should, between now and next year, give us additional 700,000 barrels, over and above the 2.2 million barrels per day. That is why I can say with confidence that we are in a position to move up to three million barrels very quickly,” Kachikwu said.
To further improve on production, the government has directed oil companies to renew expired oil mining leases, OML, while also serving notice that 45 marginal oil fields would be offered in a competitive bid round before the end of May 2017.
The government had written to holders of all expired OMLs to come forward and update their licences. The OML issued by government to oil producers is one of the two types of licences of government operatorship, and it has a validity period ranging between five and 20 years.
“We have already sent out letters on those for existing OMLs but in terms of issuing new blocks, we are probably not contemplating that for the rest of this year. But marginal fields we will deal with by end of May we should have all the data that we need.” “We have identified about 40 to 45 marginal fields, which we hope to increase, we will go forward to a bidding process” the minister said.
LEADERSHIP checks reveal that there are 109 OMLs operating either under the Joint Venture (JV), Sole Risk (SR) or Production Sharing Contract (PSC) basis by oil companies in the country. Another mile stone in the making is that the Forcados crude is scheduled to load at least two cargoes of 950,000 barrels in May, the first volumes to load at the grade’s main terminal since November, and maybe up to four cargoes.
The imminent restart of Forcados has been expected by the market, with recent signs pointing to the terminal reopening, as a couple of crude oil tankers arrived recently and have been waiting to load oil.
Shell had been testing Nigeria’s key Trans Forcados oil pipeline into the terminal, with the Astro Perseus tanker already at the terminal. Forcados is however still currently under force majeure.
Also, the NNPC has awarded the construction of Ajaokuta- Kaduna-Kano Gas pipeline to a Chinese company-China Petroleum Group Engineering Co. Ltd (CPGE). The contract includes a 40-inch pipeline of 221 km, two stations and seven valve rooms and its ancillary facilities. The consortium will assume the design, procurement, construction and transportation of the Kaduna-Kano pipeline Line and training work.
Meanwhile, LEKOIL the oil and gas exploration, development and production company with a focus on Africa, said first crude cargo produced from the Otakikpo Marginal Field in OML 11 has been lifted from the FSO Ailsa Craig by Shell Western Supply and Trading Limited, a subsidiary of Royal Dutch Shell. 120,000 barrels of gross production have been lifted.
Current production at Otakikpo is approximately 5,000 bopd. With the commencement of regular liftings, the Company is focused on ramping up to production of 10,000 bopd, now expected to be by year-end. Key components to achieve this Phase 1 milestone involve completing the expansion of onsite storage capacity – currently being undertaken with minimal capex required – and utilising a higher capacity shuttle tanker.
Lekan Akinyanmi, LEKOIL’s CEO, said: “Selling our first oil marks the commencement of cash flow from Otakikpo. Dollar receipts will increase as we further ramp up production to our Phase 1 target of 10,000 bopd and will contribute to funding Phase 2 expansion.”
Meanwhile, indigenous oil firms are ramping up production following clement environment put in place by government. For instance, Neconde Energy Limited, the E&P subsidiary of the Obijackson Group, the operator of the OML 42, the company’s management has affirmed commitment to responsible business and employee management practices.
The company whose production had gone down from 52,000 barrels per day production to 15,000 bpd says it hopes to up production to 70,000 bpd this August.
The declaration was made by the company’s managing director, Engr. Frank Edozie at an interactive session with the media on the successes and feats the company has recorded since its establishment through acquisition of a 45 per cent working interest from the Shell, Total and Agip Joint Venture (SPDC) in 2011. Also, Aiteo has made a significant impact moving production to about 90,000 barrels.