Nigeria’s oil and gas industry – Setting a New Agenda
Nigeria has had a very long history with “oil” starting from the very agrarian era of the 19th century, when palm oil was the main “oil” of the economy even though we have now lost our edge on this front to other nations like Malaysia, and Indonesia who have been more deliberate in deploying technology to scale up the integration of the entire palm oil chain for optimal value.
I chose to open with this analogy hoping that we can draw some parallels with our crude oil and gas industry to see if there are any lessons, we can learn therefrom hoping that we will not lose our edge in Deja-vu, as we have seen in the case of Palm oil industry.
While the 1950s/60s were characterised by the palm oil trade, the 1970s to date have been largely about crude oil and more recently gas.
I do not need to repeat the history of Nigeria’s oil and gas industry, but you will all remember the journey from Oloibiri and the emergence of the IOCs onshore and Nigeria becoming a member of OPEC nations in 1971 through to the recent foray into deep offshore and the growth of Nigeria as a recognised Oil Nation to now becoming, as some would say a Gas Nation with some oil.
It is however important to put a few things in perspective in respect of the enablers that underpinned the growth we enjoyed largely between the mid-80s and early 2000s – from the Petroleum Act 1969 (as amended) through the IOC partnerships that underpinned the likes of the 1986 MoU and the 2000 MoU; without which it may have been difficult to realise the kind of growth that Nigeria experienced in that period.
All through the ’80s and ‘90s the global focus was on oil as the major source of energy and a key component of the energy mix and indeed revenue earner for producer nations.
This energy mix was underpinned by the demand from western economies, predominantly for transportation, residential and commercial heating as well as support for massive industrialisation, and a key source of competitiveness for western economies. Indeed, Oil and Gas guaranteed the Energy security for western economies over the last century and more.
Nigeria’s case is no different, but even more so that oil became the country’s major revenue and foreign exchange earner to date.
Nigeria’s oil activities were always underpinned by the partnerships with western IOCs and more recently, the independent and indigenous producers, heralding the era of the joint ventures which largely was dominated, and still is, by the federal government with an average of about 57% of the entire onshore JV equity and strong holder-ship of most of the concessions offshore which are modelled as Production Sharing Contracts (PSCs).
The JVs by their nature are designed such that you contribute and distribute earnings according to equity holding, which essentially means government by implication is required to contribute about 57% of the entire cost of running the onshore JV business as well as entitled to take commensurate value in return.
As you may recall, the industry over time struggled with government cash calls for funding its share which subsisted till very recently when creative solutions were developed by NNPC leadership working with the IOCs to resolve the cash call arears to enable the industry move forward and ensure that government continues to play in the game.
Since then we have seen the advent of some creative options like the “Outright Carry arrangements, Modified Carry Agreements, Strategic alliances and more recently the Financial and Technical Services Agreements (FTSA).
It is pertinent to note that the industry is highly capital intensive and as such the creativities of the 1990s and early 2000s largely addressed the issues of funding and incentivising the IOCs; but also facilitated the emergence of smaller indigenous players to diversify the game, noting the importance of the industry to Nigeria as a key contributor to both GDP at about 10% and over 80% Forex and more than 75% of government’s revenue. This perhaps is why the industry was referred to as the goose that lays the golden eggs!
While the 90s and 2000s were characterised by the issues of funding, cash calls, and trust deficit between partners, today’s industry in Nigeria is facing more local challenges and globally interwoven issues of higher complexities and dimensions requiring more collaborations and broader creativity if Nigeria is to remain in reckoning globally – thus giving eloquence to the need for a new agenda that is robust and consistent with current realities. Permit me to dimension the current issues broadly as internal and external; but first, lets start with the external.
Most of the external issues are largely around the global interconnectivities of the world and the integration of energy systems beyond geographical boundaries giving credence to the analogy of a butterfly flapping its wings in Australia and floods happening in New York, Hurricane in Florida, Tsunami in Japan and earth quakes in Africa in the chaos theory and butterfly effect also known as the Edward Lorenz, theory of deterministic chaos.
Global energy integration has become intertwined with geopolitical power to the extent of becoming an instrument of economic and political weaponization, as we are currently experiencing in Europe.
The global consequences of climate change and the need for cleaner energy has also served to raise more consciousness on the need for decarbonisation of the energy systems resulting in energy transition with a fast-changing energy mix. Even though the world needs more energy as a result of global population growth from the current 8 billion to 10 billion people by 2050 (Nigeria expected to double; 400mln). The world no longer needs energy at all costs, thus instigating the current dilemma on energy. Yes, the world needs more energy, but it, also needs it cleaner, cheaper and in abundant supply. The requirements for “cleaner” and advancement in technology have led to the quantum growth in renewables which remain the cleanest but unfortunately is still costly and constrained by intermittency in most cases and unable to meet the full energy demand growth thus making gas, the next best option of a global transition fuel to power the world. In all of these, the key considerations of Availability, Affordability and Accessibility must be maintained to guarantee sustainability, which gives gas a crucial edge in the energy mix, even though Hydrogen is fast gaining ground on the back of improvements in technology. As the demand for energy prioritises electrons over hydrocarbons to meet the projected 30% demand growth, suppliers need to prioritize which hydrocarbons will bridge that transition before Hydrogen takes centre stage. On balance, Gas meets that standard and checks most of the boxes today.
Energy transition is also exacerbating the issue of how we secure funds for new projects development including new exploration scope, especially for gas and being able to produce at capacity consistent with our massive oil and gas reserves. Securing funding remains a key challenge for the industry with the international banks, Export Credit agencies and Multilateral Institutions no longer keen on financing fossils/oil and gas projects that are either outside of their territories or perceived as contributing to further CO2 emissions. This in addition to the introduction of carbon taxation portends very grave impediments to oil and gas projects’ viability going forward, even though the ongoing Russia and Ukraine crisis is slowing down the overall pace of the energy transition in Europe.
Let me touch on the internal dimensions. The internal dimension of course follows the need to respond to the global issues of Climate change, Energy transition with the attendant consequence of reduced funding for the development of oil and gas infrastructure projects across the world and the emergence of new global energy powers with the shale revolution in the US and new major discoveries around Africa in places like Mozambique, Senegal, Namibia, Tanzania and Ghana creating more competition for Nigeria and a massive challenge to our market share.
Beyond the response to the external dimensions highlighted, the local above-ground risks and issues are perhaps the biggest for our industry today; issues like crude oil theft, Pipeline Vandalism, Insecurity, Community development and agitations, Infrastructure deficit, and value attacks due to multiple agencies/ministries with cross functions making the ease of doing business in the industry more cumbersome compared to the new frontiers in Africa.
That said, it is commendable to see the progress made to approve the PIA; at least we now have a clear basis to go forward on the fiscals to attract new investments into the industry. There however, has been some critique on how long it took to pass PIB to PIA; some believe it’s come rather late and may not have taken full cognisance of global dynamics in the world of energy where the energy mix is fast changing, and the energy system balance is shifting both in joule terms and the extremes of political power. Moreso, they argue, asserting that the PIA fiscals may not be inspirational enough to lure back investors and attract the requisite level of investments needed to unleash the potential of the industry again.
Irrespective of our thoughts, the fact remains that the PIA indeed took so long and while waiting, Nigeria lost quite some grounds and opportunities noting that, of the over $70bln investments that came into Africa between 2015 and 2020, only about 5% made it into Nigeria, 5%! ($4bln)! Essentially the rest of the world continued to move on while we were vacillating on the passage of the PIB over the last 20 years. That said, I personally think the PIA is a welcome development which will go down in history as one of the key legacies of the President Muhammadu Buhari’s administration even though the real value addition will be tested by how well we are able to operationalise and make it effective to attract new investments while protecting the existing ones through preserving the sanctity of contracts and agreements.
Operationalising the PIA and being able to sort out the now near cancerous issue of crude oil theft and its attendant impact on the industry, environment and indeed the nation’s economy, will have to form the key pillar of whatever new agenda will be developed in order to have a fighting chance of regaining our position as industry leader and a force to reckon with in Africa.
The industry in Nigeria continues to be plagued by massive and industrial scale crude theft which is now becoming endemic and on the brink of completely getting out of hand if extraordinary steps are not taken to stem this ugly situation. It is estimated that a sizeable amount of crude oil (100-400kbbls) is allegedly stolen every day, amounting to about $1billion consequential loss to Nigeria on a monthly basis; this translates to a monstrous loss of over $10bln per annum, which is almost 25% of Nigeria’s national budget! Beyond these incredible financial losses to the nation, this menace also has huge potential to snowball into a full-blown crises akin to the Mexican and Colombian drug cartels with its attendant complexity and challenges from the standpoint of security, economy and even regional stability. Most of the economic and social issues of today are being linked to this menace as potential root cause of why the nation is unable to meet both its OPEC production quota or balance its budget in the face of dwindling national revenues with knock on effect on the economy as a whole.
While it is debatable whether the recent exits of the IOCs from the onshore plays in Nigeria is linked to this issue of chronic crude oil theft, the resulting divestments could portend a hint of opportunity to deepen and grow more local content participation and capacity building with more independent and indigenous players emerging as part of the new agenda. Essentially, we are beginning to see the advent of indigenous companies’ consolidation on the back of IOCs divestments which could also mop up some of the recent marginal fields in whatever guise of partnerships, merger or outright takeover for scale. I see a future where there will be mainly 3-5 major independent producers in Nigeria with capacity to manage the onshore scope against all odds while also playing a crucial role across the African sub region alongside the now commercial NNPC Limited.
The future of Nigeria’s oil and gas industry will not be complete without ensuring the consolidation of the independent and indigenous players. It is instructive to note that the indigenous producers have grown tremendously over the last decade to be accountable for about 30% of national production (from just about 2% in 2010) with capital and development investment of over $20bln within the same time frame. The role of the indigenous players has got to be a critical element of the new agenda.
Against the backdrop of the foregoing, permit me to put some stakes in the ground in respect of what should be the main building blocks of the new agenda for Nigeria’s oil and gas industry going forward:
Let me start with the PIA as an opportunity:
The opportunities offered by the approval of the PIA which is designed to deliver effectiveness, efficiency, accountability, competitiveness, and safety are immense if the Act is conscientiously and diligently applied as the new foundational basis for a reset of the Nigerian oil and gas industry; it could become a key enabler to win back investor confidence and restore Nigeria’s hitherto vantage position in Africa. This should inspire the unbundling of the full industry value chain, thus creating an improved enabling environment for Nigeria to become the investment destination of choice once again.
While we are at it, it is very heart-warming to see NNPC Limited emerge as a key product of the PIA, repositioning it as a commercial entity under CAMA regime, consistent with the realities of other private entities in the industry. This can only serve to increase the much-needed transparency to boost investor confidence in the overall governance of the oil and gas industry in Nigeria. I congratulate Mr President and Minister of Petroleum, the Honourable Minister of State for Petroleum, the National Assembly and the NNPC, IOC leadership, and other well-meaning stakeholders who made this happen.
Another critical component of the new agenda linking to the PIA must be the focus on Energy transition, the fast-changing energy mix and the new global direction with respect to Energy systems. Even though the ongoing geopolitical situation in Ukraine seems to have slowed down the initial momentum of the transition, this is seen in some quarters, as just a temporary but necessary desperate measure to focus on the survival of Europe which needs to manage its over dependence on Russia while working to create new avenues to guarantee security of supply to wean itself from Russian oil and gas. There is however, another school of thought which suggests that Energy transition will switch to over-drive mode once the dark cloud over the uncertainty around Russia lifts giving clarity to policy makers in the EU. Hence, we need to brace to respond to an even steeper trajectory in the energy transition journey but note the tempered refinements including accepting Gas as the credible transition fuel as against the blanket castigation of all fossil fuels as dirty and harmful to the planet. This may also catalyse the acceleration of further state backed investments in renewables which holistically could accelerate the pace of transition but either way, gas remains a credible partner to renewables and hydrogen as the transition fuel of choice.
Let me touch on the Role of Gas in this new agenda.
The new thinking of gas as a global transition fuel has got to be a second opportunity for Nigeria to reposition and take advantage of the new demand and supply gaps to deploy our gas reserves as the catalyst for development and industrialisation while taking centre stage as a leading gas nation supplying most of Africa, Europe, and rest of the world. Nigeria currently has over 206Tcf of proven gas reserves with massive potential to become top five in the league of Qatar, USA and Russia as a gas superpower. We must crank the engine on gas to bring about massive developments deploying and taking advantage of the PIA but also being very deliberate about the focus on gas with thoughts around exclusive moratorium to create more gas development incentives and waivers to inspire new investments in the gas value chain. We must take advantage of the ongoing work on the declared “Decade of Gas” programme which is meant to form the bedrock of how we transition Nigeria into a full-fledged gas economy as a national priority and a key element of the new national agenda for the oil and gas industry.
Therefore, the other key components of the new agenda must be hinged on gas development, specifically on deliberate gas exploration to rebase our gas reserves, and consideration for more attractive fiscals to incentivise further gas developments, infrastructure investments and cost reflective pricing for the domestic and export gas supplies. Essentially government needs to do everything including granting additional and far-reaching fiscal incentives focused on gas development as the main pillar on which our industrialisation will be built and also for global exports as a key forex revenue earner for the nation. The potential 5bcf/d local market for gas is huge and we must domesticate a significant part of our gas development to drive our national economy. This focus on gas should also result in a structural improvement of the current ministerial portfolios to create a critical position solely to focus on gas development – the “Minister for Gas” should be tasked with doing every and anything possible and necessary to ensure all the gas policies and guidelines cum initiatives are brought to fruition as part of the call to declare emergency on gas and power development in Nigeria.
This story will not be complete without addressing the issue of Crude theft
Against the backdrop our current reality, whatever agenda we design will be inconsequential if it cannot resolve the issue of the massive industrial scale crude oil theft and illegal artisanal refineries plus pipeline vandalization currently going on. This is of major concern both locally and internationally to the extent that there does not seem to be any quick fix solution in sight without government rising up to its responsibilities of securing lives and livelihoods. I have followed active debates on the subject and note some of the proffered solutions including the socio-political ones and deployment of technology which largely are about detection of the criminality rather than very robust response and deterrence to ensure full consequences for these illegal activities. Government at all levels and across all arms need to, in unison, declare a state of emergency on crude oil theft and deploy technology to fight the crises and deal more decisively and transparently too as a deterrent to those involved in the nefarious activities and economic sabotage. This singular issue threatens our economic and energy security and so must be dealt with as a consequential security emergency.
In summary we need to press the reset button as part of the new agenda to galvanise the oil and gas industry in a post PIA world. The basic components of the new agenda can be encapsulated in the following suggestions:
1. First and foremost, we need to take back control and secure our oil and gas production territories to create a more enabling environment by declaring a security state of emergency on crude oil theft and illegal artisanal refining activities in the Niger Delta.
2. While it is encouraging to read about government’s recent push towards tackling the crude oil theft menace, this needs to be sustained and underpinned by fresh thinking including deployment of geo referencing and geo-spatial tracking technology and diplomatic cooperation across the Gulf of Guinea. This new drive should include active Gulf of Guinea regional and international cooperation and partnerships especially with the EU, USA, and the Britain to help proffer and implement sustainable solutions including fingerprinting our crude oil, following both the molecules and the money in order to tackle crude theft once and for all.
3. Fully operationalise the PIA by deploying all the enabling fiscal incentives therein to boost investor confidence and attract new investments to stay relevant in Africa and globally.
4. Focus on gas as a strategic imperative to drive the ongoing Decade of Gas declaration to cause the implementation of very deliberate moratorium and gas focused incentives cum waivers to instigate massive exploration and development of our gas reserves for both domestic and export markets.
5. As part of the strategic imperative on gas, create a focused position for the “Minister for Gas” to ensure laser pointed focus on gas matters including actionable policies, fiscals and investments to reposition gas as the bedrock of Nigeria’s industrialisation
6. Take advantage of the ongoing global demand and supply imbalance to partner with the EU, towards unlocking the requisite funding and technology needed to develop our gas reserves within this decade of gas agenda.
7. Encourage government to bite the bullet on the petroleum subsidy issue by enabling more modular refineries to scale up alongside the much-anticipated Dangote Refinery and the rehabilitated NNPC refineries to supply the domestic market and the sub region as a net exporter of petroleum product thus eliminating smuggling.
8. Deliberately focus on more human capacity development and skills acquisition to international standards to make Nigeria a net exporter of skilled engineers and technicians across emerging oil and gas markets in Africa. Our over 60 years of operating a functional oil and gas industry has got to count for something to restore our dignity as the giant of Africa one more time!
Tony Attah, an independent energy consultant has also been the Managing Director of Nigerian Liquefied Natural Gas Company, NLNG