The fractious relationship between the Nigerian government and International Oil Companies (IOCs) is creating oil exploration and marketing opportunities for Chinese and Russian companies as a cash-strapped Federal Government now seems impatient to wait for investment decisions by the IOCs.
In August, Mele Kyari, the Nigerian National Petroleum Corporation (NNPC) boss, said Chinese investment in Nigeria’s oil and gas industry has reached $16 billion but the Asian giant is not relenting.
From 2019 to 2023, Chinese national oil companies’ – China National Petroleum Corporation (CNPC), China Petroleum & Chemical Corporation (SINOPEC) and China National Offshore Oil Corporation (CNOOC) – development and production capital expenditure (Capex) in Africa’s upstream sector is projected to reach $15 billion.
The combined investment from these Chinese oil companies is the fourth highest in the time period, behind BP plc, Royal Dutch Shell plc and Eni SpA investments in Africa.
Chinese money is helping ramp up production from the Egina field in Nigeria. Egina commenced production at the end of 2018 and is expected to reach peak production of approximately 200,000 barrels of crude oil per day (bpd) in 2019. CNOOC, the biggest China’s offshore sector investor, spent $2.3 billion in 2006 to acquire 45 percent stake in Nigeria’s OML 130 deepwater licence, a lucrative contract that holds the Akpo and Egina fields.
Following the Russia-Africa summit held in Sochi last week, the Federal Government said it would seek Russia’s help in reviving Nigeria’s moribund oil refineries through the establishment of a framework for a joint venture between the Nigerian National Petroleum Corporation (NNPC) and Russia’s second-biggest oil company, Lukoil.
Most IOCs have refused to touch refining business in Nigeria on account of government subsidies that make it unprofitable. In 2016, ExxonMobil divested its 60 percent stake in Mobil Oil Nigeria, thus leaving Total as the only IOC operating in the downstream sector. Globally too, oil majors like Shell are divesting from refining as it becomes less profitable with the proliferation of refineries in Asia. As global bodies awaken to the threat of climate change, gas offers more opportunities for cleaner energy and guilt-free profit.
Nigeria and Russia also agreed to revive and solidify the venture between the NNPC and Russia’s gas giant, Gazprom, in order to develop Nigeria’s huge gas potential and infrastructure as well as explore some of Nigeria’s oil in the deep offshore, an area once the exclusive preserve of the oil majors.
Though major oil companies like Shell, ExxonMobil, Eni and Chevron have huge assets in Nigeria, further investments into the country’s energy sector have been few and far between in the past decade. They blame this on the lack of fiscal and regulatory reforms in the country as seen in the inability to pass a petroleum industry bill.
A project like Shell’s expansion of its 225,000 bpd Bonga South West/Aparo has been unable to reach Final Investment Decision based on disagreement over fiscal terms. The project has been suspended every year since 2016. Other projects including 120,000bpd Zabazaba-Etan project; 140,000bpd Bosi project; 110,000bpd Uge project, and 100,000bpd Nsiko deepwater project have been stalled. The 1 billion barrel Owowo field development is also waiting on the right fiscal terms among other conditions.
Yet, these oil majors vacillating on completing these projects in Nigeria are investing in newer producers from Africa and other regions. Exxon Mobil is investing $33 billion into two liquefied natural gas projects in Mozambique, a country of 30 million people with less than 50 percent of Nigeria’s gas reserves. Though struggling with an economy clobbered by civil unrest, corruption and debt, Congo’s energy industry has been boosted by major recent finds from Italy’s ENI and France’s Total oil fields in the country that it could soon rival Nigeria’s.
“In Nigeria, security is a big issue. There is also regulatory uncertainty and contracting issues which raise the cost of production for oil companies, so they seek alternatives elsewhere,” said Chuks Nwani, an energy lawyer based in Lagos.
Though the Federal Government has repaid over $2 billion of the $5.1 billion cash call arrears it negotiated with International Oil Companies (IOCs) which had hitherto discouraged new investments, oil majors are still cautious on account of fiscal and regulatory uncertainties.
Bank Anthony Okoroafor, chairman of Petroleum Technology Association of Nigeria (PETAN), an association of leading local producers, told BusinessDay recently that investors are uncertain about what regulatory and fiscal terms to apply since the PIGB was not passed.
With interests from China and Russia, the Federal Government is emboldened to squeeze out concessions from the IOCs.
Abubakar Malami, Nigeria’s attorney general, is asking the IOCs to fork over $62 billion in back taxes for government’s inability to activate provisions of section 16 of the Deep Offshore and Inland Basin Production Sharing Contracts Act which provides that where the price of crude oil exceeds US$20 per barrel, the PSC Act will be reviewed to ensure higher revenue for the Federal Government.
Since 2003 when the Act became operational, Nigeria has been unable to activate these provisions. Legal analysts say the biggest challenge is that the PSC Act did not provide clear guidance on how to implement a review.
“The formula for crude oil share between the Federal Government (through the NNPC) and its PSC contractors is provided in the PSCs themselves, rather than in any provision of the PSC Act,” said analysts at Lagos-based Templars Law firm, led by Adewale Atake, partner & head, Dispute Resolution, in a commentary.
Therefore, the assumption, that the Federal Government could simply increase its share of crude oil revenues unilaterally, by amending the PSC Act to allocate higher quantities to itself, can hardly be said to be well thought-out, the analysts said.
The Act did not specify whether individual contracts or the Act will be amended, how often it will happen, and what will happen to fields with peculiar characteristics such as irregular production volume or even due to crisis. The section does not also provide a specific sharing ratio to which a review of the PSC Act must conform.
Though the Revenue Mobilisation, Allocation and Fiscal Commission said Nigeria lost $21 billion for failing to review the law, four years of trying by the Muhammadu Buhari presidency has not had an impact. Suasion, threats and even a Supreme Court ruling have not had an effect.
Lawmakers are now at work to amend the law. The Senate has already passed the Production Sharing Contract Act 2004 (amendment) Bill 2019, which they say will help Nigeria gain at least $1.5 billion in 2020 in improved revenues.
They have also called for a public hearing on the Deep Offshore and Inland Basin Production Sharing Contract 2004 (amendment) Bill 2019.
ISAAC ANYAOGU
