• Monday, February 26, 2024
businessday logo

BusinessDay

Nigeria tops list of least favourable countries for oil, gas investments

businessday-icon

A new report released by the Norwegian research group DNV GL, further reinforces the long held view that failure of Government to pass the Petroleum Industry Bill (PIB) is damaging Nigeria’s oil and gas sector.

With global oil and gas companies set to keep a tighter rein on capital expenditure in 2014, Nigeria topped industry leaders’ list of least favourable countries to invest in this year, according to the new research report published by Norwegian research group DNV GL, the leading technical advisor to the oil and gas industry.

Analysts say that the delay in the passage of the Petroleum Industry Bill (PIB), which is expected to overhaul the Nigerian oil industry, has continued to cause uncertainty, limiting investments in the vital industry.

The report which was published on Monday, said security issues, corruption and political uncertainty leave Nigeria as the least favourable country to invest in, as it was in 2013.

Other key destinations regarded as highly risky for investment, according to the DNV report, include Iraq, Afghanistan, Russian and Iran.

The United States, Brazil and Australia are the top investment destinations for 2014, with larger operators seeking to expand into challenging new environments such as deepwater sites in East Africa. In fourth place is Malaysia, up from eighth in 2013, followed by China, which rose one spot to fifth place.

In what is a reflection of the growing status of East Africa as the new investment frontiers, Chinese and Indian national oil companies spent over $9bn on deals in Mozambique during 2013, excluding the fourth quarter, according to the report.

The report identifies rising operational costs, an ongoing skills shortage and competition from new international rivals as factors that will define the industry’s barriers to growth in 2014.

The report entitled ‘Challenging Climates: The outlook for the oil and gas industry in 2014’, which is an annual litmus test for industry sentiment in the year ahead, was produced with input from a survey of more than 430 oil and gas professionals and in-depth interviews with more than 20 industry executives.

Last Thursday, global oil major Royal Dutch Shell had alluded to Nigeria’s security situation as one of the drivers of the expected slump in its earnings for 2013.

“The security situation in Nigeria remained challenging,” the company said in an update on its expected 2013 results.

International oil companies (IOCs) operating in the country have increasingly shifted to the offshore region in recent times amidst onshore risks.

But the growing shift by the oil majors to the offshore region, which now accounts for a large percentage of total oil production in the country, signals their continuing appetite for the country’s oil sector despite operational and regulatory challenges, said analysts.

Between January 2010 and November 2012, Shell sold stakes in eight of its more than 30 onshore interests to local players. The company announced in October 2013 that it was putting up for sale four additional onshore oil blocks. In June 2013, Chevron announced its plan to divest from its 40 percent stake in Oil Mining Leases (OMLs) 52, 53, 55, 83 and 85. The firm is currently selling three of the five fields.

Wumi Iledare, president of International Association for Energy Economics and director, Emerald Energy Institute, University of Port Harcourt, said: “We can expect increase in offshore production as investment in development of the fields increases. The beauty of offshore is that it does not require cash call from government. They are production-sharing contracts, but government approves the companies’ expenditure. Production is going to increase depending on how fast government approves the companies’ expenditure plan.”

He added that the current level of investment onshore is not encouraging and it should be a source of concern. “Investment must be sustained for the life of the reserves to be expended. The business climate onshore is not encouraging because of oil theft and pipeline vandalism.”

“It is unlikely that the current wave of divestments means a mass wave of IOC exits from Nigeria in the near future. The divestments are a re-balancing of asset portfolios towards the offshore, which now account for at least 70 percent of Nigeria’s total production. IOCs such as ExxonMobil, Total and Chevron still look set to invest capital to Nigeria’s offshore region over the next decade,” said Claire Lawrie, head, oil and gas advisory for Africa, Ernst & Young.

“There will be increase in activity offshore because oil majors are now moving offshore as onshore reserves are gradually being depleted. Now, more than 50 percent of our production comes from offshore, and oil majors are discovering bigger reserves,” said Akinyemi Akingbade, senior manager, energy, utilities and mining, PricewaterhouseCoopers (PwC).

Lawrie said the attractiveness of fiscal terms for offshore exploration could be crucial, given operators’ commercial shift towards the offshore.

Ayodele Oni, an energy law and policy expert and senior associate in top law firm, Banwo & Ighodalo, said majority of the IOCs divesting assets still have several assets in the country and are still interested in keeping them because of the very rich hydrocarbons play.

“Note that the divestments have not involved deep offshore blocks which are quite lucrative and part of the arguments around the Petroleum Industry Bill (PIB) relate to deep offshore fiscal terms,” he added.

The major offshore and deep water oil fields include Bonga, Agbami and Ebok. The Usan field operated by Total is the latest major deep water oil field to come on stream. Major upcoming oil fields in the country include Bonga North, Egina, Nsiko and Nkarika.

 “Nigeria’s oil production has declined in recent months to below 2 million bpd and the country will need to retain a competitive edge in upstream, given the emergence of new exploration and production frontiers in the Africa region – Ghana, and the Gulf of Guinea pre-salt plays (Angola, Gabon, Congo) and East Africa, which has rapidly gained world-class hydrocarbons status,” said Lawrie.

Other key destinations regarded as highly risky for investment, according to the DNV report, include Iraq, Afghanistan, Russian and Iran.

The United States, Brazil and Australia are the top investment destinations for 2014, with larger operators seeking to expand into challenging new environments such as deepwater sites in East Africa. In fourth place is Malaysia, up from eighth in 2013, followed by China, which rose one spot to fifth place.

In what is a reflection of the growing status of East Africa as the new investment frontiers, Chinese and Indian national oil companies spent over $9bn on deals in Mozambique during 2013, excluding the fourth quarter, according to the report.

The report identifies rising operational costs, an ongoing skills shortage and competition from new international rivals as factors that will define the industry’s barriers to growth in 2014.

The proportion of companies planning to increase investment in new projects has declined by 18 percentage points over the past three years, from a high of 63 percent in 2012 to just 45 percent in 2014, the report said.

The report entitled ‘Challenging Climates: The outlook for the oil and gas industry in 2014’, which is an annual litmus test for industry sentiment in the year ahead, was produced with input from a survey of more than 430 oil and gas professionals and in-depth interviews with more than 20 industry executives.

By: FEMI ASU