‘The huge oil and gas resource base, which currently stands at about 38 billion barrels of proven oil reserves and 187 trillion cubic feet of gas, has positioned the country as one of the key players in the global energy supply.
Nigeria is the 10th largest oil producer in the world and the 7th in proven gas reserve with potential to grow to 600 TCF. In 2009, the oil and gas sector accounts for approximately 16.05 per cent of Gross Domestic Product, (GDP), 95 per cent of total foreign exchange earnings and 85 per cent of total government revenue resulting in near total dependence on oil and gas revenue for national development.
For the first time in seven years (2003- 2010), Nigeria’s crude production rose to 2.5 million barrels per day (bpd) in February 2010. The increase was largely attributed to the amnesty of the Federal Government that has restored relative peace in the oil producing Niger Delta Region.
Oil production had dropped to the lowest level of 1.7 million barrels per day in the heat of repeated militant attacks on oil and gas facilities in the Niger Delta region. The gas sector equally is experiencing a high demand underpinned by the growth of diverse demands (industrial, domestic, nuclear and power generation).
The sector is re-positioning Nigeria from being among the top gas flaring countries in the world to being the most aggressive in gas utilization growth.
Robust growth in the last five years has delivered a rich gas sector portfolio that should generate significant income for the country in the future as well as fuel for the rapid industrialisation of the economy. Demand is forecast to grow from about S billion cubic feet per day in 2009, 12 billion in 2010 to over 20 billion cubic feet per dayby 2013.
The expected stability in the prices of gas up to 2035as shown in Figure 4 is also a major attraction for its use across the different sectors of the economy.
Currently, there is a robust portfolio of planned projects aimed at increasing oil exploration and refining capacity. The Federal Government’s transparent and competitive bidding rounds for oil blocks licensing are used to strategically link developments in the upstream and downstream sectors. Government also made it mandatory for all operators in the sector to attain 35 per cent local content vis-à-vis 15 per cent that hitherto prevailed.
This is expected to rise to 70 percent by 2013 as is the case of Petrobras, the Brazilian National OH Corporation. Deregulation, privatization and general institutional reforms which are still ongoing have resulted in large inflow of investment. Refineries and petrochemical plants are being privatized while approval has been granted for establishing new ones by the private sector.
There is also the transformation process of the Nigeria National Petroleum Corporation (NNPC) to a world-class national oil company with the capability to compete and fund oil and gas projects like other oil producing countries. The average crude oil price grew steadily from less than $40/bbl in 1988 to $l40/bbl in mid 2008 and thereafter, crashed to $45/bbl by end of 2008. In recent times, the price of Nigeria crude stood at $83.54 per barrel.
Similarly, natural gas which traded traditionally at about $2/mmbtu in the Henry Hub a few years ago, peaked at about $14/mmbtu in early 2010; it currently (mid 2010) hovers between S6-8/mmbtu.
Despite the gas potential, the level of gas penetration and utilization in the country for both domestic and industrial purposes is relatively low. For years, most of the associated gas produce were flared and the initiatives implemented to reduce gas flaring have not yielded the required results.
Various flare out dates were set but as these dates approached different reasons were adduced for a deferral. It is therefore ironic that despite the country’s large gas reserves and gas flares, domestic gas demand, especially for the power and manufacturing sectors are not being met.
Also, there is lack of infrastructure to allow the easy movement of gas from the Niger Delta to the consumers.
The existing gas pricing mechanism has also not enabled investments.
Crude Oil Export
In 2009, Nigeria exported approximately 1.9 mob/d of its 2.17 million bbl,/d of oil production. Of this, about 44 per cent was exported to the United States of America, considering Nigeria the 5th largest overseas oil provider to the United States. The light, toffee quality of Nigerian crude makes it a favourite gasoline feedstock. subsequently, disruptions to Nigerian oil production impacts trading patterns and refinery operations in North America and affects world oil market prices.
Crude Oil Refining
In the downstream oil sub-sector, Nigeria has four refineries with a combined installed capacity of 445,000 barrels per day (bpd). At optimum capacity, the output of the refineries will be 18 million litres daily. The combined capacity of these four refineries is insufficient to satisfy the domestic consumption of refined products, which is largely premium motor spirit (PMS), estimated at 30 million litres daily. The refineries are currently operating far below their installed capacities due to inadequate funding for their routine maintenance and sabotage of oil facilities by militants. The demand shortfall for petroleum products is, therefore, met through importation.
Nigeria’s downstream allocation amenities include 22 storage depots, 5,120 km pipeline network, 24 Pump Stations, nine (9) butanization depots with a total combined capacity of 12,000 MT, over 40 private depots, five NNPC jetties and a number of private jetties.
The distribution of refined products in Nigeria is carried out through more than 7,000 retail stations. The retail system and the transportation facilities that bring the products to these outlets are managed by the Pipelines and Products Marketing Company (PPMC). The storage and distribution depots are linked to the refineries and port terminals by a network of pipelines. Product distribution is also done by tanker service, which has been the focus of theft and diversion of shipments.
The Oil and Gas sector Implementation Bill IDGIC), which envisioned a dramatic reform zf the industry is now before the National Assembly, and when it eventually becomes law, be institutional reforms will ensure that Nigeria derives added value from the oil and gas given the fact that institutions like NNPC would re strengthened and empowered to operate as purely commercial venture.
In this regard, rigorous analytical measures are being taken in reparation of the monthly Official Selling Price of the various Nigeria crude oil grades as well as calculation of Realizable Prices (RPs). A petroleum Industry Bill was drafted, as an all encompassing legislation to regulate major aspect of the Nigerian petroleum industry.
The Local Content Bill has been signed by the President and an appropriate institutional framework put in place with the creation of the Local Content Commission.
However, advocacy and awareness creation will be sustained to ensure the success of the policy. In the downstream sub-sector, there will be an increased drive for investments in integrated petrochemical industries based on gas feedstock through private sector initiatives.
A major policy thrust for the current administration is the conclusion of the liberalization and privatization programme of the downstream sub-sector to ensure regular supply and distribution of petroleum products.
There will be expansion of downstream programmes that will pave way for petroleum product exports, while the hedging of the national economy against volatility in the crude oil market and OPEC quota will continue. Furthermore, a policy objective centred on Nigeria emerging as the regional hub for oil and gas activities in the African sub-region will be pursued.
Unleashing the Nigeria Oil and Gas Industry, for growth and added revenue generation to the benefit of Nigeria and international investors, requires a focused solution to key developmental challenges. Consequently, government’s strategy for the oil and gas industry will be underpinned by the following:
• Creating an enabling environment in the Niger Delta;
• Realizing economic benefits to Nigeria through greater linkages; and
• Structural solution to the issues of the oil and gas industry with respect to funding, enabling policies and an efficient NNPC/DPR structure.
Creating an Enabling Environment in the Niger Delta
It is evident that Nigeria will not realize the economic benefits the oil and gas industry portends if it does not quickly find solutions to the Niger Delta issue. Specific problems the Petroleum Industry faces in the Niger Delta can be summarized as follows:
Absence of law and order and related lack of security;
Inadequate infrastructure (basic and key developmental infrastructure);
Low literacy levels due to poor/limited education system, resulting in inadequate capability of the work-force to service/support the local oil industry; and
Awfully soaring joblessness levels as well as limited revenue generating opportunities athwart a diverse range of working and expert groups.
The agitation of the Niger Delta communities is spurred by the desire to have solutions to all these monumental problems as soon as possible and in the belief that it is within their just right to achieve their goals by any means.
Oil and Gas Industry –Links and Economic impact
The Oil & Gas Industry has failed to catalyse the rapid growth of our industries and related businesses. To reverse this undesirable trend, the Federal Government will drive the realization of the goals in each of the following five initiatives to the benefit of the country:
Nigeria Content Development
(Achieving Local Content)
The Federal Government of Nigeria has a Nigeria Content Policy to ensure that investments made in the oil & gas industry have a significant trickledown effect on the Nigerian economy, and has set local content target of 70 per cent by 2010.
The overall objective of the policy is to create an economic engine for growth, encouraging wealth establishment, employment generation, and enhanced the linkage between the oil and gas industry and other sectors of the Nigerian economy. This policy needs to be pursued vigorously with emphasis on utilizing Nigerian (i) Human resources, (ii) Material resources and (c) Local Services.
Technology Drive
The oil and gas industry is dependent on new innovations and technology to enable it open up new frontiers of oil and gas fields, optimize and introduce new efficiencies to discovers, develops and operates its assets and, ultimately, create value for its shareholders. Most of these technologies are imported into Nigeria for implementation. The industry represents an opportunity for Nigeria to grow its technology development capabilities. Hence, key technologies that are pertinent to the growth of the oil and gas industry need to be identified and tripartite partnerships created with International Technology Centres (Oil Company Research Centres/Universities), Nigerian Universities and Local Enterprises/ Companies that will be the implementation yebides for these technologies.
The Oil and Gas Companies and the related Service Companies through their Projects and Operations directly employin the range of 25,000 and 50,000 personnel and spend between $12
-$15 billion. However, if forward and backward linkages are established with other business sectors as shown in the diagram above, it will have significant benefits in the following areas:
• Potentially a 10—100 fold increase in direct and indirect employment generation in the industry;
• Significant proportion of the $12 – $15 billion retained in the Nigerian economy;
• Significant revenue generation for FGN through taxes;
• IncreasM capacity utilization in the manufacturing and service sectors; and
• Increased business efficiency across all sectors.
Capacity Building / Manpower Planning
The rapid development in the oil and gas sector in the last few years has led to an acute shortage of skilled manpower. Capacity building during the plan period will focus on developing the skills of the technician, engineering, support and general services, management and executive level to appropriately support the requirements of the industry. This is essential if we are to have an industry that is successfully run and managed by Nigerians and the appropriate amount of expatriates. Therefore, capacity building should focus on the following areas:
• Focused development of Technical Training Institutes (such as the Nigeria Institute of Welding and the range of Polytechnics and Technical Institutes in the country);
• Update the curricula and quality of the Engineering and Geosciences departments of Universities; and
• Upgrade the Petroleum Training Institute into atop capacity building institute in support of the resource requirements of the industry.
Adequate Funding of the Oil & Gas industry
The oil and gas industry requires up to $15 billion per year to execute projects that will deliver 4.5 million barrels of oil per day by 2010 and over 4 billion standard cubic feet of gas per day by 2012. As mentioned earlier, the FGN is expected to provide its share of this investment, which is about $8 billion. Currently, the Joint Ventures and other related Oil & Gas Ventures are funded from the following sources:
• Government funding of its equity share from appropriated funds from the FGN budget;
• Project Finance through Bank/Finance Institutions;
• International Oil Company Partner Financing concepts (called Alternative Funding);
• Short Term Corporate Loans for venture partners of banks; and
• Minor equity sell-down to raise capital for major projects.
However, a structural and permanent funding solution is required to adequately fund the growth of the business. The FG will intensify efforts to address the following:
• Incorporation of JVs;
• Commercialisation of NNPC;
• Conversion of the JV/M0TJ business to PSC;
• Structural Partners Financing solutions; and
• Third Party Financing solutions.
Utilisation of Gas to Fuel the Nigerian Economic Growth
The huge gas resources in Nigeria will play a major role in fuelling the economic growth of the country. A Gas Utilisation Master Plan will be required to give focus to how Nigeria realizes the true potentials of this huge gas resource to the benefit of the economy in terms of revenue generation as well as associated economic enablers/ benefits. The Plan will define the investment requirements, the sequence of activities and the role of respective stakeholders {government and private partners). Gas provides the following opportunities:
• Energy requirements;
– Gas to Power (Electricity)
– Gas to Liquids
– Gas as a fuel (Liquefied Petroleum Gas (LPG)/ Compressed Natural Gas (CNG))
• Feedstock into our Petrochemical Industries
– Fertiliser
– Plastic
The majority of the gas resources are in the Niger Delta. Gas has to be delivered across the country if Nigeria is to achieve balanced economic growth across the country.
Infrastructural Development
In view of the proposed increase in refining Capacity during the plan period, a large investment would be required for creating marketing and associated infrastructure such as ports, storage, pipelines and terminals.
Servicing of E&P Activlties
E&P service providers play a key role in enabling success for E&P operators. The accelerated growth of E&P activities has led to multi-fold growth in demand of technology and oilfield services worldwide. Therefore, availability of services in Nigeria is becoming constrained and expensive. Hence there is a need to facilitate their growth.
Key lssues and Challenges
The major challenges that have continued to undermine development aspirations in the oil and gas sector include:
• Unrest and agitation in the Niger Delta region over the past five to ten years, which creates an unattractive environment for investment.
• Loss of revenue due to interruption of production operation and theft of crude oil from pipelines and the tank firms.
• Escalating operational and development cost (of operations and project activities), arising from the requirements of additional security for oil company, contractor staff and assets. Escalating demands from the host communities and the cost premium of operating in a very unstable business environment.
• High incidence of delayed and abandoned projects in communities where companies are unable to sustain a license to operate. This gives rise to a lower than expected rate of growth of the Nigeria Oil and Gas Industry.