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The New Face of Nigeria's Oil Industry (Posted 10th October 2005) Tell your friends about this page! Email it to them.
Since the discovery of oil in commercial quantities in 1956, and the oil boom of the 70s, the oil industry has become the backbone of the Nigerian economy, accounting for over 90% of the total foreign exchange and nearly 80% of government revenues.
Oil and Gas Journal (1/1/05) estimates Nigeria’s proven oil reserves at 35.2 billion barrels, with the majority of oil found in numerous, small producing fields in the swamps of the Niger Delta.
Nigeria’s crude oil reserves have gravities ranging from 21 o API (American Petroleum Institute) to 45 o API; and approximately 65 percent of crude oil production in the country is light (350 API) and sweet (low sulphur content).
The main export crude blends are Bonny Light (370 API) and Forcados (31 o API), with majority of the crude exports destined for markets in the United States, Western Europe and more recently, Asia and Latin America.
As a member of OPEC, the global oil cartel, oil production in Nigeria fluctuates in line with the cartel’s response to world oil supply. Currently daily production (since August 2004) is estimated at an average of 2.5 billion barrels per day (bbl/d) of which 2.3 billion barrels us crude oil.
Although Nigeria has substantial oil wealth, it is one of the world’s poorest with more than 70 percent of the population living in poverty.
The failure of successive governments to shift Nigeria’s heavy dependence on oil sector revenues to other sectors of the economy resulted over time in an overall economic depression, such that June 1999, when a new democratically elected government led by Chief Olusegun Obasanjo was inaugurated, the economy had become stagnant.
A number of reforms intended to revive the economy and promote growth in all sectors, was subsequently introduced by the Obasanjo administration among which was deregulation of the downstream oil sector.
The down stream sector, which covers the refining, petrochemical and transportation areas of the oil industry, is controlled by government and indigenous operators and is one area in which government has made considerable investment over the years.
The sector has however been a major problem for the country over the past 4-5years, as the NNPC (Nigerian National Petroleum Corporation) has found it increasingly impossible to maintain the country’s refineries and provide adequate supply of P.M.S. (Premium Motor Spirit or petrol), diesel (Automotive Gas Oil) and kerosene nationwide.
Factors such as low capacity utilization of the country’s refineries and petrochemical plants in Kaduna and Port Harcourt; the neglect and repeated vandalization of state-run petroleum product pipelines and oil movement infrastructure nationwide; the colossal damage of institutionalized corruption; the disturbing emergence of a local mafia that controls and coordinates crude oil; illegal bunkering nationwide, large-scale cross-border smuggling of petroleum products; a non-commercial pricing environment and lack of resources to maintain and manage the resources properly, have all accounted for the dismal performance of the downstream oil sector, hence, the need for deregulation of the sector.
The focus of the government’s deregulation policy (which seeks to remove government control and allow for privatization of the state owned entities) can be summarized as follows; to maintain self-sufficiency in refining, to ensure regular and uninterrupted domestic supply of all petroleum products at reasonable prices and to establish infrastructure for the production of refined product for exports.
Significantly, since the adoption of the deregulation policy in the downstream oil sector, the oil industry has witnessed a number of changes.
In August 2004, Nigeria announced that it would require crude oil producers to refine at least 50 percent of their production in the country at exiting refineries by 2006. The plan is expected to save NNPC the $2 billion per year that it currently spends in oil imports and guarantee supply to Nigeria’s four government owned refineries.
Nigeria’s refining capacities is currently insufficient to meet domestic demand, and the country is reliant on imported petroleum products. At the end of 2004, because all four refineries were operating below capacity, the government enacted a 20 percent reduction in refined import in 2005.
Presently, the country’s four refineries: Port Harcourt I and II, Warri and Kaduna, are due to be sold along with the NNPC’s numerous petrochemical plants and its Pipelines and Products Marketing Company (PPMC).
This follows a fresh bid by the Bureau of Public Enterprise (BPE) to sell controlling shares in downstream assets of the NNPC, which include the four refineries, and the Eleme Petrochemicals Company limited in Port Harcourt, Rivers State.
Already, Oando Plc, one of the six major oil-marketing companies, has signified interest and is said to be currently bidding for the Nigerian government’s controlling stake in the Port Harcourt Refining.
The indigenous fuel marketer was very recently among the few largely independent oil operators that participated in a “bidders forum” held in the United Kingdom by BPE privatization Advisers, Credit Suisse First Boston (CSFB), for the re-launch of the privatization process for the Port Harcourt Refinery, which was first launched in November, 2003.
Similarly, the Federal Government has opened negotiations with Libyan, Indian and Chinese investors, following the reluctance of multinational oil companies to invest in refinery privatization. It will be recalled that attempts to privatize the Port Harcourt refinery in 2004 elicited no bids form oil majors, who claimed that the operating environment in Nigerian was not conducive for refinery business.
Plans are also underway for the development of several, small independently owned refineries, for which the Federal Government has already approved licenses to 18 private investors. Recently, the President/Chief Executive Officer of Zenon Petroleum and Gas Mr. Femi Otedola, announced that his company has raised $100m for the setting up of a refinery in the country in a joint venture with Transnational Corporation of Nigeria.
According to Mr. Otedola, whose company is a major importer of diesel, the signing of a Memorandum of Understanding (MOU) with Transnational will lay the foundation for a joint venture to build a 400,000bpd petroleum refinery, which has been planned to be executed in two phases.
“This venture typifies the government’s efforts to deregulate the downstream sector of the Nigerian, petroleum industry and its drive to encourage the creation of competitive, indigenous companies to supply petroleum products capable of competing in the international markets” he said.
In a related development, the Federal Government is said to be planning for three new refineries to come on stream by 2008.
The $1.5 billion tower refinery in Bayelsa State appears set to be the first private refinery in Nigeria, with a planned critical capacity of 100,00 bbl/d.
The other two refineries - Phase I and Phase II of the Amake Modular Refinery are located in Eket, Akwa Ibom State, and the U.S. Export-Import Bank has agreed to provide a loan guarantee for $10 million of the $29.8 million total cost of the 120,000-bbl/d Modular Refinery.
Production at Phase I of the refinery is expected to begin this year while Phase II of the Amake refinery, which will allow for another 6,000-bbl/d distillation unit, is expected to be operational in mid-2006.
These developments are however not restricted to the downstream oil sector alone. The upstream oil sector, another key player in the Nigerian oil industry is equally undergoing a series of reforms in line with the on-going deregulation of the downstream oil sector.
In August 2004, the finance minister, Ngozi Okonjo-Iweala announced plans by the Nigerian Government to produce 2.6 million bbl/d in 2005, which it plans to increase to 3 million bbl/d in 2006 and 4 million bb;/d in 2010.
Following the announcement, the NNPC estimated that $7 billion per year would be required to fund exploration and field development in the hope of reaching its production targets.
A new licensing round offering 61 deepwater and inland oil blocks in the Gulf of Guinea was subsequently launched in March 2005. An additional 14 oil blocks were added to the bid portfolio last month, bringing the total number of oil blocks on offer by the Federal Government to 75.
So far, 165 multi-national and local companies have picked up bid packages to seek allocation of the 75 oil blocks with some of the companies picking up more than one package.
Top indigenous companies such as Alhaji Aliko Dangote’s Equity Energy Resources (EER). Dr. Mike Adenuga’s Conoil, Femi Otedola’s Zenon Petroleum Company and Walter Smith’s Petroman (promoted by Mallam Isa Abdulrasaq), are leading the local challenge for the oil blocks, in which a total of 31 indigenous companies have already applied.
The five traditional multi-national oil companies, namely Shell, ExxonMobil, Chevron, Total and Eni, are also in the race for the licenses, and about seventy Nigerian Companies have also applied to be allotted 10 percent equity in the blocks under the Federal Government Local Content Vehicle (LCV) policy.
While the race for acquisition and exploration of oil blocs continue, giant strides are equally being taken in the area of field development.
In October 2001, ChevronTexaco announced that it would invest $2.5 billion in Nigeria in 2005 developing the Agbami field, (which is scheduled to come on stream in late 2007), and a number of natural gas projects.
The Agbami field, which contains 1 billion barrels of recoverable hydrocarbons, is located 70 miles form Nigeria’s coast, with majority of the field lying in Oil Mining Lease (OPL) 216 and one-third of Agbami lying in the adjacent block OPL 217.
In December, 2004, NNPC concluded negotiations on a $4 billion contract for development of the Agami field and in February 2005, it awarded ChevronTexaco a $1 billion contract for the construction of a floating production, storage and offloading vessel (FPSO) in the field, which will be undertaken by Daewoo Shipping and Maritime Engineering (South Korea).
The FPSO is expected to export up to 250,000 bbl/d of oil and 450 million cubic feet per day (Mmcf/d) of natural gas.
Similarly, the development of ExxonMobil’s offshore Erha oil field is being estimated to cost $2.6 billion. The field, located on OPL 209, is due to come on stream at a rate of 150,000 bbl/d in early 2006, while Shell’s deepwater Bonga field, estimated to hold reserves of 1.2 billion barrels is expected to begin production in 2005, although the NNPC announced in October 2004 that no 2005 quota would be allocated to Shell for oil production in the Bonga field because of uncertainties concerning production.
Very recently, specifically on the 18th of July 2005, the Federal Government, represented by NNPC and the management of ELF/Total, led by the Managing Director of Total Nigeria Plc, Mr. Jacques Marraud des Grottes, signed a Memorandum of Understanding for the take-off of the drilling exercise on Oil Prospecting Lease (OPL) 223, which was awarded to Total in 2003.
The signing of production sharing contract (PSC) exercise-one of the two major funding arrangements the Nigerian Government has for oil production in the country, which was supervised by the Petroleum Resources Minister of State, Dr. Edmund Daukoru, was also witnessed by the Presidential Assistant on Petroleum and Energy Matters, Alhaji Ja’afaru Kpaki, the Group Managing Director (GMD) of the NNPC, Mr. Funso Kupolokun and other management staff of the corporation. The pact includes a 30-year concession comprising an initial 10 years of exploration and 20 years after conversion from OPL to OML (Oil Mining Lease).
Describing the oil bloc as lucrative, especially since it was adjacent to OPL 222, another equally lucrative oil bloc, Dr. Daukoru said, “I have seen the presentations where some of the features in OPL 222 actually started in OPL 223” adding that ”It (OPL 223) has so many features, almost every square metre is a potential oil discovery, so I have no doubt that 223 will prove to be equally highly prospective”.
Development is also occurring in the waters surrounding the Joint Development Zone (JDZ) shared by Nigeria and neighbouring Sao Tome and Principe (STP). In March 2005, Spinnaker Exploration (US) purchased a 12.5 percent interest in OPL Block 256 from Ocean Energy, a subsidiary of Devon Energy. Drilling of the Tari 1 exploratory well at OPL Block 256, located 125 miles off the Nigerian coast near the JDZ, has commenced. Three wells are planned for the block.
Even though 6 major joint venture operators, which are all foreign-based, dominate the oil industry, the Nigerian Government has tried, to a very large extent to encourage indigenous participation in the sector, through its Marginal Field Development Programme (MFDP).
MFDP provides tax breaks and government incentives to encourage local content in the oil sector, which the government is planning to increase from 15 percent currently to 50 percent by 2007 and 70 percent by 2010.
In November 2004, 16 indigenous companies acquired possession of marginal outfields from SPDC (Shell Petroleum Development Company) under the MFDP. The fields estimated to hold 150-200 million barrels of oil, are part of the 24 fields offered for sale in 2003. First oil from the fields is expected in November 2005.
The Chinese firms are also becoming increasingly involved in the Nigeria oil sector. For instance, in December 2004, Sinopec (China) and NNPC signed an agreement to develop the Nigeria Delta’s OML 64 and 66, with production expected to commence in late 2005. Of the five exploration wells drilled in OML 64, one encountered hydrocarbons, while 12 of 16 wells drilled in OML 66 encountered hydrocarbons.
The issue of deregulating the downstream oil sector has however not been without some degree of opposition, given the grueling socio-economic impact the exercise is having on the generality of Nigerians.
Since President Olusegun Obasanjo’s assumption of office in 1999, he has left no one in doubt as to his direction concerning petroleum products. From N22 per litre in 1999 when his administration was sworn in, Nigerians now pay around N65 Naira per litre of petrol. Diesel is sold for a little higher while kerosene sells for under N60 Naira.
Insisting that Nigerians must pay commercial prices for petroleum products, the President hinged his argument on the fact that, firstly, the bulk of fuel used in Nigeria is imported and secondly, that subsidy was only aiding the corrupt practices of a few who were smuggling the products to neighboring countries of Niger, Chad, Cameroon and Benin Republic.
Faulting the President’s arguments, organized labour led by the Nigerian Labour Congress (NLC) and other antagonists of full deregulation said that Nigerians had no economic capacity to pay international price for petroleum products.
They equally faulted the argument over smuggling because to them, it meant punishing poor Nigerians for the failure of government officials and/or their corruption for failing to check smuggling, and that explained why no smuggler has been arrested and prosecuted.
The diametrically opposed views held by the Federal Government and organized labour subsequently crystallized into a series of face-offs and counter measures between the two parties. This was clearly shown by the NLC and its allied forces’ regular calls to Nigerian workers to “down tools and sit-at-home” in protest of the Federal Government’s arbitrary fuel price hikes.
In the year 2004, the NLC ordered its workers to “sit-at-home” on two separate occasions, both of which were complied with, with the attendant result that there was a general economic lull, particularly in Lagos, the commercial nerve centre of the country.
The war was far from over as the Federal Government subsequently made moves to muzzle the NLC which it saw as more of a nuisance, while the NLC on the other hand, made it a point of duty to be a thorn in the flesh of the Federal Government.
Interestingly, despite the cat and mouse game, played by both parties at the initial stage, the Federal Government has more or less succeeded in getting Nigerians to pay for fuel at cut-throat prices.
With the phased removal of government subsidy and fluctuating international oil market prices, the ordinary citizen is now at the mercy of both the oil marketers and the Federal Government, for whom just another arbitrary increase may mean nothing, forgetting that an inversely proportional relationship presently exists between the fuel price hikes and the purchasing power of the domestic consumer of these petroleum products.
It has been argued in many quarters that the Government should become more sensitive and realistically attuned to the plight of its ordinary citizens. Though to be fair to the Government, it has tried hard not to increase the pump price of kerosene to anything close to the prices for petrol and diesel. Kerosene is almost exclusively used by the poor in the country. For a privileged few, a regular hike in fuel pries will mean nothing. However, with a vast majority of Nigeria’s population living in abject poverty and dependent on at least one or two of these petroleum products, every non-cushioned hike will mean having to rearrange their list of priorities to accommodate the new hikes on a relatively lean economic purse, with dire consequences.
With an arbitrary increase in fuel prices, transportation fares go up, which in turn lead to an increase in the prices of food and services, all of which will invariably plunge the ordinary citizens into further economic hardship.
The picture becomes grimmer when on a visit to several high-density areas of Lagos State and several rural areas, one is confronted with the regular sight of firewood and charcoal being used to cook food with its attendant health risks and potential green-house effect.
All these factors, coupled with years of mismanagement of the Government-owned NNPC and its subsidiaries, as well as the increasing restiveness of the Niger Delta region, bring to mind the following questions: in the post-deregulation era of the downstream oil sector, would Nigeria’s flirtation in the recent past with fuel scarcity be consigned to history?
Would the ordinary citizen truly enjoy the benefits of a privatized downstream oil sector within the Nigerian context? Would the oil industry continue to remain the mainstay of the Nigerian economy?
The answers to these questions will be unveiled in due course.
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