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Nigeria’s oil and gas conundrum

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Nigeria’s oil and gas industries could see a revival because of geopolitical tensions, despite many commentators regarding it as sunset industries. Image credit: Zbynek Burival from Unsplash

Nigeria’s oil and gas conundrum

Although a significant oil and gas windfall couldn’t kickstart the faltering Nigerian economy, it has emphasised the importance of this sector, not only for Nigeria, but for the whole of Africa.

By Leon Louw, owner and editor of WhyAfrica

Amid tragic death and destruction in the Ukraine, Russia’s warmongering has resulted in a serious squeeze on global oil and gas supply. While international sanctions have crippled Russian producers, the supply shortage has turned the global energy transition on its head.

Although the green energy drive weaned Western European nations from their fossil fuel addiction, the transition to renewables happened so fast that they were forced to find temporary alternatives. In their haste to do so, several countries invested in gas from Russia through the Ukraine. When the Russian-Ukrainian crisis thus erupted earlier this year, more than 40% of Europe’s gas was sourced from these two troubled countries. When the bombings in the Ukraine started, the oil and gas price headed north on the back of reduced supply.

Skyrocketing oil and gas prices gave African producers a significant boost in the first half of 2022. It also made oil and gas producing countries like Nigeria ponder the possibility of increasing production while the world was in a whorl. While it is highly unlikely that hostilities in the north will prompt investors to re-visit funding strategies immediately, a prolonged regional, or worse still, a global war, is bound to change their anti-hydrocarbon stance.

Meanwhile, Europe will be looking to de-risk their current oil and gas supply, which could play into the hands of African countries like Nigeria, Angola, Algeria, and Morocco. Nigeria recently developed a comprehensive roadmap to increase its natural gas production, diversify away from an oil-reliant economy, and to supply an increasingly gas-thirsty international market.

Even before the Ukrainian crisis, Algeria revived its plan for a trans-Saharan Gas Pipeline, which will run from Nigeria, through Niger, into Algeria. The pipeline will make gas exports to Europe simpler for all three these African countries. Algeria is already linked with a line to Italy, while Morocco is contemplating the construction of a subsea gas line to Spain.

According to NJ Ayuk, Executive Chairman of the African Energy Chamber, Nigeria has massive gas reserves that could solve the European energy and gas crisis. However, structural constraints and inefficiencies have hampered Nigeria’s oil and gas production and export. In fact, despite its massive potential, the country has serious energy shortages itself. But there is unlimited potential, not only in the oil and gas space, but across the entire energy spectrum, including renewables.

Is Nigeria moving away from oil?

The Nigerian economy has been reliant on oil production since the first oil fields came on stream in 1958. Oil was discovered in Nigeria in 1956 at Oloibiri in the Niger Delta after half a century of exploration. The discovery was made by Shell-BP – at the time the sole concessionaire.

According to Ayuk, the country has made significant progress in moving away from an oil- based economy to a gas-based economy. In addition, the government has been promoting Nigeria’s mineral resources to attract the world’s major mining houses. However, for the country to become a serious gas producer, it needs more investors. “To attract more investors, regulations and policies are important. The recent passage of Nigeria’s Petroleum Industry Act (PIA) is a move in the right direction, but implementation is key. The government needs to fast track the implementation of the PIA, and this will give investors more confidence. Remember, capital goes where it feels welcome.”

Nigeria’s Petroleum Industry Act

The long-predicted drop in oil investment finally enabled the government to pass the redrafted PIA after two decades of trying.

The act sets out new terms of investment on both exploration and production, while offering more commercial rates for natural gas production to ensure that gas is marketed within the country rather than being flared. Moreover, the Act brings renewed certainty to oil and gas royalties and taxes. On the other hand, hopes that the PIA would require oil and gas companies to pay 10% of revenue to host communities, were dashed when the new law made provision for just 3% – a big disappointment to campaigners.

Abuja has set a target of boosting oil production from an average of about 1.6 million barrels per day (b/d) at present to 4 million barrels per day (b/d) because of the PIA’s passage. Whether this is possible remains to be seen. The new Act is a good sign though. It has jolted the government into action to exploit its resources properly before the world turns its back on fossil fuel for ever.

Nigeria’s gas potential 

Despite a move away from fossil fuels, Nigeria’s economy will not transform overnight, and will continue to be reliant on its massive oil and gas reserves for at least another decade or two. The importance of gas in this transition was emphasised by Yemi Osinbajo, the Vice President of Nigeria, when he addressed delegates at the World Economic Forum’s Davos Summit earlier in the year. In his speech, Osinbajo called for natural gas to be accepted as a transitional fuel.

“For many gas-rich African countries, one of the biggest shocks is the notion that fossil fuels including gas should be defunded, especially by international financial institutions,” he said.

“We think that gas as a transition fuel is absolutely crucial, not just for an effective transition but also for our economies,” Osinbajo added.

He made it clear that gas is “without doubt the only pathway” for Africa to transition out of more hazardous fuels such as coal and heavy oil.

Osinbajo claimed that Nigeria is “probably the first country in Africa to develop an energy transition plan and to cost it out”. The plan, which he said will be launched in the next couple of weeks, includes connecting 5 million homes to solar power, requiring more foreign investment in manufacturing panels and components.

Despite the enormous challenges of tackling Covid-19, climate change and terrorism, Osinbajo remained upbeat about economic prospects for Africa and Nigeria. The sub-Saharan economy grew by 3.7% in 2021 and is projected to continue on this trajectory into 2022. Nigeria’s National Development Plan 2021-2025 envisages investments totalling USD840-billion, of which 86% is expected to come from the private sector. A lot of this money will be invested in new deep-sea and offshore oil and gas projects and also in Nigeria’s marginal oil fields.

Nigeria’s marginal oil fields

Although the oil majors still play an important role in the Nigerian landscape, this is slowly changing as global giants start divesting their international fossil fuel exposure to reduce their environmental impacts. This has left a gap for a new breed of local, Nigerian companies to claim a stake in the lucrative oil and gas sector.

Royal Dutch Shell recently started talks with the Nigerian government to sell down its interest in onshore oilfields. Shell plans to divest all its operated joint venture licenses held by the Shell Petroleum Development Company.

According to consultancy Wood Mackenzie, independents and new entrants in Nigeria are eager to acquire under-invested assets with plenty of volume upside. “Playing at home, their acceptance of risk differs markedly from international exploration and production companies.”

Nigeria has several small, well-developed local companies that are nimble and more focused on operational issues than the large International Oil Companies (IOC). This makes it possible to reduce costs and increase efficiencies.

There are also several smaller international players that are looking at Nigeria and other parts of West Africa. These include Afentra, an Africa-focused company led by Paul McDade, former CEO of Tullow Oil and PetroNor E & P, a sub-Saharan focused independent oil and gas company listed in Oslo, Norway. PetroNor E & P holds offshore licenses in West Africa including in the Republic of Congo, The Gambia, Guinea-Bissau, Senegal and in Nigeria, where it is developing the Aje Field.

According to Ayuk, smaller companies will pick up the crumbs and keep the industry alive. “The cost of production is exorbitant for big international players, and they have massive overhead costs. New entrants run tight ships and are able to increase production rapidly. The local players are doing really well in Nigeria and we’ll see it increasingly becoming a trend across West Africa.

According to Ayuk’s book Billions at play – the future of African Energy and doing deals, Nigeria began looking into marginal field development in the 1990s after a number of international majors declined to develop some sites they had been awarded, saying that the reserves in question were too small to warrant their attention. “In 1996 the government amended existing legislation to identify these sites as marginal fields and encourage their development by Nigerian companies. It spent the next few years developing guidelines for licensing and then launched the first round of bidding for 24 fields in 2003. Since then, it has handed a few more sites over to local investors, bringing the total number of marginal fields under development up to 30.

“Nigeria’s marginal field initiative ought to be counted as a success. It has given more than 30 locally-based companies the opportunity to establish themselves and develop their capacities as upstream operators. It has allowed them to do so without assuming the risks (or the costs) of exploration, since all the fields designated as marginal were confirmed discoveries, surveyed and tested by foreign companies, and known beyond a shadow of doubt to contain hydrocarbons,” says Ayuk.

Ayuk says that Nigeria’s oil potential is massive, and its gas reserves are immense. “There are massive deals waiting to be signed this year,” says Ayuk. As the world’s funders turn their backs on oil projects, Nigeria is readying itself to sign two or three large billion-dollar oil deals.

Leon Louw is the founder and editor of WhyAfrica. He specialises in natural resources and African affairs.        

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