Important as it may be to wean Nigeria off its dependence on oil, the black gold and, increasingly, gas will be the mainstays of the economy for a long time. Presently, oil output accounts for 40% of GDP, 95% of foreign exchange earnings and 70% of fiscal revenue. The country is the largest oil producer in Africa and the sixth largest oil exporter in the world with a crude oil output of more than two million barrels per day (bpd).
To develop the sector, the government has embarked on ambitious plans to raise production and increase reserves of oil, commercialise the country’s significant gas potential, and restructure the Nigerian National Petroleum Corporation (NNPC), the country’s state-owned oil company.
Production target
The government has set a goal of raising oil production by half to 4.5 million bpd by 2010 and reserves by almost a quarter to 40 billion barrels. According to the NNPC, it and its six multinational joint venture partners will require about $7bn yearly to fund oil exploration activities to meet the government’s oil output target. To cover its equity holding in joint ventures, the government would have to cough up $4bn a year.
The Nigerian government holds an average 57% share in the six joint ventures with Shell, Mobil, Chevron, Agip, Elf and Texaco.
“Funding definitely is a challenge. If we leave things the way they are and we do nothing in the industry, we will go down rapidly to something like one million bpd by 2007,” says NNPC group managing director Funsho Kupolokun. So far this year, the government has approved just $3.2bn for investment – indicative of the funding gap between targets and reality.
Recognising that funds will have to be sourced in the capital markets – and will be priced in relation to risk – Mr Kupolokun has thrown himself into the job of restructuring and improving the operations of the creaking NNPC. He wants to transform it into a globally competitive, integrated oil and gas company to rival the likes of Brazil’s Petrobras, Malaysia’s Petronas and Norway’s Statoil, where synergies from diversified operations are adding value and improving operating margins. Accenture and Shell’s Global Solutions unit will advise on the restructuring.
For 33 years, the NNPC has been involved in the upstream and downstream sectors of the industry, managing the Nigerian government’s investments in the oil and gas industry. Its track record has been dismal.
Whereas Petrobras produces 1.7 million bpd, NNPC pumps out just 25,000 bpd. Statoil operates in 25 countries; NNPC has not yet moved out of Nigeria. Possibly the worst indictment is that NNPC’s four refineries operate far below capacity, necessitating the importation of 70% of Nigeria’s refined product demand. With its two refineries, Petronas is able to serve Malaysia’s needs and export surplus output.
“We must be honest with ourselves: the company’s scorecard shows poor overall performance in almost all aspects,” says Mr Kupolokum.
Mr Kupolokun, a tough-talking reformist hand-picked by the Nigerian president, Olusegun Obasanjo, to head up NNPC in November last year, will have to provide more than just words to sceptical analysts. He faces a huge challenge with ingrained corruption in the industry, previous failed attempts to restructure NNPC and general turmoil in Nigeria.
“I am sure the Nigerian government will go ahead with the change as it fits in with its overall strategy, but the NNPC is not going to become Saudi Aramco (Saudi Arabia’s well-regarded state run oil company) overnight. It will take a long time for the company to become efficient,” said David Cowan, senior editor at the Economist Intelligence Unit, quoted on the newswires following the recent announcement of the restructuring.
Mr Kupolokun, a former special adviser to the president, showed his mettle when he deregulated the downstream oil sector in the face of ardent (and ongoing) public protest. He is confident. The difference this time, he says, is that the Nigerian government supports the plan.
New rules
Other government moves include a draft resolution that will compel the oil majors to refine at least 50% of their output locally by 2006. Also a draft policy Act to guide investments and operations in the gas sector has been drawn up. Included are provisions exempting would-be investors in the gas sector from payment of royalties, certain taxes and levies. The government is aiming to increase gas revenues to levels on a par with oil revenues, driven by the 2008 deadline to end all gas flaring.
In July, NNPC and its three multinational joint venture partners agreed to fund the construction of the sixth train (production line) of the Nigeria Liquefied Natural Gas (NLNG) project at a cost of $1.6bn. The NLNG plant began production in October 1999 with two trains, while the third train was added in November 2002. Trains four and five are due to come on stream in 2005. NLNG’s other long-term customers are located in Italy, France, Turkey, Spain and Portugal.
“Liquefied natural gas (LNG) production in Nigeria took about 30 years to get off the ground, but since first production in 1999, the rate of growth has been the fastest in the history of the LNG industry,” Andrew Jamieson, managing director of NLNG told local reporters.
The LNG expansion will provide a further outlet for associated gas that is now being flared in the oil fields scattered around the Niger Delta, as well as helping the producers to meet the gas flare out deadline of 2008.
Despite the richness of potential, Nigeria’s oil and gas industry is not without major snags. For one, the industry is plagued by attacks by criminal gangs and activists trying to extort company pay-offs. Last year, 97 expatriates and 170 Nigerians were held captive during a wildcat protest by some Nigerian staff that lasted for weeks. Political and ethnic violence has also disrupted crude oil production in the restive Niger Delta, where US-owned ChevronTexaco has been forced to cut production of 144,000 bpd since March 2003.
And labour relations are seldom smooth. Recently, Total’s subsidiary shut down oil and gas production in Nigeria in the face of a strike threat that raised what a company spokesman described as management fears for the “safety of life and property”. At about the same time, ExxonMobil’s subsidiary said its workers issued a work-to-rule ultimatum when labour negotiations became deadlocked. At NNPC, a pension dispute and fears of job losses related to privatisation led to threats of a walk-out. And workers from Nigeria’s two major oil unions threatened strike action unless local workers received “conditions and pay comparable to those” of expatriate Europeans and Americans.
Strategic attraction
Despite this, investment is still pouring into the country. The strategic importance of West Africa, in particular to the US to diversify energy supplies away from the Middle East, means that whatever the challenges, oil companies are eagerly drilling. High prices plus advances in technology that improve the viability of deep-sea wells mean that risks can be mitigated.
Concurrently, oil companies are adopting a more proactive approach to managing relationships in Nigeria. Shell recently appointed a Nigerian to head its subsidiary in the country – a move that the unions welcomed.
With government commitment to developing the sector, strong investor interest and favourable global demand factors, the weakest link in the chain is NNPC. If Mr Kupolokun succeeds in turning the company around, the prospects for Nigeria’s oil and gas sector will brighten considerably.
