Since the oil crisis of the mid-1970s, Nigeria’s oil and gas industry has grown to become the single largest contributor to Nigeria’s economy, turning over about $25bn annually and accounting for more than one-fifth of gross domestic product (GDP). Soaring oil prices over recent years have seen the Nigerian government reap a revenue windfall. By the end of 2005, high oil prices had propelled Nigeria’s foreign exchange reserves to $28bn, up two-thirds from the $17bn recorded a year earlier, enabling the government to pay down Nigeria’s huge foreign debt and invest in some strategic infrastructure improvements.
However, oil has been far from an unqualified boon to the Nigerian economy, with vast swathes of revenue lost to corruption over the years. The World Bank estimates a paltry one-fifth of oil revenues benefit the population as a whole, while the remaining four-fifths go into the pockets of an elite 1% of the population. Oil wealth has also underpinned the naira, encouraging consumers to depend on cheap imports and hindering more balanced trade and broader development of the domestic economy.
Once a major exporter of cocoa, groundnuts, palm oil and rubber, Nigeria’s production of these commodities plummeted as capital and entrepreneurs were sucked towards more lucrative opportunities in oil. Likewise, Nigerian manufactured goods, not least in the once thriving pharmaceuticals and textiles sectors, became increasingly uncompetitive in their long-established regional markets.
Meanwhile, at a political level, the division of oil revenues has been the subject of continual disputes between the federal government and various states, with issues of fiscal discipline competing with demands for greater public sector investment. At the same time, the ready availability of crude oil has spawned a lively and large-scale illicit bunker trade in the Niger Delta region, while local political disputes and the relative scarcity and high prices of refined products, such as gasoline and kerosene, have driven countless small-scale thefts of crude oil from illegally tapped pipelines.
Reserves and production
Nigerian crude, from 10 main streams (including condensate), is mostly light and sweet. The premier stream, Bonny Light blend, is particularly attractive to refiners worldwide and sells at a premium to Brent and West Texas Intermediate grades on the international market, as does the slightly heavier Qua Ibo. Other commonly shipped Nigerian grades include Forcados and Brass River crudes.
Proven oil reserves were estimated at about 36 billion barrels in 2006. Most lie in the swamps of the Niger Delta, spread across several hundred small onshore and offshore deposits of typically less than 50 million barrels each. With the exploration of scores of new small fields, reserves are forecast to reach 40 billion barrels by the end of 2010.
In January, output averaged 2.25 million barrels of oil per day (bpd), almost as much as produced by Kuwait or the United Arab Emirates and exactly in compliance with the country’s current Organisation of the Petroleum Exporting Countries (Opec) quota. However, in recent years, Nigeria has regularly been chastised by Opec for over-production. The government forecasts output could rise to four million bpd within three years, a target that could prompt a resumption of disagreements with Opec and will present a formidable diplomatic challenge for Edmund Daukoru, Nigeria’s minister of state for petroleum resources, who was appointed Opec president in 2006.
The major foreign investors in Nigeria’s oil industry regard the Opec quota as unrealistically low, holding back production at several of the new deepwater oilfields. It remains unclear whether Mr Daukoru will be able to forge a new settlement within Opec allowing Nigeria to expand production. If not, quota-busting is likely to continue as long as the oil price remains high.
Nigeria is the world’s eighth largest oil exporter, shipping crude from six onshore terminals and various offshore floating production, storage and offloading vessels (FPSOs). The US is the destination for about two-fifths of Nigerian exports, with Europe accounting for much of the rest. Demand is also increasing from Asia and Latin America. Over recent years, oil has consistently accounted for more than 95% of export earnings and some three-quarters of government revenues.
Since 2004, the government has been making strenuous efforts to expand domestic refining capacity. In 2003, only one-sixth of the country’s gasoline needs and less than half its kerosene consumption could be supplied by Nigerian refineries. The government’s stipulation to crude oil producers that, by the end of 2006, at least 50% of their production had to be refined in country is designed to squeeze out imports of refined products and has led to a slew of new refinery construction.
Three new refineries are scheduled to come on stream by the end of 2008, with 13 other private sector refineries already licensed for construction.
Foreign investors
The Nigerian National Petroleum Corporation (NNPC) estimates that oil exploration and development will need annual investment of at least $7bn for several years if Nigeria is to reach its medium-term production targets. Much of this is likely to come from abroad. Major oil and gas projects are typically operated as joint ventures between large western multinationals, with the latter providing the technical expertise and the NNPC being the majority shareholder. The largest joint venture is Shell Petroleum Development Company (SPDC), in which NNPC has a 55% stake, Shell 30%, Total 10% and Agip 5%. SPDC operations have an output capacity of 1.3 million bpd, but under current Opec quotas they are restricted to less than one million bpd.
ExxonMobil’s 90 offshore platforms, with an output capacity of 720,000 bpd (including condensate and natural gas liquids), make it the second largest oil producer in Nigeria. Chevron, Agip, Total, ConocoPhillips and Petrobras, among others, also operate or have financial stakes in onshore and shallow offshore production facilities in the country.
Since 1993, in a bid to offload the costs of funding new exploration of deepwater projects, the government has also offered a handful of 30-year production sharing contracts (PSCs). Under these, NNPC licenses exploration blocks to contractors and the contracted company is entitled to recover exploration and development costs from any discovery before being required to share profits with NNPC.
PSCs awarded to Shell for five deepwater blocks yielded major finds in 1999, 2001 and 2002, resulting in the development of the Bonga and Bolia fields with ExxonMobil as a minority partner. Production at Bonga, which began in 2005, is expected to peak at about 225,000 bpd. ExxonMobil and Shell also have stakes in the deepwater Erha PSC. Meanwhile, development drilling by Chevron under a PSC for the deepwater Agbami field is expected to continue into 2009.
At an estimated 5200 billion cubic metres, Nigeria’s proven natural gas reserves are the seventh largest in the world and subject to ambitious development plans. By 2010, the government expects revenues from natural gas exports, unconstrained by Opec production quotas, to be half those of full-capacity oil exports, but to achieve this it will need to attract $15bn of private investment.
Shell, with a long history of involvement in Nigeria’s liquefied natural gas (LNG) sector and a 26% state in the Nigerian liquefied natural gas (NLNG) joint venture with NNPC, Total and Agip, heads the field in gas investment. NLNG’s first two gas trains at its Bonny Island facility in the Niger Delta region began producing gas for export to Europe and the US in 1999. A third train was commissioned in 2002, bringing capacity up to 10 million metric tonnes (T) per year and catapulting Nigeria into the major league of global LNG players. Fourth and fifth trains commissioned in 2006 increased capacity to 17 million T per year, while a giant sixth train due to come on stream in 2007 will boost output to 22 million T per year.
Gas for LNG trains is presently sourced from non-associated gasfields, but this will soon change. Until recently, Nigeria’s oilfields with associated gas deposits were responsible for 20% of gas flaring worldwide, but the government plans to end flaring in 2008, instead sending the gas for liquefaction at Bonny Island and elsewhere.
The government is keenly driving forward several other LNG projects. A $12bn Chevron-led joint venture with NNPC, BG and Shell has been formed to build a four-train plant at Olokola in western Nigeria, due to begin shipping in 2009, with its full 22 million T capacity available from 2010. Also under consideration is a joint venture between ConocoPhillips, Chevron, ENI and NNPC to construct an LNG facility at Brass River at a cost of $8bn, scheduled to come on stream in 2009.
Besides LNG trains, the government is also developing gas pipeline projects to supply regional and European markets. The West African Gas Pipeline (WAGP), due to be commissioned by mid-2007, will supply 16.4 million cubic metres of gas daily to Benin, Togo and Ghana. Meanwhile, the $7bn Trans-Saharan Gas Pipeline, which would carry natural gas 4000 kilometres from Nigeria’s Delta region to Algeria’s Beni Saf export terminal on the Mediterranean coast, remains under study and is likely to take six years to build.
Politics and security
Since the end of 2005, politically and criminally motivated groups in the Niger Delta have stepped up the tempo of their violent attacks on oil company personnel and infrastructure in an attempt to wrest resources and influence from the federal government. Incidents have included multiple kidnappings of expatriate workers, sabotage of pipelines and other armed attacks.
As a consequence, operations at some existing production facilities have been brought to a temporary halt – notably Shell’s oil exports from the Forcados terminal – while final investment decisions on the Brass River and Olokola LNG projects, due last year, have been deferred and some other projects slowed down. A clearer indication of how these issues might be resolved can be expected once the forthcoming elections are over.
