Nigeria: The Present And Future Of Nigerian Energy

Last Updated: 24 September 2012
Article by Robert Hamill and Simon Allison

Keywords: onshore, oil, gas, Niger Delta, PIB

This year there have been a number of acquisitions and proposed acquisitions of onshore oil and gas assets in Nigeria. In August 2012, Eland Oil & Gas completed the indirect acquisition of a 45 percent interest in OML 40, an onshore oil and gas license area in the Niger Delta, from sellers including a subsidiary of Shell. Heritage Oil and Afren have also acquired onshore assets in Nigeria from Shell in the recent past. Such onshore assets have been typically underdeveloped by incumbent license holders. These recent activities indicate that independent operators now have the confidence to seek to acquire interests in these onshore license areas. So, in the most petroleum-rich nation in Africa (with estimated reserves of between 16 and 22 billion barrels) why are these recent activities particularly noteworthy?

The problems faced by oil and gas operators in onshore areas such as the Niger Delta have been well documented, with some reports estimating that nearly 200,000 barrels of oil are stolen each day from pipelines and wells by criminal gangs, in a practice known as "bunkering."

Oil and gas exports account for 77 percent of Nigeria's revenue. Thus, declining output prompted by theft and violence in onshore fields, which also pose a risk to future investment, is a significant problem for the Nigerian government.

The government of Nigeria has initiated policies that aim to deter further theft and violence and to address some of the underlying disenfranchisement issues. For example, the government has recently increased the frequency of military patrols in affected areas (such as the Niger Delta), with some success. However, the government seems to have abandoned its attempts to outsource this security mission to private contractors after experiencing domestic political criticism.

Other, less direct, measures taken by the Nigerian government include encouraging foreign investors to partner with Nigerians along the oil and gas value chain, and implementing an amnesty program for erstwhile militants. Another measure is the Petroleum Industry Bill (PIB), an executive bill to reform the regulatory framework of the industry, which includes proposals to align the interests of local communities and oil companies by compelling oil companies to make payments to those communities.

Although indigenous oil companies have a number of advantages over foreign oil companies (for example, preferential consideration in the allocation of acreage and other contracts in the oil and gas industry), a company may be classed as indigenous even if up to 49 percent of its share capital is owned by foreign entities. This policy has encouraged joint ventures between local and foreign oil companies. However, over the long term, the government may need to liberalize the industry by reducing the advantages offered to indigenous companies in order to allow domestic and foreign oil companies to compete on a level playing field. However, there appears to be little domestic political will to move away from the somewhat protectionist status quo.

The PIB includes proposals to modernize the award and management of oil and gas acreage. For example, it proposes introducing a "drill or drop" system (where companies must propose and adhere to exploration or production work programs, or else the asset reverts to the government for reallocation in future bidding rounds), which should help to remedy the underdevelopment of certain license areas. The PIB also includes helpful proposals for the implementation of production allowances and enhanced production allowances for dry gas producers. Nevertheless, since 2008, the PIB has been in legislative limbo, and foreign oil companies will have to endure an uncertain regulatory environment until a form of the bill is passed into law. The sooner the government can offer a stable and predictable regulatory environment, the better to retain the participation of foreign oil companies in Nigeria.

In addition, much still needs to be done to improve the transparency of the oil license bidding process. There has been a notable improvement since 2000, with the introduction of competitive bid rounds. However, past bid rounds have been widely criticized, with complaints of irregularities. As a result, some of the majors did not participate in the last bid round (held in 2007). The first bid round under the current government is expected to be held later this year; many will note with interest the extent of the participation mix of the majors and independents and whether the round is conducted in accordance with industry leading practice.

It remains to be seen whether the newfound willingness of independents to operate in onshore areas of Nigeria will remain undiminished in light of the continuing issues facing the oil and gas industry in the region. If progress is not made in resolving these issues, oil and gas companies may look for opportunities elsewhere in the region, and the story of the industry in Nigeria in the near future may be one of unrealized potential.

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© Copyright 2012. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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