18 September 2015

Oil & Gas: Challenges Facing The New Government

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Nigeria has vast oil and gas history and potential. It has the largest natural gas and second largest oil reserves in Africa with estimated known reserves of 37 billion barrels of oil and 5 trillion cubic metres of natural gas.
Nigeria Energy and Natural Resources
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Keywords: Nigeria, oil, gas,

By Rob Hamill, partner and Jamie Lad, trainee solicitor

Nigeria has vast oil and gas history and potential. It has the largest natural gas and second largest oil reserves in Africa with estimated known reserves of 37 billion barrels of oil and 5 trillion cubic metres of natural gas. Oil generates around 70 percent of the country's revenue and current output amounts to 1.9 million barrels per day, with the capacity to increase to 4 million barrels per day. What is causing this huge under-capacity? Heavy government participation, legislative uncertainty, corruption, and large-scale oil theft are a few of the factors that have been cited. Are these issues likely to be solved by the incoming government?

What Are the Issues Facing the Nigerian Oil and Gas Industry?

Nigeria's oil industry is largely controlled by the government-owned Nigerian National Petroleum Company (the NNPC) via join ventures (JVs) and production sharing contracts (PSCs) with international oil companies (IOCs). The government has an average of 60 percent ownership interest in JVs with IOCs, which account for the majority of the country's crude oil production. It is no secret that this government has suffered from corruption, and its close links with the NNPC means that the oil industry has also suffered. A recent PwC report recommended an urgent overhaul of the way that Nigeria manages its oil industry. The report, among other things, raised questions about the legality behind several multibillion dollar transactions conducted by the NNPC and found a discrepancy of more than $2 billion in the total value of crude oil sales—making the financials of the company barely auditable.

Another issue stifling the industry is uncertainty over the passing of the Petroleum Industry Bill, which was first proposed in 2008 but is still not sanctioned. Controversy over several of its provisions (mainly relating to tax and government participation) has delayed the passing of the Bill. For example, one of the proposed drafts would increase the government's share of production revenue from deepwater projects, which have traditionally contained more favorable fiscal terms for IOCs than onshore/shallow water projects. Many IOCs, therefore, view the proposed changes as making deepwater projects commercially unviable. According to a recent US Energy Information Administration report, well under half of planned deepwater oil projects are currently sanctioned by IOCs due to this uncertainty.

Many IOCs also consider onshore/shallow water projects to be commercially unviable. This is mainly due to the financial challenges posed by operating their assets as JVs with the NNPC and also due to the large scale oil theft/pipeline vandalism (an estimated 100,000 barrels of oil is stolen daily) that plagues much of these onshore and shallow water assets. A large proportion of IOCs have therefore been divesting their interests. A recent PwC article estimates that by the end of 2015, IOCs will have sold at least 250,000 barrels per day worth of equity in onshore and shallow water producing assets in the Niger delta region. This is great news for indigenous oil companies as it provides an opportunity to participate in the upstream sector. The divestments may also be good for the country's deepwater sector if IOCs consider such projects to be a viable alternative. However, uncertainty surrounding fiscal provisions for deepwater projects may mean that the presence of IOCs will diminish in both the onshore and offshore sectors.

Is the Situation Likely To Improve?

Many of the industry's problems have been blamed on the outgoing government led by Goodluck Jonathan. Will the new government be any better? General Muhammudu Buhari of the All Progressive Congress Party took office on 29 May 2015. He first governed Nigeria as a military ruler in the 1980s and was petroleum minister when the NNPC was created in 1977. His manifesto planned to break up the NNPC, and the manifesto's main themes include security and anti-corruption.

One month after taking office, Buhari dissolved the board of the NNPC in an attempt to stamp out the corruption that has stifled the country's oil industry for years. He also appointed Harvard-trained lawyer and former ExxonMobil executive Emmanuel Ibe Kachikwu as head of the NNPC in August of this year. The day after he was appointed, Kachikwu sacked eight senior managers of the NNPC. His strategy has been to hire from the private sector (e.g. Total, Statoil and Royal Dutch Shell) in an attempt to provide a fresh, corruption-free start for the national oil company. He is also set to review all PSCs and JV agreements made between IOCs and the NNPC.

More recently, it has been reported that Nigeria is to start using drones to fight oil theft, with an aim to end crude theft in the next eight months. Kachikwu has also said that the NNPC would work more closely with the country's navy to deal with the problem. These are good examples of the incoming government's commitment to stamping out corruption and getting the oil industry back on its feet.

Is It Enough?

Buhari and Kwachikwu have already made some key changes to the NNPC but there is still much to be done in the sector as a whole. It is unclear what Buhari's plans are for the sector and who is advising him on possible reforms. There is talk of splitting the NNPC into two (a regulatory body and a national oil company) and either reverting the Petroleum Industry Bill back to its original version or breaking it up into more manageable pieces.

Change is urgently needed, particularly as government finances are straining with oil prices below $50 per barrel, but the uncertainty that has been affecting the industry for years looks set to continue, at least in the short term. Many have claimed that Buhari is moving too slowly because he has yet to appoint an oil minister or the rest of his cabinet. Is he acting too slowly or is he taking time to familiarize himself with the company's problems? Only time will tell.

Originally published 10 September 2015

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