The Nigerian Government aspires to increase the country’s oil reserves from about 36.2 billion barrels to 40 billion barrels by 2010. Daily production is also planned to increase from its current estimated productive capacity of about 2.5 million barrels to 4.5 million over the same period. However, with continuing attacks on installations at different oil company’s facilities leading to constant disruptions, it is unlikely that that target will be met. In addition, with the reduction in supply and OPEC supply cuts, the price of oil has been on the rise.
Against this background, and in view of the increasing demand for crude oil, the Nigerian Oil Industry offers significant investment opportunities for players in all of its sub-sectors.
The upstream sector continues to be dominated by the multinational corporations who are best placed to respond to the high-risk and capital-intensive nature of the business. Significant discoveries have been made in the deep offshore blocks since exploration commenced in 2003, notably, the Shell operated Bonga field, ExxonMobil’s Erha field and ChevronTexaco’s Agbami field. Some of these fields are estimated to have close to one billion barrels of oil, in addition to gas.
The Nigerian National Petroleum Company (NNPC) dominates and controls both the upstream and downstream sectors. However, according to an announcement in August 2007, NNPC is to be restructured. The main change is that there will be a National Oil Company that will have responsibility for upstream activity, a Petroleum Products Distribution Authority and a National Oil and Gas Holding Company. These new companies will report to a Petroleum Directorate, which will replace the Ministry of Petroleum and a Petroleum Inspectorate which will succeed the Department of Petroleum Resources.
In the downstream sector, none of Nigeria’s four refineries are fully operational. Refining is dominated by state-owned refineries with a combined capacity of 440,000 barrels of gasoline per day. However, as a result of problems including sabotage, fire, poor management and lack of regular maintenance, they have been operating well below capacity, resulting in dependence on foreign supplies. Licenses were granted to about 20 private companies to build and operate refineries in 2003. Deregulation of the downstream sector remains a stated government aim however, this will mean allowing the price of oil to rise to international levels – a situation that will only cause more civil unrest.
The current estimate of total proven natural gas reserves is about 5210bcm. About 60% of the estimated annual production is flared. Fiscal incentives have been put in place to encourage gas utilisation as part of Government’s initiative to reach its zero-flaring target by 2008. Some gas projects in Nigeria include the NLNG Trains 1, 2 and 3, the Escravos-Lagos Gas pipeline and other domestic gas utilisation projects. Proposed projects include the West Africa Gas Pipeline, Brass LNG and NLNG trains 4, 5 and 6. Train 7 is currently in development and there are also a number of gas to liquid projects and gas powered independent power projects which are a major part of the Government’s plan to improve power generation, transmission and distribution.
Government is taking steps towards restructuring and privatising the National electric power authority (now re-christened Power Holding Company of Nigeria), and building structures to encourage private investments in the power sector. The Electric Power Sector Act 2005, which was signed into law focuses mainly on the restructuring/unbundling of the Power Holding Company and amongst other things, the creation of a regulatory body that will license and regulate the generation, transmission, distribution and supply of electricity.
In spite of the security and political problems in the Niger Delta, the Oil and Gas industry in Nigeria provides significant investment opportunities and several fiscal incentives to support investors. However, navigating the regulatory landscape and taking advantage of these incentives present considerable challenges.
