Stories by Adewale Sanyaolu
Nigeria’s inability to attract fresh investment in the oil and gas sector or expand existing ones has left the country in a precarious situation. The loss for Nigeria has become the gain of other countries, including, Ghana, Gabon and Angola, which have become new frontiers for oil exploration in Africa.
Today, investors, especially those operating in upstream, have found new haven in these countries. The investment loss for the country is occasioned by the lack of clear cut policy direction for the oil and gas industry as policies, including fiscals and legal regulatory framework, are not clear enough and in some cases shrouded in secrecy.
Industry experts and operators believe that despite developments in the global oil industry, the responsibility for giving direction to the Nigerian oil and gas sector rests on the government. Its actions or inactions will ultimately determine how well the industry fares.
Effect of non-passage of PIB
The Nigerian Extractive Industry Transparency Initiative (NEITI) recently raised the alarm that Nigeria was losing about $200 billion as a result of its failure to pass the Petroleum Industry Bill (PIB) as an enabling law for the oil and gas industry.
NEITI, in its policy brief entitled, “The urgency of a new petroleum sector law”, said some of the losses were projected investments due to regulatory uncertainty, which experts had put at $120 billion since the commencement of the process for the passage of the bill or about $15 billion annually.
The policy brief stated that clear, unambiguous rules, predictable policy-making and efficient regulations had been lacking in Nigeria’s petroleum sector since the process of enacting a law for the industry commenced.
It said governance deficiencies had been equally prolific and that its 2013 audit of the oil and gas sector revealed that $10.4 billion and N378.7 billion were lost as a result of under-remittance, underpayments, inefficiencies, theft or absence of clear fiscal regime in the industry.
According to energy experts, there is an urgent need for government to resolve with speed and finality, lingering issues that have slowed down investment in the sector. Oil revenue has over the years become a major source of funds for the country’s budgets. Despite being a major revenue source for the country, the sector, according to experts, is being driven by outdated laws and regulations that needed to be overhauled. For the oil and gas sector to become attractive and profitable to investors, its antiquated framework has to be updated to address current industry realities.
“The current law and regulatory framework is not responsive enough. The sector is being governed by outdated legal and regulatory framework. We have to re-examine the continued relevance of existing framework,” said an energy analyst.
Expressing support for the need for urgent reforms in the sector, another expert and Chairman Africa, Schlumberger, Mr. Sola Oyinlola, said the present government should put in place and implement policies that would spur growth in the industry.
“The Buhari administration has its work cut out for it and the industry awaits with bated breath any new policy directions, but we are all optimistic that challenges would be tackled expeditiously to provide a new dynamic investment destination.”
Achievement of tottering industry
However, despite uncertainties in the operating environment, recent accomplishments by some operators in the oil and gas industry have further demonstrated that there are still untapped opportunities in the sector.
Erha North Phase II project is one of the flagship projects executed by US oil giant, ExxonMobil. The project is a deepwater subsea development located 60 miles offshore Nigeria in 3,300 feet of water and four miles North of the Erha field.
The field has been producing since 2006. According to the oil firm, the project which was completed five months ahead of schedule and under its initial budget was a clear demonstration of its disciplined project management approach and expertise.
“Executing successful projects such as Erha North Phase 2 ahead of schedule and under budget results from ExxonMobil’s disciplined project management approach and expertise,” said Neil W. Duffin, President of ExxonMobil Development Company. “We are able to create additional shareholder value by optimising existing infrastructure, which reduces capital spending requirements and improves capital efficiency.”
More than N50 billion has been invested in Nigeria for Erha North Phase 2, bringing direct and indirect benefits to the Nigerian economy through project spending and employment, consistent with project objectives.
Since completion, Erha North Phase 2 project has delivered additional 165 million barrels per day (bpd) of crude to Nigeria with a peak production of 65,000bpd.
Equally, the project was delivered with 63 per cent Nigerian content translating to 74 per cent Nigerian content man-hours which accounted for over $2 billion of project investment for goods and services. According to ExxonMobil, the project further demonstrates its contribution to and support for Nigeria’s long-term goal of increasing its oil production volumes.
Major milestone recorded
Energy experts believe the successes recorded by ExxonMobil on the project could be replicated on its recent oil find in Owowo field given the right operating environment. For such a huge project as Erha North Phase 2 to be completed despite the harsh operating environment, the Owowo oil field exploration could be a monumental success with the right policies in place.
The company last October announced the discovery of Owowo oil field, which it projected to hold over 1 billion barrels of crude oil reserves and over N3 trillion in potential revenue to Nigeria. Experts reckon that the oil field discovery has brought new hopes to the Nigerian economy, especially at a time when new investments in upstream operations were shrinking. The discovery came as a morale booster for the industry especially as Nigeria’s reserve replacement ratio has been on the downward trend.
The Owowo oil field has the potential to provide new employment opportunities for Nigerians once production starts. The implication of this is enhanced living standards for some households and revenue to government in form of taxes and royalties. But this can only be accomplished in a business-friendly environment.
Head of Oil and Gas Research, Renaissance Capital, lldar Davletshin, tasked the Buhari government to use its mandate to implement much-needed reforms in the oil and gas sector, which continues to be the driving force behind the economy. “While it is unlikely that Nigeria will escape its dependence on the sector, there is clear potential for the country to strengthen its oil and gas industry and develop a more diversified and balanced economy, following the successful models of resource-rich countries such as Canada, Norway and Australia,” he said.
He added: “It is essential that the new administration avoids making the same mistakes as most other emerging nations and does not launch a complete overhaul. Nigerian taxes for onshore production are in the highest quartile globally, so some easing could make sense, especially in the weaker oil price environment”.
In the same vein, the International Association for Energy Economics (IAEE), while supporting reforms in the sector, warned that the rationale for such reforms should be to enhance the sustainability of petroleum wealth that would impact all stakeholders.
In a paper entitled, “An Appraisal of Oil and Gas Industry Reform and Institutional Restructuring in Nigeria”, the association said, “the rationale for restructuring the oil and gas sector in a petroleum dependent economy like Nigeria should be to enhance the sustainability of petroleum wealth and its impact on all stakeholders. Undergoing such reforms presupposes that the current state of the industry is inefficient in service deliveries and ineffective at promoting society’s welfare objectives. This notwithstanding, such reforms or restructuring must not only focus on enhancing industry effectiveness and efficiency, it must be mindful of equity issues with respect to wealth distribution among all stakeholders – governments, communities and operators.”
IAEE noted that a prompt passage of the PIB, provision of infrastructure and security for oil installations across the country would be a good start. And these are what government can do to support the industry.