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A Special International Report
Prepared by
The Washington Times
Advertising Department - Published on September 30, 1999
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Sponsors (1) Federal Ministry of Finance
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Aiming to remain a top exporter
The upstream oil industry has become Nigeria's lifeblood and is the key to understanding the political and economic situation in the country. In June 1999, President Olusegun Obasanjo appointed OPEC Secretary General Rilwanu Lukman to be his adviser on petroleum and energy affairs. The president also chose Jackson Gaius-Obaseki to head the Nigerian National Petroleum Company (NNPC). Gaius-Obaseki had previously held several lower-level positions within the organization.
Democracy has brought more confidence to the energy industry and subsequently more opportunity for expansion.
“Democracy can only be seen as a positive for the country and also for the companies doing business in Nigeria,” said Chevron spokesman Joseph Lorenz.
Obasanjo has set very aggressive goals for his administration. “Our national objective is to increase our crude oil reserves to 30 billion barrels and production to 3 million barrels per day by the year 2002,” Lukman told a gathering of the Society of Petroleum Engineers in August. “This is a big challenge that requires the cooperation of all the oil companies operating in Nigeria. The government, for its part, will continue to provide a conducive business and economic environment.”
Oil Dominant Force
The oil sector is the dominant force in Nigeria’s economy, accounting for nearly 50 percent of the country’s gross domestic product (GDP) and 95 percent of its foreign exchange earnings.
The NNPC entirely owned the plant and since 1979 has also held a majority interest in Alesa Eleme. Technical and maintenance difficulties have resulted in a production decrease; the combined total of petroleum processed by the two plants in 1979 averaged 89,000 barrels per day – about 83 percent of the domestic requirement.
Nigeria’s oil reserves are found mainly in the coastal Niger River Delta in 250 fields of less than 50 million barrels each; unknown reserves exist in at least 200 other fields. The country's main export crude blends are Bonny Light (37o API) and Forcados (31o API). The majority – up to 65 percent – of Nigeria’s crude is light and sweet (having a low sulfur content).
Nigeria hopes to increase its proven reserves to 40 billion barrels by 2010, but field operators have postponed exploration and field development because the NNPC has not paid its share of capital spending as required. However, Obasanjo’s government has assured its partners this problem will be dealt with exigently.
“The government will continue to honor its cash-call obligations to our joint venture partners to ensure that their operations are not impeded, and as a matter of exigency, all outstanding financial obligations to joint venture companies will be conclusively reviewed and honored,” Luckman said.
In addition, Luckman said, the government will also be seeking alternative financing arrangements to support profitable joint venture projects and will continue to encourage production-sharing contracts (PSCs) “as a means of infusing as much needed capital in the upstream and to relieve government of financial burden.”
Exploring Upstream Possibilities
Deepwater and frontier exploration, unlike the joint ventures established for onshore and shallow offshore upstream activities, utilize PSCs wherein the operator typically covers the exploration and development costs. Operators, if oil is found, pay tax and royalties to the government upon the start of production. Such terms have attracted several oil majors to deepwater exploration.
Given that deepwater recoverable oil reserve estimates run from eight to almost 20 billion barrels there is plenty of room for new players.
Royal Dutch/Shell (Shell) announced the Bonga discovery, estimated to have from 600 million to 1 billion barrels and a production capability of 350,000 billion barrels a day (bbl/d), in 1996. A smaller discovery with an estimated 100 million barrels of reserves, Ngolo, was made by Shell in 1997. Exxon (20 percent), ENI/Agip (Agip) (12.5 percent) and Elf Aquitaine (Elf) (12.5 percent) have joined efforts with Shell (55 percent interest) on both.
Italy’s Agip (40 percent interest) had a 4,800 bbl/d discovery, Abo, in 1996 with production expected to start in 2001; Agip's partners are BP Amoco (35 percent) and Exxon (25 percent). The local firm Famfa Oil, and its technical partner, Texaco, announced the Agabami discovery in January 1999. This new find, about 113 kilometers offshore, is believed to contain several hundred million barrels of recoverable oil. Following its discovery of the Nnwa field estimated to hold several million barrels, Norway's Statoil has decided to remain active in Nigeria.
Although deepwater activity is causing a stir in Nigeria’s industry, exploration and field development continues in Nigeria's traditional oil areas onshore and in the shallow waters of the Niger Delta and elsewhere. Several areas in the central and northern states of Gombe, Plateau, Bauchi and Adamawa are being explored by Shell, Chevron, and Elf while Shell’s announcement of plans to invest $8.5 billion over the next five years in offshore developments is the largest industrial investment ever in sub-Saharan Africa.
The 1,000-square-kilometer Bakassi peninsula in the Gulf of Guinea, claimed by both Nigeria and Cameroon, is believed to contain significant oil reserves. Although several oil discoveries have been made in the area, operations have been suspended. Cameroon submitted the dispute to the International Court of Justice (ICJ) for settlement in February 1994, with Nigeria soon to follow suit. Formal hearings began in March 1998, but a decision has yet to be reached.
Nigeria also disputes Equatorial Guinea's control of the Zafiro field. The core issue is whether Zafiro is a distinct structure or part of an oil field straddling territorial waters belonging to both countries. America’s Mobil Oil, under contract with Equatorial Guinea, began oil production in September 1996. France’s Elf holds the lease on the adjacent Nigerian block, and along with the Nigerian government, claims that Zafiro extends into Nigerian territory. Nigeria has called for joint field development but negotiations have met with little success so far.
Dealing with Delta
The first five months of 1999 saw Nigerian crude oil production average more than 2.012 million bbl/d, down from 2.043 million bbl/d in 1998 and 2.317 million bbl/d in 1997. Nigeria agreed with other OPEC countries and some non-OPEC producers in March 1998 to cut production to stabilize world oil prices; Abuja pledged to decrease production by 125,000 bbl/d.
An OPEC ministerial meeting was held on June 24, 1998, to discuss further oil production cuts in light of the lowest oil prices seen since 1986. The cuts OPEC agreed, including earlier reductions from a March meeting, totaled 2.6 million bbl/d from February 1998 levels. Under this arrangement, Nigeria cut an additional 100,000 bbl/d of production. On March 23, 1999, OPEC agreed to cut an additional 1.7 million barrels per day on top of the cuts made in the two agreements last year. Nigeria's quota is now 1.89 million bbl/d, and Nigeria's production cuts total 373,000 bbl/d.
Obasanjo announced plans to increase Nigeria's oil production by 50 percent over the next four years, with the stated aim of boosting output from 2 to 3 million barrels of crude oil per day by providing better funding to develop new oil fields.
A key hindrance to increased oil production has been ethnic violence in the Delta region, in part due to disagreement over revenue allocation. Several hundred people have been killed in clashes between tribal groups and security forces since Obasanjo’s inauguration, with foreign companies operating in the area suffering disruptions. The president’s bill for the creation of the Niger Delta Development Commission (NDDC), dedicated to the region’s development, has been submitted to parliament for review and approval. Foreign oil firms have also agreed to help finance the NDDC.
“As far as the disruption of oil operations is concerned, government is effectively addressing it by coming into terms with the interests of the oil producing communities,” Luckman said. “The Niger Delta Development Commission bill is already before the National Assembly and we hope the bill will address the current problems.”
Funding the Future
Government funding has been a major problem in Nigeria's upstream sector. The present joint venture (JV) structure calls for the NNPC shares costs with its foreign partners while NNPC funding from the Finance Ministry has been below budgeted levels since 1993. The decrease in funding has led to a growth in overdue payments to foreign partners, and to a decrease in their exploration/development activities.
In the 1999 budget, submitted before the Abubakar regime left power, JV funding was slashed to $2 billion and did include tax credits and investment incentives specific to the oil and gas sectors. The government also said that it would seek to diversify funding for the industry.
To try to overcome funding problems, the government approved an alternative- scheme for Shell's EA oil field. The projects' private partners will finance the $400 million EA development while NNPC's share will be born by Shell and repaid as EA starts production. Elf is also seeking other means to fund the development of its Amenam field, an estimated cost of $1 billion.
The U.S. and Western Europe account for the majority of Nigeria's crude exports. Although Asia is more and more becoming a market for Nigerian crude, economic difficulties in the region have slowed regional oil demand. Exports to the U.S. averaged 689,000 bbl/d in 1998 (7.9 percent of U.S.-imported crude oil). In 1998 Nigeria was the fifth-largest crude exporter to the United States behind Saudi Arabia, Venezuela, Mexico and Canada. For the first five months of 1999 Nigerian exports, averaging 682,000 bbl/d, have been the sixthlargest source of crude for the U.S.
On July 2, the NNPC canceled all crude oil term contracts effective in September in an apparent attempt to limit the role of trading companies in Nigerian crude oil sales. The government hopes to make crude sales more transparent and reduce the role of middlemen by increasing direct sales to refiners. Lukman said that those refineries wanting to purchase crude contracts would no longer have to pay commissions as in the past.
Delving Downstream
Despite a combined capacity of more than 438,750 bbl/d, problems including sabotage, fire, poor management and lack of turnaround maintenance (TAM) limit the output of Nigeria’s four refineries, resulting in severe fuel shortages throughout the country. Shortages of refined products have forced the NNPC to import them, and the government to authorize import increases to help ease shortages. Deregulation of petroleum product imports, unveiled under the new budget plan, will end the NNPC's monopoly and hopefully decrease the smuggling of products: such illicit activity has exacerbated the country's fuel shortages.
Fuel shortages have caused many problems in Nigeria. Manufacturing firms have cut production because worker’s manhours countrywide have reduced, and domestic flights have been delayed or canceled for lack of aviation fuel.
The Federal Petroleum Monitoring Unit (FPMU), established in November 1998 to oversee fuel distribution in the country, will operate out of eight zones to ensure that imported petroleum products are not diverted or sent to unauthorized locations. In December 1998 official fuel prices rose in excess of 50 percent as the government said subsidized prices were not sustainable. However, it was announced in January that petroleum prices would be reduced as agreed, during a meeting between the Association of Petroleum Marketers and former Petroleum Advisor Aret Adams.
With the recent effort to free the petroleum product market, the government anticipates the private sector to set up new refineries in the country. For its part, Luckman said the four refineries, storage depots and pipelines are being rehabilitated to ensure Nigeria “meets its domestic demand for petroleum products without resorting to undue importation.”
TAM contracts for Nigeria's refineries have also been initiated. In early 1998 Total Fina agreed to perform maintenance on the 110,000-bbl/d Kaduna facility and declared in February 1999 that the refinery was back on-line.
The TAM contract for the Port Harcourt refinery was awarded to Shell in September 1998 while in May 1999 a repair and refurbishment contract for its 125,000-bbl/d refinery in Warri was given to a consortium composed of Canada's Ramboil, Dietsman Comerint of the Netherlands and Litwin of the U.S.
Natural Gas for the Future
In addition to crude oil, Nigeria has the world’s tenth largest proven natural gas reserves, an estimated 124 trillion cubic feet (tcf). Actual associated and non-associated gas reserves could potentially reach as high as 300 tcf. Nigeria currently burns off or ‘flares’ 75 percent of the gas it produces, re-injecting only 12 percent to enhance oil recovery.
Lacking an infrastructure to take advantage of most of its gas reserves, associated gas production is limited mainly to offshore fields and swampy areas of the Delta region. But the Nigerian government is very ambitious. By 2010 Nigeria intends to reach a zero percent flaring of natural gas. “Nigeria should look toward an era in which gas contributes to revenue as much as oil,” Luckman said. “As a matter or priority, gas flaring must be terminated soonest, so that more gas can be recovered for conversion, domestic utilization of exports. This would be a major contribution to achieving a clean environment.”
In line with this goal, several of the oil joint-ventures are planning to make use of the gas currently lost to flaring.
For its part, Chevron has a three-pronged strategy through which it hopes to completely eliminate gas flaring by 2007 – three years ahead of the Nigerian government mandate. “Chevron has a pretty robust gas strategy in Nigeria,” Lorenz said. “Natural gas has not had a market in Nigeria, as a result quite a bit of flaring has occurred. What we are trying to do is stop the flaring.”
The Central Bank predicts the sale of natural gas reserves will improve Nigeria’s balance of payments position and be a major boost to the overall performance of the economy.
The Escravos gas project (EGP), in which the NNPC holds a 60-percent share and Chevron a 40-percent share, is another project Nigeria is undertaking to better utilize its natural gas reserves and the first in Chevron’s strategy. The first phase of the project has already been completed to the tune of $550 million. By the time the project is finished the investment will have been raised to about $1 billion.
The Nigerian government moved on its plans to construct the West African Gas Pipeline (WAGP) to Benin, Togo and Ghana in August this year when a joint agreement between the consortium of companies and governments involved was signed. Gas from the second phase of the EGP will be used to supply through the $400-million offshore project; Chevron, Shell, NNPC, Ghanaian National Petroleum Corp., Societe Beninoise de Gaz and Societe Togolaise de Gaz were named as joint developers of the WAGP. A feasibility study for the WAGP was completed in the first quarter of 1999 while World Bank studies projected a potential savings in primary energy costs for the countries involved of about $500 million more over a 20-year span.
As the largest joint infrastructure venture undertaken in the West African subregion the project is expected to bring a myriad of economic and ecological benefits. Development of the project will immediately translate into more jobs and an injection of capital into the area. With the multiplier effect this will translate into more business, more jobs as well as increased regional integration and cooperation. Once the WAGP comes on-line in 2002 CBN expects the project to generate $113 million annually.
It will also go a long way in reducing harmful greenhouse gas emissions. Currently, flaring from natural gas associated with the petroleum extraction industry is a major contributor to global greenhouse gas emissions and Nigeria’s gas flaring is estimated to contribute some 25 percent to the worldwide total.
“WAGP has double the environmental benefits because it not only reduces gas flaring – eventually to eliminate it altogether – it is also supplies a cleaner burning source of energy to Benin, Togo and Ghana,” Lorenz said. “It is really a wonderful project.”
Shell’s joint venture also intends to use formerly flared gas in several projects. One, the Odidi Associated Gas Gathering project, will hopefully come online in late 2000 and will gather 80 Mmcf/d of gas currently being flared at five Shell flow stations. The gas will flow into the NGC's Escravos-Lagos pipeline system. A similar project is being developed at Shell's Nembe flow station will likely begin operations in mid to late 2000.
The $3.7 to $3.8-billion LNG (liquefied natural gas) facility under construction at Bonny Island is the most ambitious gas project to date. Projected for completion in 1999, the facility has a 7.15 billion cubic meters (Bcf) of annual processing capacity. Nigeria Liquefied Natural Gas Corporation (NLNG), the consortium developing the project, is made up of the NNPC (49 percent), Shell (25.6 percent), Elf (15 percent), and Agip (10.4 percent). CBN predicts sales from the project will amount to $322.5 million in 1999, $623.4 million in 2000 and $716.8 million by 2005.
Although at first Bonny Island will be largely supplied from dedicated gasfields, within a short time half of the gas input is expected to be from associated reserves. Long-term purchase agreements have been signed between the NLNG, Italy’s electric utility ENEL (49 percent of the production volume), Spain's Enagas (22 percent), Turkey's Botas (17 percent), Gaz de France (7 percent) and Transgas of Portugal (5 percent) with deliveries expected to begin in October 1999.
A third LNG production train planned for late 2002, with a 3.7-Bcf annual capacity, would increase NLNG's overall processing capacity to 10.85 Bcf per year. Spain’s Enagas signed a 21-year agreement to purchase more than 70 percent of the third LNG train's output while Portugal’s Transgas signed agreed to purchase an additional 1 billion Bcf per year. With this agreement, NLNG has pre-sold all output from the third LNG train.
Chevron plans to build an LNG plant adjacent to Escravos by 2003 in a joint venture with Sasol, a South African company.
“LNG is an old technology finding its way into the industry which could represent a paradigm shift in the way that the industry markets natural gas,” Lorenz explained. “It can be turned easily into marketable and clean burning fuel.”
In the near term, Chevron hopes to use the gas from some of its facilities offshore and turn it into LNG for sale to customers both in Nigeria and the Western markets.
“The Nigerian government has been very helpful in providing tax incentives in the gas sector,” Lorenz said. “It is because of their tax incentives that projects like these have been made viable and it all goes back to them being a business friendly government.”
According to Luckman this environment will be strengthened going forward. As a matter of urgent attention, the government is seeking to put in place a natural gas policy that will outline the roles of producers, transmitters and distributors. “This administration is poised to encourage domestic gas utilization,” Luckman said. “To this end, fiscal terms will continue to be accommodative. Besides, government will continue to provide gas infrastructure to support private sector investments.”
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Table of Contents (1) It's a new dawn over Nigeria |
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Nigeria, an Organization of Petroleum Exporting Countries (OPEC) member, is one of the world's largest oil exporters and it intends to stay that way. The country is a major oil supplier to the United States and Western Europe, ranking as the fifth largest supplier of crude oil to the U.S. in 1998.
Alesa Eleme, the country’s first refinery near Port Harcourt, initiated operations in late 1965 with a capacity of 38,000 barrels per day. After the civil war the facility expanded production to 60,000 barrels per day but failed to satisfy the demands of a rapidly growing economy. An additional refinery, delayed by political maneuvering over its location, was constructed at Warri, opening in 1978 with a capacity of 100,000 barrels per day.
This arrangement has increased access to local companies. “I am pleased to note that the upstream sector which used to be the exclusive preserve of the multinationals is now a theater of activities for our indigenous oil companies, since the introduction of PSCs,” Luckman said. “This welcome development will continue as more blocks will be opened for bidding and awarded on competitive basis under the PSC, particularly in the offshore zone. Our objective is to develop Nigerian entrepreneurship in the petroleum industry, in the exploration, production and service subsectors in order to internalize the petroleum technology required for successful operations in the industry.”