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Changing Nigeria

The government has promised to clean up the country’s economy and help the oil and gas sector realise its full potential, ending years of inefficiency and corruption. David Townsend looks at some of the recent developments in Nigeria

THE GOVERNMENT is determined to expand Nigeria's energy sector, rectify its structural flaws, attract foreign capital and use the nation's oil and gas wealth to improve national welfare.

That was the message from senior Nigerian government and energy officials at a conference in London in May. "We have to move Nigeria forward and we know we have to do it ourselves, but we also welcome foreign partners to help us in this programme," Victor Oyofo, the chairman of the senate committee on Niger Delta and privatisation issues, told delegates at the CWC Third Annual Nigeria Oil&Gas Conference.

Nigeria's natural resources wealth has been squandered in the past, bringing inadequate benefits to the population, the largest in Africa, the speakers admitted. But that could now change. Several new projects are expected to boost oil and gas output and bring in more foreign dollars. The government has also promised to take steps to reduce environmental damage. The downstream sector is also being modernised and reformed. 

Vital revenues

Revenues from oil and gas, the mainstay of the economy, represent the best chance of social advancement. In 1999-2000, the last financial year for which government data are available, the sector contributed 30% to the country's GDP. Oil and gas accounted for over 90% of export earnings and for over 80% of the government's budgetary revenue.

At around 25bn barrels, Nigeria has the world's 10th-largest crude reserves. Including condensates, production capacity is about 2.3m barrels a day (b/d), but the Opec production target—set at 1.787m b/d—limits output.

The government has aggressive expansion plans. The department of petroleum resources—led by the former Opec secretary general, Rilwanu Lukman—aims to increase the country's crude reserves to 30bn barrels within the next two years and to boost production capacity to 3m b/d. Further additions are expected to raise the reserves total to around 40bn barrels by the end of the decade, lifting production capacity to 4m b/d.

Untapped reserves

The country's largely untapped natural gas reserves are estimated at over 150 trillion cubic feet (cf), but production is only around 2bn cf a day (cf/d), almost all of which is associated gas. Nigeria aims to increase recoverable gas reserves to 40bn barrels of oil equivalent (boe) by 2010 and to double production to around 4bn cf/d by the same year.

Gas reserves are expected to grow rapidly through the introduction of new technology, mainly supplied by foreign operators. The opening-up of the so-called frontier areas in Nigerian deep waters and some onshore fields will also make a contribution to planned growth.

Nigeria flares around 63% of all the gas it produces, but the government plans to put an end to all gas flaring by 2008. This will be achieved by an enhanced gas-reinjection programme, as well as through the various large, gas-based projects under development or being planned.

Lukman told the conference that while there was still a long way to overhaul the oil and gas sector, there have been "lots of achievements" since the government came to power, in 1999. "One of the major focuses of President [Olusegun Obasanjo's] administration has been to reinforce Nigeria's position as a major player in world oil and gas," Lukman said, citing the ambitious growth targets for crude and gas reserves and production.

"We cannot afford not to increase our reserves. Not to do so would be like committing a form of slow suicide. We need to optimise our revenues." 

Lukman said the country is on track to meet its 2003 target of increasing reserves to 30bn barrels, as 6bn barrels have already been added by significant discoveries in deep waters. "There are a number of field-development projects in progress and, once they are completed, by 2003 to 2004, we will have hit our production target of 3m b/d—some 50% higher than under the previous administration." 

Targets will be met

He was also confident that the targets for gas reserves and production would be met—possibly even ahead of schedule. "We have introduced many new incentives to encourage gas projects and utilise our huge reserves," he said.

Projects include the proposed 4,000-km, west African gas pipeline project and the expansion of the Bonny Island liquefied natural gas (LNG) plant (in March, Nigeria LNG's shareholders took the final decision to proceed with fourth and fifth trains). There are also studies for at least two more LNG plants, new petrochemicals units and the Escravos gas-to-liquids project.

Lukman's department has also launched a programme to increase output from marginal fields. After consultation with existing operators, 24 of these have been identified onshore and in shallow waters offshore, which the government plans to make available. He said several domestic companies have expressed an interest in operating these fields and that a pre-qualification process has been completed with specific bids due shortly.

New licensing possible

Lukman declined to speculate when another licensing round will be held (the last was in 2000), but said it is the government's intention to continue to offer "competitive licensing rounds". He added that the next would be announced "once all the necessary ground work is completed".

To drive the expansion of the gas sector, the government wants to develop the domestic market and is introducing several incentives for investors, including tax-holidays and value-added tax and customs-duty exemptions, Lukman said. It has also taken measures to ensure the appropriate infrastructure can be set up, with its recent approval of the creation of an integrated pipeline network.

Investment in new industrial plants, for power, steel, aluminium and fertilisers, will also boost gas demand over the next 10-20 years.

The government will also encourage independent power producer projects.

Lukman admitted that most of the government's plans for the oil and gas sector depend on "the willingness of existing and future investors to make more investments". To create an environment that will attract the necessary investment, Lukman said the government is committed to continuing deregulation of the upstream and downstream sectors and to encouraging exploration and production in basins other than the Niger Delta. It will also establish a competitive fiscal regime.

Some of the problems that have concerned investors in the past are being resolved, Lukman said. In a reference to corruption (linked with Nigeria in the minds of many investors), he claimed: "We have removed the middle-men and our new procedures will enhance the nation's image among the international community." 

Backlog of payments

Meanwhile, the backlog of government payments for the state's share of joint-venture projects has been cleared, Lukman said. "As a result, there has been an increase in joint-venture-partner confidence in the system and the amount of companies active in our upstream sector has risen." 

Nigeria has, in the past, been criticised for its lack of transparency, excessive bureaucracy and corruption. Wooing back foreign investors, despite the obvious rewards, particularly for the energy sector, remains a challenge.

"In the past, we may have done some things wrong, but we are determined to correct them and we are tackling corruption," said Christopher Kalode, the high commissioner for Nigeria in the UK.

An increasing level of openness in business, less-stringent controls on flows of capital, ambitious crude oil and natural gas production targets, oil products market deregulation and plans for the privatisation of other areas of the economy, such as telecommunications, are improving the outlook for foreign investors, he said.

Another potential deterrent to foreign investment has been civil unrest in the Niger Delta, particularly among the Ogoni and Warri tribes. Although the situation has improved of late, several challenges remain. The region accounts for most of Nigeria's economic wealth, yet remains one of its poorest regions.

Major concern

Lukman says this is an area "of major concern" to the government. "We need a level of calm there, with all the communities at peace. We have promoted consultations with the local population and the oil industry and have created a ministry of the environment to ensure the sustainable development of the area, as well as the rest of the country." 

table 1: Nigeria's major oil and gas fields

   

Oil reserves

Gas reserves

Name

Operator

(m barrels)

(bn cf)

Apoi North-Funiwa

ChevronTexaco

500

750

Amenam-Kpono

TotalFinaElf

500

350

Bonga

Shell

875

175

Bomu

Shell

875

1,500

Cawthorne Channel

Shell

750

900

Delta

ChevronTexaco

300

220

Edop

ExxonMobil

733

350

Ebegoro

Agip

160

350

Forcados-Yokri

Shell

1,235

1,100

Imo River

Shell

875

600

Jones Creek

Agip

900

350

Meren

ChevronTexaco

1,100

1,300

Nembe Creek

Shell

950

1,500

Obagi

TotalFinaElf

670

811

Okan

ChevronTexaco

800

1,000

Ubit

ExxonMobil

945

600

       

Source: Nigerian Department of Petroleum Resources

 

The government has also set up the so-called Niger Delta Development Commission (NDDC), through which it aims to promote economic growth in the region "as well as the social aspect of all individuals in our oil- and gas-producing areas".

Lukman claimed the sabotage of oil-producing installations had stopped recently and he promised that "the government will continue to protect these communities' interests." 

The oil industry has been asked to contribute to the success of NDDC. Companies operating in the region have been asked to donate a minimum of 3% of the agency's annual budget.

"It is a very important body for the industry and for the country—3% is a very small price to pay for peace," Oyofo told the conference. "Some [oil] companies in the region have tried to extricate themselves from the damage done to the communities and the area, but this is not in the interests of their continuing to operate here." 

Clean it up

He said the large-scale pollution in the region must be dealt with. "Oil companies should please try to operate there as they would in the North Sea. We are appealing to the majors to help us clean it up." 

Onyema Ugochukwu, the chairman of the NDDC, said most of the problems in the region stem from a "a lack of political will in the past to address the problem", but that a new master-plan for the region—involving projects that will benefit local communities—is being worked out.





Downstream overhaul

NIGERIA RECOGNISES its downstream sector is in a mess and is taking steps to modernise refineries, reduce environmental damage, improve distribution and attract private-sector investment through structural reform.

Long queues for fuel at gasoline stations, products shortages and smuggling have afflicted the country's downstream sector for years, but the government is attempting to "restore some sanity", says Rilwanu Lukman, presidential adviser on petroleum and energy.

Important changes have already been made. On 1 January, the government liberalised the downstream sector, allowing private investors to enter refining, distribution and marketing. In April, state-owned Nigeria National Petroleum Corporation (NNPC) announced a $500m refinery-upgrade programme at three of the country's four refineries—Kaduna, Port Harcourt I and Warri—to enable them to produce unleaded fuel.

The continued consumption of leaded fuel in Nigeria is leading to environmental problems that NNPC admits "far exceed the cost of converting the existing technology". Only the newer Port Harcourt II refinery produces unleaded fuel. The project is being carried out at the same time as a plan to privatise the facilities.

NNPC has also said it will carry out maintenance in a more timely fashion at all four refineries.

As a result, the country's four refineries—which have a combined capacity of about 440,000 barrels a day—are "functioning better and we have measures in place to improve product availability nationwide." 

He added: "We are also encouraging private refinery ownership and recently asked for bids to establish private-sector refineries in Nigeria. So far, 25 have been received." The bids are being evaluated and preliminary results are expected to be announced soon. "The government hopes private refineries will help stabilise the sector permanently." 

Although progress may depend to a large degree on foreign capital, the government remains focused on its domestic obligations.

Lukman said the government wants to see more labour, materials and skills being supplied from within the country.

"We will promote the benefits of the domestic industry and this will position Nigeria as a hub for the supply of technology, human resources and reserves in west Africa.

We are convinced the future of our industry is bright and that Nigeria will continue to play a role as a major player in the global oil and gas industry." 





Deep-water strike for TotalFinaElf

NIGERIA'S flagging deep-water scene could be revitalised by TotalFinaElf's recent Usan discovery, following closely on Shell's Bolia find.

Usan is viewed as particularly promising because the French company has already made one find in the block—with the Ukot-1 well, drilled and tested in 1998, writes Martin Quinlan.

TotalFinaElf's Usan-1 well was drilled in the OPL222 licence, about 100 km offshore, at a water depth of 750 metres—deep, but not extreme by present standards. The well encountered several oil-bearing reservoirs, one of which was tested at 5,000 barrels a day (b/d).

ChevronTexaco, a partner in the licence, says a study of the block's commercial potential will follow. Interests in OPL222 are TotalFinaElf, 20%, ExxonMobil, 30%, ChevronTexaco, 30%, and Nexen (a Nigerian firm), 20%.

Shell's find was made with the Bolia-1X well, drilled in 1,100 metres of water, which tested 6,000 b/d. The discovery is in the OPL219 licence, where interests are Shell, 55%, ExxonMobil, 20%, Agip, 12.5%, and TotalFinaElf, 12.5%.

Four large development projects are under way in Nigeria's deep-water areas—Shell's Bonga and Bonga Southwest, ChevronTexaco's Agbami, Agip's Abo Central and Abo North and ExxonMobil's Erha. The start-ups of Bonga/Bonga Southwest and Agbami have both been put back by a year, to 2004 and 2005 respectively, following the re-working of development plans to accommodate increases in field sizes.

Abo Central/North could, therefore, be Nigeria's first deep-water producer, with a start-up target of 2003. Erha's start-up target has been deferred by a year, to 2005, following a disappointing appraisal well.

Deep-water discoveries under appraisal include Norwegian company Statoil's Nnwa—using a floating liquefied natural gas (LNG) facility—Shell's Doro (possibly sharing the floating LNG facility) and TotalFinaElf's Akpo.





Shell boosts reserves

SHELL Petroleum Development (SPDC) Nigeria added around 400m barrels to the country's crude reserves base last year, according to the company's data.

In its most recent annual report, SPDC says it holds some 55% of Nigeria's total oil reserves and is responsible for 39% of the country's daily crude production. SPDC says it sold 620m cubic metres a day of gas last year, up by 15% on 2000 levels.

Shell has already allocated $8.5bn to Nigeria (for 1997-2002) and plans to invest a further $7.5bn in the country over the next few years.

But SPDC says it lost around 20,000 barrels a day of crude last year through sabotage and theft and it is working with the government to address the issue.

The company spent around $50m on community development in 2001 and has joined a major initiative, with the International Finance Corporation, to boost the involvement of local contractors in its operations.





Resolving the gas dilemma

SLOW ECONOMIC growth, an undeveloped local market, a lack of pipeline infrastructure and funding problems could threaten future natural gas growth in Nigeria, says Funsho Kupolokin, special assistant to the president on petroleum matters, writes David Townsend.

However, the sector has "enormous potential" and if the "right economics" are put in place, the government's ambitious growth-demand forecasts could be met.

The government has devised a strategy for the gas sector, based on an end to flaring, making gas more economic to produce and consume, developing the domestic market and addressing environmental issues.

Kupolokin says forecasts for natural gas production in the country are promising, but that the "scope for discovery is much higher if gas becomes the main focus of exploration". And the significant amount of natural gas flared in the country is "a major loss of economic value and bad for the environment". The government plans to end flaring by 2008.

Kupolokin says it is vital that more gas-oriented exploration is carried out to ensure Nigeria can meet future demand for exports and internal supplies. Based on existing and expected gas projects, the 159 trillion cubic feet (cf) of gas discovered so far are already spoken for, he says.

Gas-to-liquids (GTLs) projects represent "enormous potential" for the Nigerian gas sector. "Technology improvements and the tightening of diesel sulphur specifications mean GTLs-manufactured diesel is viable for export and for domestic use." 

Kupolokin says the $1.3bn Escravos GTLs project is particularly welcome. It will combine ChevronTexaco's advanced hydro-processing technology and the Slurry-Phase Distillate technology developed by South Africa's Sasol to produce about 34,000 barrels a day of synthetic fuel and naphtha for export from 2005. The plant will consume around 300m cf/d of gas.

Kupolokin also welcomes plans to add two new trains (4 and 5) at Bonny LNG (liquefied natural gas)—which will use some 9.64 trillion cf of reserves over their life-span—as well as other potential LNG projects, including West Niger Delta LNG, Brass River LNG and Statoil's floating LNG proposal.

The plan for West Niger Delta LNG, unveiled in February 2001, is a joint venture between NNPC, ChevronTexaco, Conoco and ExxonMobil. The firms are carrying out feasibility studies. If approval is received this year, as expected, the plant would come on stream in 2005.

In September, Phillips and Agip signed a memorandum of understanding for an offshore Niger Delta LNG plant. The facility, which should be operational in 2007, would be the world's first offshore liquefaction terminal, with a planned capacity of 5m tonnes a year. Statoil is also reportedly considering an offshore LNG plant on its Block OPL218, where gas reserves are estimated at around 10 trillion cf.

The government hopes similar projects will emerge in the next five years, Kupolokin says, noting that it is developing "the appropriate fiscal system" to encourage further investment in gas exploration, production and associated projects. "We want to encourage the development of a broad range of projects with a fair and equitable share of economic rent to the host nation." 

He admits encouraging new investment has not been easy recently. "We have experienced major funding problems in upstream oil and gas operations around the world. The financial requirement in our energy sector is very high and the financial demands on the government from the public service sector continue to rise." 

"Funding constraints could lead to an inability to deliver the important supply schemes we want to see in Nigeria, hamper our gas re-injection efforts and attempts to remove flaring." Kupolokin says it is important that the government considers forms of alternative financing.

"The government has recognised the need for a coherent energy policy and is implementing this. We want to promote the development of gas and target it as a substitute for other sources of energy, to meet domestic energy needs and for export earnings." 

The government's approach to negotiations and openness to new investment initiatives from the international energy community should help to generate the necessary funding, he says.

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