Nigeria looking up
Long-awaited legislative progress, peace in the Delta and some astute political management are creating optimism in the country's energy sector
Over the next five years, the federal government of Nigeria is looking to attract about $10bn in new investment into the country's energy sector. About $6bn is needed to fix its refineries and reduce petroleum product imports. The Nigerian National Petroleum Corporation (NNPC) also intends to upgrade total refinery processing capacity to 0.7m barrels a day; a level that, even at 50% utilisation, would meet domestic demand. (Current nameplate capacity is about 450,000 b/d, but actual processing is much lower.) Much new spending is needed for gas pipelines and processing capacity; the NNPC has its own plans to build a 0.5bn cubic-feet-a-day gas processing plant to feed the power sector. Nigeria has over 10 gigawatts of installed capacity for gas-fired power supply but is barely able to get its electricity power supply above 4GW due to insufficient gas feedstock.
Beyond the NNPC, the government also hopes to boost investments in oil and gas exploration. A marginal-field licensing round is scheduled for the third and fourth quarter of this year, while a proper block licensing round could be held by the end of 2017 or early next year. It would be Nigeria's first licensing round in about 10 years.
The plans are therefore great. Yet, for all its oil and gas potential, investment in recent years has been weak. Offshore exploration activity has slowed considerably while major field development projects earlier earmarked for 2017-18 have been pushed further back to 2019-20. While major new projects are being brought on stream in neighbouring countries such as Ghana, Côte d'Ivoire, Congo and Angola with several others lined up for first oil or first gas before the end of 2017, Nigeria has only the Egina field in Q1 2018 as the major project to look forward to.
The main reason for the slow progress in Nigeria has been the lack of passage of the Petroleum Industry Bill, an effort to harmonise all laws regulating the Nigerian oil and gas industry into one single document. The bill has been in and around the legislative arm of government since 2007, when it was first submitted to the Senate. Due to the perceived haircut to the value of projects implied by the bill's terms, many were suspended and some postponed—especially in the deep water, where major changes to fiscal terms were expected.
The peace is likely to be sustained as long as the government continues to engage the region constructively
The government has now taken several steps to address this delay in passage. First, the bill has been split into four parts, a governance bill, a fiscal-regime bill, a downstream and midstream bill and a petroleum revenue management bill. The first section, called the Petroleum Industry Governance Bill (PIGB), has just been recently passed by the Senate for the consideration of the lower house, the Federal House of Representatives. Following passage by the representatives, the bill will be reviewed by a sitting of both houses and then passed into law with the assent of the president.
The passage of the first section, that is, the governance bill, is expected to clear the way for deliberations to begin on the subsequent drafts, especially the fiscal bill, which is viewed as the most important section. This is because it is expected to clear the air on how the deep-water assets will be taxed, what the government plans to do with gas under the production-sharing contracts (PSCs) and how it intends to review the general taxation of the petroleum industry to generate more revenue. Furthermore, the petroleum host community fund, a 10% levy on profits before tax, which will be used as a community-engagement scheme, is likely to be included in the fiscal bill. The draft copy of the National Petroleum Fiscal Policy released in February, which will form the basis for the fiscal bill, already indicates a favourable reduction in taxes, which operators are likely to find attractive. Gas operations, which previously had no fiscal terms under the PSCs, are to be taxed lower than oil. However, focus on the fiscal policy will have to wait for the full passage of the governance bill first into law.
The governance bill intends to revolutionise the way the state relates with the oil and gas industry. A new regulator, the National Petroleum Regulatory Commission (NPRC) will be created, combining the functions of the current upstream regulator—the Department of Petroleum Resources (DPR)—the Petroleum Inspectorate and the downstream regulator (the Petroleum Products Pricing & Regulatory Agency). The benefits of having a single industry regulator to provide all necessary licences and permits cannot be over-emphasised. The current regulatory framework has proven to be mostly weak and inefficient with operators having to respond to several regulators to get various licenses or permits.
The bill will also streamline the powers of the petroleum minister to award or renew oil blocks, making them reflect the will of the NPRC as against using his own discretion. NNPC will be restructured into a new national oil company that will be fully commercial with no regulatory functions or powers. The equity will be held by the federal government (50%) and Bureau for Public Entreprise (BPE, 50%). The BPE will sell down 40% to the public within five years. This is likely to be a challenging task as the NNPC is currently a behemoth of an organisation, with over 30 subsidiaries. All these subsidiaries are expected to be re-absorbed back into the new organisation before it is then transformed into a commercially focused oil company. The Nigerian Gas Company is also likely to be listed on the stock exchange.
In short, the bill seeks to improve transparency and accountability in the oil and gas industry. However, implementation has always been the problem. So while the bill could be passed into law, anticipate the actualisation of these plans to be drawn out further than expected in the document.
Another key concern for investors in Nigeria has been security. Most of these worries were based on the attacks in 2016, which showed the extent to which the militants could really damage oil and gas investments. They succeeded in shutting down key oil export terminals such as Brass River, Bonny Light, Escravos and Forcados for extended periods. Forcados stayed offline for nearly nine months only to be attacked and shut down for a further seven months.
But, so far in 2017, the Niger Delta has been peaceful—the result of extensive negotiations between the government, the militants and Niger Delta communities. The communities provided the government with a list of 16 demands largely focused on getting more share of the revenues from the oil and more ownership of the reserves. Although I doubt that the government will be able to meet most of these demands, the communities seem to appreciate the more engaging framework of the current talks they are having with the government.
The visits by the acting president Yemi Osibanjo to the Niger Delta over several months from January to March are a sign of the government's good intentions to tackle the issues of the region. Furthermore, the government also restarted the amnesty payments to ex-militants and increased the budgetary provision for the payments from 20bn naira ($6.3bn) annually to over 65bn naira to cater for previous payments missed and also cover additional payments, likely to the new militant groups that came on the scene in 2016. These steps, in addition to other forms of less-publicised engagements with the militants via the Pan Niger Delta Forum have helped to restore stability to production; allowing repairs and lifting of force majeures on major oil exports, especially Forcados.
However, a sense of fragility persists over the recent peace in the region; the insecurity has not totally abated due to continued kidnappings and smaller attacks on gas pipelines by some groups. Illegal refinery operators continue to break into pipelines to steal crude oil to feed their plants. The government had initially mulled the idea of converting these operators into a form of cottage refineries but has since suspended the idea due to the risk of further degradation of the environment. Vandalism of petroleum product pipelines remain high, with the NNPC reporting more breaks in March than in previous months. These breaks continue to hinder the functioning of NNPC depots around the country, which would ease the distribution of petroleum products and help the NNPC reduce its distribution expenses. Furthermore, the delay in start-up of the oil spill clean-up program in the Niger Delta, despite its elaborate kick-off over a year ago, could prove to be a distraction from the ongoing engagements. The delay is largely due to lack of funding from the government and its partners, the international oil companies. Continued postponement could create doubts about the sincerity of the government in really tackling the key issues of the region. Still, the peace is likely to be sustained as long as the government continues to engage the region constructively. The improvement in government revenues from oil due to the return of the Forcados pipeline and passage of the budget could ensure release of funds for payment to ex-militants and also investment in capital projects and infrastructure in the region.
The third factor in the country's lack of investment remains the political angle. This is largely two-fold. The first is a potential succession problem due to the persistent health concerns of President Buhari. The second is the tense relationship between the executive and legislative arms of government. Buhari has had to make two trips to the UK to get medical attention on an undisclosed illness and also had to reduce his involvement in the running of the country. Although, power was delegated to the vice president as expected by the constitution, worries about Buhari's inability to continue in office beyond 2019 raise questions about the impact of a change in personnel at the top of the country. Investors may take comfort in the competence shown so far by vice president Yemi Osinbajo. At least until 2019, when the elections are due, key decisions will be made in a timely fashion. This is largely reflected in the Enabling Business Environment 60-day plan launched in February, which has helped reduce some of the problems of doing business in Nigeria. From entry and exit into the country to accessing credit, registering a company, obtaining permits and facilitating trade across borders, the government has shortened previously long timelines.
65bn naira - Amount Nigeria's government is spending on amnesty payments in the Delta
But the relationship between the executive and the legislative continues to be a sour spot. The 2017 budget was finally passed in June after several months of delay by the National Assembly (a combination of the upper and lower houses of the legislature). The Federal House of Representatives announced suspension of deliberations on the governance bill passed by the Senate pending conclusion on discussions about a $17bn disparity in the country's oil revenues when figures from all the various government agencies are compared. According to the House, the figures from the NNPC, DPR, Nigerian Navy, Nigerian Maritime Administration and Safety Agency indicated a discrepancy of over 48m barrels during the years 2011 to 2013; a period during which oil was sold at over $100 a barrel. While this is a necessary investigation, this discussion could further delay passage of the PIGB.
Recently the House also passed an amendment to the NLNG Act (for liquefied natural gas) to include some new duties and charges not initially included in it. This amendment, which reduces the profit share of partners in the NLNG while increasing the government share of benefits (taxes) could put current discussions with partners over a new LNG train 7 at risk. The Senate has also had its own fair share of disagreements with executives, most recently stopping the concessioning of the Port Harcourt refinery to Italian oil major Eni and local oil company Oando, after a protracted discussion between the petroleum ministry and these companies.
Despite all these obstacles, the open and entrepreneurial focus of the current leadership of the petroleum industry and the strong support from both the president and vice president (acting president) provide some basis for optimism on the fortunes of the industry. The ability of the current junior minister for petroleum, Emmanuel Ibe Kachikwu, to engage constructively with various stakeholders has also ensured that industrial actions and other industry constraints are less of an issue than they've been in previous years. This was critical to getting a deal with the international oil firms that enabled Nigeria's exit from its joint-venture cash call obligations. The exit lets Nigeria spur new investments by the joint-venture partners as they seek to get their debt payments from Nigeria through incremental production, and is expected to see the country produce more crude oil from 2018. Involving the legislature in the discussions that led to the creation of the Petroleum Sector Roadmap launched in 2016 has also helped to create a good working relationship with the upper and lower houses.
Overall, the combination of the steps taken by the government to de-risk operations in the Niger Delta, pass key legislation and create a more collaborative environment in the oil sector are major positives that should attract new investment into the country. Although security and political risks remain, Nigeria is increasingly open to investment especially in its crucial oil and gas sector.
Dolapo Oni is vice president and head of energy research at Ecobank. He is based in Lagos
This article is part of a report series on Nigeria. Next article is: Nigerian continuity