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January 5, 2016

Fresh hope on the horizon for offshore Nigeria

The Nigerian National Petroleum Corporation recently secured a $1.2bn multi-year deal to drill 36 offshore / onshore oil wells from a consortium of Nigerian and international lenders. The Nigerian offshore industry has faced problems with corruption and piracy, so the deal could be an integral step in boosting investor confidence.

By Lindsay Dodgson

niger delta

Offshore oil drilling in Nigeria could be substantial, but corruption and piracy in the sector mean the industry hasn’t boomed as much as it could have with the available resources. There has been a stagnation of oil production over the past few years, but a recent deal between the Nigerian National Petroleum Corporation (NNPC) and international lenders may be the boost Nigeria needs to invigorate its offshore industry.

The NNPC has secured $1.2bn of funding to drill 36 offshore oil wells in a joint venture with Chevron Nigeria. The project is expected to generate between $2bn and $5bn of incremental revenue, while also increasing the confidence of international investors.

Corruption, spills and pirates

Nigeria is one of the largest oil producers in Africa, along with the likes of Angola and Algeria. The Niger Delta is an oil-rich area of the Niger River which produces about two million barrels of petroleum per day. There is ample oil still available in the region; as of early 2012, an estimated 38 billion barrels of crude oil still resides under the delta. However, the country doesn’t make the money that it should out of its offshore oil.

"We’ve seen a lot of exploration done in West Africa: in Ghana, Liberia," says Ecobank energy analyst Dolapo Oni. "We haven’t seen as much offshore activity in Nigeria, that’s really because everyone is scared to invest the capital."

At the annual conference of the Nigerian Association of Petroleum Explorationists, Chevron Africa president Ali Moshiri said that investment in Nigeria’s oil and gas industry, which stood at $20bn in 2014, dropped by 20% in 2015.

Moshiri said this was because of lack of gas infrastructure and policy, and not the level of its gas resources. For example, four oil refineries were brought down over corruption and the country now relies on imports for nearly all of its fuel needs.

Nigeria’s oil industry has suffered major setbacks from many different angles. Oil spills in the Niger Delta have caused devastation, particularly two massive incidents for which Royal Dutch Shell paid compensation in 2008 and 2009.

"Oil spills in the Niger Delta have caused devastation, particularly two massive incidents for which Royal Dutch Shell paid compensation in 2008 and 2009."

In addition to environmental problems, there have been prevailing security troubles and the industry has faced frequent losses from piracy, oil thefts and poor infrastructure.

The energy committee of Nigeria’s national conference said in a report that Nigeria loses the equivalent of $35m every day in oil thefts. A study by Goddey Wilson from Ignatius Ajuru University in Nigeria estimates that the annual value of oil stolen from Nigeria is between $3bn and $8bn

Oil theft and pipeline vandalism are particularly common in the Niger Delta. There is an open-air market for illegal crude oil off the Delta, called the Togo Triangle, where many pirates operate. So, while rich in oil, the area can be particularly off-putting for long-term investors.

Making sure the correct maritime policy is in place is vital for stakeholders, and thus the federal government, so it set aside $1bn to fight vandalism and oil theft this year. As a result, the number of armed robbery and piracy incidents has declined from the 55 attacks in 2014 in African waters or by African pirates.

African states are increasingly prepared to work together to tackle their piracy problems as regional blocs, which is promising for future investment opportunities. However, the NNPC has also experienced shady financial troubles of its own, with corruption in the company, oil theft and other crimes hitting its profits.

"The NNPC owes several companies a lot of money," says Oni. "So they have to clear the debts before they can raise money."

The National Economic Council calculated that the NNPC earned N8.1tn ($41bn) between January 2012 and May 2015, but paid just N4.3tn ($21bn) to the federal government in Abuja. PricewaterhouseCoopers found that the company owed the federal government up to $4.3bn for the 19 months following January 2012.

Time for transparency

Nigerian President Muhammadu Buhari has a long-term plan to overhaul the country’s oil and gas sector by emphasising transparency in the industry and returning it to profitability. He has promised to investigate the billions of dollars in oil and LNG income that have gone missing over the years, which he estimates has caused $150bn worth of losses to the public over the past decade.

Fuel scams, corruption in the NNPC, lack of transparency and loss of revenue due to tax avoidance have all contributed to losses for the Nigerian offshore industry, and Buhari has said he is committed to bringing the four oil refineries back on-stream.

Oni says Buhari has an emotional attachment to the oil industry because he was in power when much of it was set-up.

"He supervised the creation of the NNPC, he supervised the completion of the oil refineries," Oni says. "So there’s a bit of an attachment to the industry, which makes it quite imperative for him."

Buhari accentuates the importance of transparency in the industry, and Oni says that it is starting to happen.

"We’re seeing a lot of information about the industry that we didn’t have access to before," he adds. "How much is being paid into the accounts, how much revenue is being generated, on a monthly basis."

The new NNPC deal might be what is needed to turn the industry around, if all involved play by the rules. President Buhari has brought in a new group to manage the NNPC, after the previous administrators largely mismanaged operations. The company’s new group managing director Dr Emmanuel Ibe Kachikwu has made assurances that there will be no reason to go back to fraudulent ways.

Turning around the industry

The fields to be explored will be located in the Warri region west of the Niger River and offshore in shallow water. Kachikwu believes that, although oil prices are currently very low, the industry can be turned around by overhauling oil contracts, and renegotiating production sharing contracts (PSCs), which are contracts signed between the government and resource extraction companies.

Kachikwu wants to discuss the contracts because they were first signed 20 years ago amid sub-$20 oil barrel prices and when deepwater activity was in its infancy.

Nigeria has a vast deepwater sector that still has large potential. Deepwater extraction plants in the country are less disturbed by local militant attacks, seizures and sabotage and are therefore attractive to oil companies and investors. Kachikwu may want to rewrite the agreement to include more on this area.

It is unclear what the NNPC hopes to achieve from the renegotiation, but ultimately Nigeria was previously being denied returns as the contracts were skewed in favour of the companies.

"The proposed Nigerian Petroleum Industry Bill means that investors are scared to put money in if, when they make a discovery, it will be subject to new terms that mean less profit."

Oni says the restructuring of the industry has actually deterred some investors. The proposed Nigerian Petroleum Industry Bill means that investors are scared to put money in if, when they make a discovery, it will be subject to new terms that mean less profit.

The NNPC is also likely to see some restructuring. "Over the next five to six months, you will begin to see emerging a new NNPC," Kachikwu said. "Things have been done wrongly; things need to be done rightly."

Chevron spokesman Deji Haastrup said: "We support the Nigerian Government’s objectives, and are pleased to do what we can to help the administration succeed in its efforts to build a prosperous Nigeria."

According to the National Bureau of Statistics (NBS), foreign investment has improved in the oil and gas sector in Nigeria, attracting $14.34m in the first half of 2015, which may show that investors are gaining more confidence in the area.

Oni is aware that the offshore industry in Nigeria isn’t a quick fix, and there are problems to work on. "It’s going to be a challenge if we don’t have those new fields coming on-stream and production continues to decline at the rate it is declining," he says.

But Oni is hopeful for the future. There are not many long-term contracts for crude oil, and Nigeria’s relationships with consumer countries such as India, China and South Africa are not so strong, but the fight for transparency in the industry is a good start.

"All the effort to clean out and block all the leakages in the system," Oni says. "That’s really a positive light for the industry."

 

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