The Price of Nigerian Oil

21 May 2008 (Last Updated May 21st, 2008 18:30)

Nigeria is one of the world's richest oil and gas zones but is still held back by civil unrest. Fleur Doidge reports.

The Price of Nigerian Oil
An aerial view of Nigeria’s troubled hot spot, the Niger Delta.

West African nation Nigeria is in the top ten largest oil and gas producers globally and is the largest oil producer in Africa. So it is no surprise that it regularly makes headlines. But as time goes on, this is increasingly for all the wrong reasons.

The Nigerian National Petroleum Corporation (NNPC) – recently superseded by the National Petroleum Company of Nigeria – recently said an increasing amount of oil capacity is shut in – much of it due to disturbances such as pipeline vandalism or violent attacks on oil companies, including but not limited to staff kidnappings and even killings.

If all shut-in oil capacity were to come back online, total potential production capacity is estimated to exceed three million barrels a day, with one million from offshore sources, including Shell's shut-in 115,000bpd EA Platform. On 7 February, Shell shut in a further 130,000bpd, bringing the Nigerian shut-in total to one million barrels.

"West African nation Nigeria is in the top ten largest oil and gas producers globally."

Offshore sites exist in the Bight of Benin, Bight of Bonny and Gulf of Guinea, with major and lesser players from all over the world jostling for advantage and eyeing these risks – which are also holding back refineries and future development.

"Deepwater projects may represent the future of Nigerian oil production by allowing multinational operators to avoid security risks inherent to the unstable Niger Delta region," said state oil sources last year.

Currently, a third of Nigerian oil production capacity is offshore, with 36.2 billion barrels of oil reserves as of January 2007, according to the US Energy Information Administration (EIA). Government has flagged plans to expand that to 40 billion barrels by 2010. Around 20% of the nation's crude exports are destined for European markets. Oil exports reached an estimated 2.2 million barrels a day in 2006.

Nigeria also had 182 trillion cubic feet of proven natural gas reserves as of January 2007. The government plans to raise earnings from natural gas exports to 50% of oil revenue by 2010 – costing an expected $15bn in private sector investments. But 40% of Nigeria's annual natural gas production is flared, according to government sources.

NIGERIA'S HISTORY WITH OIL

Oil was first found in Nigeria in 1956 by Shell-BP, with the first oil field coming on stream in 1958 and producing 5,100bpd. This discovery opened up the oil industry in 1961, bringing in Mobil, Agip, Safrap (Elf), Tenneco and Amoseas (Texaco and Chevron respectively) to join the exploration efforts both in the onshore and areas of Nigeria.

Post 1970 saw the end of the Biafran War coincide with rising oil prices and resultant benefits for Nigeria, which then joined the Organisation of Petroleum Exporting Countries (OPEC).

NNPC was established in 1977 as a state-owned upstream and downstream player. Some 95% of major oil and natural gas projects have been funded through joint ventures (JVs), with the state oil corporation as major shareholder.

By 2004, Nigeria was producing 2.5 million barrels of crude each day. Petroleum production and export now play a dominant role in Nigeria's economy and account for about 90% of its gross earnings.

SHELL, EXXONMOBIL AND MORE

Shell in Nigeria reported an average oil production of 658,000bpd and 1.652 million standard cubic feet of gas a day for that company in 2006 – the latest figures available. However, country chair and managing director of the Shell Petroleum Development Company (SPDC) – the largest private Nigerian oil-and-gas player – Basil Omiyi says a rising tide of violence in the Niger Delta meant shutdown of many onshore and offshore operations that year.

"One of our staff members and a number of contractors lost their lives as a result of armed attacks by militant groups, who also took hostages and destroyed facilities," Omiyi said.

"Nigeria is the largest oil producer in Africa."

Such attacks have held back Shell production, project delivery, cost, safety and environmental initiatives. However, the firm's Bonga offshore field boosted production in the year while Shell Nigeria Gas increased its gas supply to customers by some 20%, according to Omiyi.

Corruption has also been an ongoing problem. Shell – and others – have signed up to the Nigerian government's Nigerian Extractive Industries Transparency Initiative which promotes public disclosure of oil and gas industry payments to the government.

But this does not deter ExxonMobil, which believes the difficulties are worth it, with oil and gas opportunities not letting up for years. "Activity is expected to remain strong in West Africa, where numerous opportunities are advancing in offshore Angola and Nigeria," senior ExxonMobil vice president Mark Albers told a 2008 analyst meeting in New York.

Technology is helping in both oil and gas offshore production. "In Nigeria, the East Area project will increase recovery from six fields through the expansion of gas gathering and injection systems and the installation of gas compression," Albers said.

"The Additional Oil Recovery and Natural Gas Liquids projects, with a total growth investment of over $4bn are increasing liquids recovery and at the same time helping to eliminate routine gas flaring offshore."

Analyst firm Global Insight notes that other companies, such as Total, are increasing their investment as well. Total in March signed up with Nigeria's Conoil Producing Ltd to farm into the deep offshore OPL 257 licence with a 40% interest. Conoil remains the operator with a 50% interest, and a local company holds the remaining 10%.

"Deepwater projects may represent the future of Nigerian oil production."

Afren recently entered into a farm-in agreement with Oriental Energy Resources Limited for the development of the Ebok Field, located offshore in south-east Nigeria.

Chevron plans to begin developing a deepwater field discovered off Nigeria in 2002. The Usan field may produce up to 180,000bpd, Global Insight said.

Many other offshore projects are at various stages of development. Additionally, Nigeria's Joint Development Zone with neighbouring Sao Tome and Principe contains 23 exploration blocks that could hold 14 billion barrels of oil reserves, if developed.

Gas industry entry looks equally buoyant. For instance, Russian gas firm Gazprom has this year discussed entering the Nigerian market.

INDUSTRY REFORM

Global Insight said Nigerian government reforms hinge partly on the traditional joint venture oil companies' transformation into capital raising, listed corporations. Meanwhile, a new state gas policy, including a new department of gas, pricing and regulation changes, will prioritise domestic demand over liquefied natural gas exports.

"The change in the [oil] joint venture agreement will alleviate the funding problems from the federal government," a report says.

The government also plans to revise existing oil contracts, tightening terms for foreign players. NNPC has been scrapped and replaced by a new Nigerian oil corporation with seven directorates – upstream, refinery and petrochemical, marketing and investments, gas and power, engineering and technology, finance and accounts and corporate services – with a view to the new body becoming a major player internationally.

"By 2004, Nigeria was producing 2.5 million barrels of crude each day."

"The reform of the oil sector [may] also help reduce the amount of crude shut in, but the key issue lies in solving the problem of security in the oil-producing Delta region," the report said. "Shell alone has been shutting in at least 477,000bpd since February 2006 and Global Insight believes the country as a whole to be shutting in around 732,000bpd."

Further, the new gas measures are tipped to put the pressure on gas flaring, fining companies a possible $100 per million cubic feet of gas if their projects still flare in 2009.

"[And] as domestic demand is now prioritised, it will buy time for the oil companies involved in the planned LNG export projects to decide how best to move forward," Global Insight said.

An $8.5bn Brass LNG facility may be delayed past 2008 by the security situation and the new gas policy is likely to set back development of the Olokola LNG facility and the Trans-Saharan pipeline further, according to Global Insight. But the question will be, will Nigeria be able to manage the safety and security of its reserves, and will the nations dealing with Nigeria be able to come up with solutions to ensure supply if it can't.