Toyin Akinosho examines the body language of the country's regulatory authorities in AbujaAT an industry conference in early August, Austen Oniwon-CEO of NNPC, the Nigerian state hydrocarbon company -made a 23 -slide presentation to a roomful of ranking Nigerian petroleum engineers, but he spent a bit more time on one slide in particular.It showed a list of rig counts for oil and gas drilling, in seven African countries, in June 2011.Nigeria had a rig count of 10 for oil drilling, compared with Angola's seven (7) and Algeria's 22. For gas drilling, there was just one rig active in Nigeria in June 2011, whereas eight rigs were on duty in Algeria.The message on the slide was as clear as daylight: compared with its closest rivals for oil and gas investment on the African continent, Nigeria's performance was sub-optimal.Nigeria's crude oil reserves are 37Billion barrels, compared with Algeria's 12.2Billion barrels and Angola's 13.5Billion barrels, respectively, meaning that each of these two countries is sitting on oil tanks that are around a third of Nigeria's. Why then should Algeria's drilling activity (22 rigs) be more robust than Nigeria's, or Angola's activity (indicated by the rig count of 7), be very close to the quantum of Nigerian activity(signified by rig count of 10)'A similar question arises for gas: Why is Algerian gas drilling activity about eight times that of Nigeria's, when Nigeria has higher volumes of gas (196Trillion cubic feet) in its reservoirs, than Algeria (with 156Trillion Cubic Feet), according to BP Review of Statistics, the bible of the industry's reserves and production data' It wouldn't have mattered if Nigeria was conserving its resources. In truth, the country was keen on exploiting them, most especially for export purposes.Oniwon was sure he knew the reason for this dysfunction. It is the Petroleum Industry Bill( PIB), an omnibus piece of legislation which combines 16 different Nigerian petroleum laws in what is supposed to be a single transparent and coherent document. This bill has been locked down in a vicious debate since it was first presented to the National Assembly in 2007. The PIB has become the 'poster document' for the decline in oilfield activity in Nigeria. International Oil Companies have been quite strident in their criticism of certain aspects of the bill, especially the overall fiscal regime, the Joint Venture relationships between the top producing firms and the government company, as well as uncertainty in framework for gas development. But these selective objections have been so played up in the media that they create the perception that the entire PIB had altogether been rejected by the IOCs, who have also come across as if they are against any form of engagement with government.In any case, investment anxiety and risk perception about the country has been enhanced by the inability of the executive and legislative arms of the Nigerian government to pass this legislation, after so much publicity.Oniwon took his gaze back from the screen to the over 200 delegates attending the main roundtable session of the Society of Petroleum Engineers' conference, in a Banquet Hall of the Hilton Hotel in Abuja. It was then he uttered that widely publicised statement:'Everybody talks about the Petroleum Industry Bill (PIB). I think we should agree that the PIB would be passed and when the PIB comes, all of us would just have to re-adjust to whatever the new PIB comes out with.'Therefore, we should stop procrastinating and saying we are not going to take decisions because the PIB has not been passed'.Oniwon knew he had just the right audience. Flanking him, on the panel, were chief executives of the country's two largest oil producing companies. Mutiu Sumonu, chair of the Shell Companies in Nigeria (2010 average operated production 1,000,000 BOPD) and Mark Ward, chair of ExxonMobil companies in Nigeria (2010 average operated production~750,000BOPD). Together, Shell and ExxonMobil, in joint venture with NNPC, deliver around two thirds of Nigeria's output.The NNPC chieftain dangled somecarrot:'I can tell from what I know from the PIB, that the fiscal regime that will emerge is not going to be any worse than what operates in the West African sub-region. I believe if you can do business under these regimes, then, those that would do business under the regime, would be very happy to do business in Nigeria, under the new PIB when it emerges.'Then he brought out the stick:'Opportunities available in the industry would not wait for the joint- venture partners and their colleagues, as others would come and fill the gap, if they failed to act promptly.'To rephrase the last statement: 'Nigeria was a great opportunity that everybody was keen to get into. If those who held its assets today did not appreciate what they had, there were others waiting to grab these opportunities'.Coming from the CEO of the state hydrocarbon company, such utterance requires close examination. The immediate question is that: is Nigeria what it's cut out to be''The three leading indices of a healthy oil and gas landscape are: rig count, production growth and foreign direct investment', says Jerry Tolkien an E&P analyst based in Cairo. 'These are not at this point happening in Nigeria'.Nigeria produced an average of 2.42MMBOPD in 2010, with capacity for far less than 3.5MMBOPD. The figures are a significant shortfall of its 2010 target, which envisaged capacity for production of at least 4MMBOPD, but things could have been worse, as the ensuing story shows, and government officials, in public, have been recently expressing the view that the country is at least producing more crude oil per day than Angola. Such views are suggestive of a low water mark in Nigeria's expectations of its main industry. What exactly happened'The Boom Years:1995 To 2005The state of Nigeria's E&P industry today is the result of several actions of state and non state actors in the last 15 years. But in the 10 years leading to 2006, the country experienced a sort of hydrocarbon boom.Bouyed by very generous incentives, including zero percent royalty, IOCs plucked a series of deepwater discoveries between 1996 and 1999, putting Nigeria squarely on the global deepwater radar. By 2002, there were confirmed six billion barrels of new oil, in water depths between 200metres and 1,500 metres. Whenever the energy press reported that the Gulf Of Guinea was racing ahead of Brazil and the Gulf Of Mexico as the deepwater exploration hot spot, they were largely referring to Nigeria and Angola.As the country returned to democracy in 1999, it was also commissioning a $3.8Billion Liquefied Natural Gas plant. Nigeria held an open, transparent bid round in 2000, a widely subscribed lease sale, which featured such distinguished newcomers as Devon Energy, the large American midsized independent and Petrobras, the Brazilian giant. The same year the government set up an Oil and Gas Reform Implementation Committee (OGIC), to carry out a comprehensive reform of the oil industry. This, in effect, led to the Petroleum Industry Bill.A rigorous, comprehensive bid round for marginal fields was conducted between 2002 and 2003, for the purpose of awarding undeveloped discoveries, located in the acreages of oil majors, to Nigerian entrepreneurs, in order to build indigenous capacity in wholesale E&P operations and in effect, boost the percentage of oil production that's attributable to homegrown firms.Three deepwater fields came on stream, at a total of around 450,000BOPD on average, between 2003 and 2006. The country recorded its highest crude oil production in history in 2005, at roughly 2.5MMBOPD.An ambitious local content programme, launched in 2002, picked up speed between 2005 and 2007, with the state enforcing, and operators committing, to 'utilization of Nigerian human and material resources'. A key plank of the programme was domiciliation of goods and services supply. One deepwater project committed to the fabrication of approximately 6000 tonnes of equipment and structural modules at fabrication yards in Nigeria, a landmark development.Engineering design services continued to increase; one engineering contractor completed over 50,000 man-hours of engineering design in Nigeria between 2006 and 2007. One major operator commenced a redevelopment project of a cluster of fields which outlined a very aggressive Nigerian Content plan, including the design and construction of whole new flowstations and integration of substantial module in Nigeria, a marked departure from the token structural fabrication that had been done in the past.The Decline: 2006 To 2011It was in the midst of this tempo, in February 2006, that the Movement For The Emancipation of Niger Delta announced its emergence, with bomb blasts of strategicinstallations, especially the Escravos River part of the pipeline that delivers natural gas to the country's largest power plant as well as the major industries in Lagos, the coastal city that is the country's financial hub. The attack heightened the sense of urgency about what has always been termed 'the Niger Delta crisis'. The damage on the gas pipeline, part of Nigeria's domestic gas artery, took out Chevron's daily supply of 150Million standard cubic feet (MMscf) to the Escravos-Lagos Pipeline System(ELPS), which feeds all the Thermal Power Plants in the southwest and midwest of the country, including Egbin, Papalanto, Omotosho and Delta Power stations, with combined nameplate capacity of about 2,000Megawatts (MW) of electricity.But it also initiated a significant wind down on crude oil production on the shelf, as well as any meaningful progress that the national content programme was beginning to make.As attacks on facilities were launched after more severe attacks, with kidnappings of international oil workers and slaughtering of Nigerian soldiers, crude oil output fell to as low as 2.06MMBOPD in 2009; a figure that would have been far less, had two new deepwater fields not come on stream between 2008 and 2009.In spite of the low intensity war on the production field, which curbed even the willingness to do exploration work, a new government, elected into power in 2007, sought as policy, a revision of ongoing hydrocarbon projects. A raft of gas to power projects were stopped on suspicion that too much money had been spent without any visible activity on ground. Two proposed Greenfield LNG projects, totaling 30Million Tonnes Per Year in scope and expected to be delivered latest 2013, were held up for scrutiny as government's body language signaled increased commitment to domestic gas production, in favour of export projects, even without clear fiscal consensus between government and producers for domestic gas output. Several deepwater projects have fallen victims of extended negotiations and back-and forth between officials of the National Petroleum Investment Management Services (NAPIMS), the subsidiary of the Nigerian state hydrocarbon Company (NNPC), which interfaces with Joint Venture partners. It is known that the so-called 'NAPIMS approval process' is one of the most drawn out in the global oil patch.In the last 18 months, NAPIMS has also muscled in on small gas 'flare-out projects that were to be awarded to small contractors by oil majors who consider them quite uneconomic to be incorporated into large scale gas processing facilities.Meanwhile, the quality of acreage bid round has declined since 2004, such that, even the Department Of Petroleum Resources, the industry regulator, declared the 2007 lease sale as largely a failure.One other culprit has been geology. While Nigeria's deepwater exploration profile had been on to a good start in the mid 90s, there has been a series of disappointing dry holes, especially in the western and southern flanks of the basin, the so 'called outer toe thrust belt. Chevron's Iroko-1(OPL 250)ENI's Dou-1 and Emein-1(OPL 244), Devon Energy's Pina 1 and Tari 1, (OPL 256), Petrobras's Erinmi 1(OPL 324), Phillips' Onigun 1(OPL 318), all were either dry holes or have encountered marginal gas or little oil shows between 2001 and 2006, setting the stage for some sort of exploration fatigue in Nigeria's deepwater, at a time when deepwater exploration success was about to break out in the marginal basins of the Gulf Of Guinea, including the Cape Three Points Sub Basin (Ghana) and the Sierra Leone-Liberian Basin.Still, the difficult challenges of geology can be managed by host government, with the right politics. BG's two dry holes in deepwater Nigeria (between 2008 and 2009) cost the company around $200Million, a vast sinkhole, but the UK major's enthusiasm about the country was already suffering reverses with the lack of progress of OK LNG and Brass LNG. Suddenly, its portfolio looked extremely lean. Now BG has not left Nigeria; but it isn't exactly active either. Devon Energy, Pioneer and Occidental, three significant American independents, who showed up with the promise offered by Nigeria's return to democracy at the turn of the 21st century, have largely left on this basis.Add to this potent mix mounting cash calls: the continuous inability of the NNPC to fund its share of approved budgets, for projects by its JV partners. And yet government bureaucrats, blissfully ignorant that this is a cake that is not growing, keep coming up with statements like Oniwon's: 'If you can't do it, get out: others are waiting'. Centrica, the UK gas company, took the cue. It sold its assets to Newcross, a Nigerian company.And one clear index of the health of the industry emerges: No single, big ticket project(>$500Million) reached a Final Investment Decision between 2008 and 2009. Any project that is coming to fruition today has had its FID taken by 2007.As debate over the PIB was fought in the media, perception of Nigeria as an investment destination for oil and gas is what has suffered the most. But, as is obvious from above, PIB is only a part of the story. 'Nigeria is having all the challenges of a third world, hydrocarbon economy that it could have right now', Tolkein explains. 'The uncertainty in the passing of the PIB has added to these challenges'.Then came the decision by Shell to divest from a number of assets in Nigeria. In 2008, the company sold its participating interest in two non-operated interests in the deepwater terrain.In 2010, Shell announced that it had started selling acreages on the shelf(land, swamp and shallow water) too. It sold its 30% stake in OMLs 4, 38 and 41, three acreages on land and in swamp of the Midwest part of the country along with partners ENI and TOTAL, who had agreed to also sell their combined 15% stakes to a local company named Seplat(an incorporated joint venture of two indigenous companies Platform and Shebah and French minnow Mauriel et Prom). Shell & Co came out less than a year later to sell their interests in another lease, OML 26, to First Hydrocarbon Company, a local subsidiary of Afren, the UK listed producer. While these divestments, led by the largest operator in the land, may indicate a surge of uncertainty in the Nigerian petroleum sector, the underlining message has been that it is an opportunity for Nigerian private sector companies to weigh in as E&P operatives.Shell then went on to call for a bid, by Nigerian companies, for four more of its acreages, including Oil Mining Leases(OMLs) 30, 34, 40 and 42.A close look at what has transpired since that bid process came to conclusion, clarifies the notion that the Nigerian government, through its ranking officials at both the Ministry Of Petroleum and the NNPC, have been active participants, all along, in sending the signals that the Nigerian space was not friendly to investors.The insistence of NPDC, the operating arm of NNPC, to step in and claim operatorship of four acreages sold to Nigerian companies by Shell, ENI and TOTAL is a clear statement that Nigerian government, as an incorporated entity, is competing aggressively against those to which it should otherwise be opening its doors.A noteworthy trend of the years of the locust(2006-2011) for Nigeria's hydrocarbon industry has been the strengthening of the spirit of local content, even if it means, an increasing sense of self entitlement(sometimes worrisome) among the country's bourgeoning business class.Although Conoil, the country's first truly independent, growth-conscious, indigenous E&P company, emerged after a discretionary lease award to local businessmen in 1991, it wasn't until after the Marginal field exercise of 2003, that a class of homegrown E&P companies started to take shape. By January 2010, there existed, in the country, at least five companies, producing anything from 1,000 to 20,000BOPD each. They are generally small, but have gradually amassed significant experience in upstream operatorship of hydrocarbon property -acquired in the process of raising fund to drill wells, running oil field operations, evacuating oil to export facility, building gas processing facilities, even constructing topping plants, all with money invested by Nigerians. There is nowhere else in Africa that this is happening.Shell had made it clear, with the example of Seplat, that this is the type of company it wants to hand over its assets to operate.When, around mid 2010, Shell invited a number of similar companies to purchase the same percentage stake in four other acreages, out of its remaining 35 operated leases, industry analysts began to predict the emergence of Nigerian midsized independents, with capacity to produce as much as 40,000BOPD each on average in at least the next five years. Companies in this class were coming in with money sourced from abroad, and this time they are partners in incorporated joint ventures, not passive venturers who collect rent and leave the foreigners to maximize experience and build capacity while Nigerians remain on the margins as was the case in the earliest period of the indigenous ownership policy. In short, what the sale of Shell's assets to Nigerian companies was meant to do was to get on the next stage of the ladder from where the marginal field exercise had reached.With Seplat's operated production already at 37,000BOPD, almost 25% higher output from the 30,000BOPD it took over from Shell in August 2010, and the company targeting 135,000BOPD operated production by 2013, an elaborate example had been set.It seemed, by commonsense, that government would be all out to encourage this kind of company: a class of nifty, midsized independents operating a number of oil fields in Nigeria and writing an alternative story about Africa's private sector capability to venture into E&P investment, not as contractors, but as producers. For once, it doesn't have to be one huge, all-powerful National Company driving everything. It would be an enlarged space, a mix of majors and minors and the mandatory national company, all co-existing. But the Nigerian government didn't see it that way. The NNPC sees the Shell divestment as an opportunity to increase NNPC's operated production, in effect choking off the burgeoning, private Nigerian E&P enterprise.On Tuesday May 24, 2011, NNPC took out full page adverts in newspapers warning investors to beware of buying interests in certain hydrocarbon assets in the country. The statement, headlined 'Nigerian National Petroleum Corporation CAVEAT EMPTOR', was published in at least three, widely circulating Nigerian dailies.What has been most instructive is how far NPDC was prepared to go to show it could 'operate'. As a rule, the NNPC, which is NPDC's parent company, has struggled in the last 10 years to pay its share of the cost of projects with its partners. So it is understandable that the NPDC will have issues funding its own share of field development and ongoing production in the leases sold by Shell and Co.But the divestment itself was an opportunity for NPDC to work with Nigerian companies to find a way out of the funding dilemma. It was an opportunity for NPDC to build its own technical capacity, through working with Nigerian companies who have bought and were keen on operating these acreages within the ambit of the incorporated joint ventures that they had formed with European IOCs.Why, for instance, can't NPDC construct a funding and training programme with, say, Niger Delta Exploration Production, a company which had produced oil from a small field over the course of the last six years' There was a lot to be gained from engagement if the true reason for NPDC's insistence to operate was to build technical capacity within the state hydrocarbon company.Instead, NPDC signed a strategic agreement with Atlantic Energy Drilling Concept, which had never featured in E&P activities either in Nigeria or elsewhere, 'to provide funds for carrying out Petroleum operations and support NPDC with technical expertise'. The Nigerian media has extensively insinuated that the terms of agreement is a give- away of resources, and was executed in aBut what's important in the context of this article is how the state hydrocarbon company considers it so crucial to undermine the enthusiasm of a collection of Nigerian companies to build Nigerian E&P capacity outside of the purview of the state.This is the latest in the series of examples of the state muscling out investment by anyone, foreigner or Nigerian.It just fits the pattern. The Nigerian state continues to see itself more as a landlord than a promoter of trade and investment.'Culled from the September 2011 edition of Africa Oil+Gas Report
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