Following over 50 years of Exploration, Nigeria finally discovered Oil at Oloibiri in Bayelsa State in 1956, by the Shell Group.
Since then, The Nigerian oil and gas industry has been vibrant, but largely dominated by multinational corporations until the early 1990s when Nigerian companies began to make a foray into the industry. Local participation was boosted with the implementation of the Nigerian Content Directives issued by the Nigerian National Petroleum Corporation (NNPC) about a decade ago, and eventually, by the promulgation of the Nigerian Oil and Gas Industry Content Development (NOGIC) Act (The Act) in 2010. The Act seeks to promote the use of Nigerian companies/resources in the award of oil licenses, contracts and projects.
Prior to the establishment of the NOGIC Act, Nigeria had lost over $380 billion to capital flight and over two million jobs to other countries. This may be attributed to the types of Contracts the Nigerian government may have signed with the International Oil Companies (IOCs).
The major forms of oil and gas arrangements in Nigeria’s upstream sector are as follows: • Joint Venture (JV)
- Production Sharing Contracts (PSCs)
- Service Contract (SC)
- Marginal Field Concession (MFC)
Joint Venture
This is the standard agreement between the national oil company i.e the Nigerian National Petroleum Corporation (NNPC) and a multinational oil company (MOC). Under this arrangement, both NNPC and the MOC contribute to funding oil operations in the proportion of their JV equity holdings, and generally receive crude oil produced in the same ratio.
Companies engaged in this form of arrangement are assessed to tax under the PPTA at the rate of 65.75% of chargeable profits for the first five years of operation (when the company is yet to fully recover its capitalized pre-production cost), and 85% thereafter. The tax payable is modified by the provisions of the Memorandum of Understanding (MOU) between the parties. The MOU seeks to guarantee certain profit margins to the MOC, when crude oil market price falls below certain thresholds. The Parties have since suspended the application of the MOU provisions since crude oil price now exceeds the reference price of $30 per barrel. Major operators in the JVs with the NNPC are Shell, ExxonMobil, ChevronTexaco, TotalFinaElf and Agip.
It is however important to note that the JV model is currently being phased out in the oil and gas industry, due mainly to the inability of the NNPC to fund its share of JV costs.
Production Sharing Contracts
As a result of the increasing funding pressure from the JVs, the Federal Government of Nigeria (FGN) adopted the PSC model in 1993 as the preferred petroleum arrangement with MOCs. Apart from awards restricted exclusively to indigenous companies, awards for upstream operations are now made on PSC basis. Under this arrangement, the concession is held by NNPC. NNPC engages the MOC or the indigenous company as Contractor to conduct petroleum operations on behalf of itself and NNPC. The Contractor takes on the financing risk.
If the exploration is successful, the Contractor is entitled to recover its costs on commencement of commercial production. If the operation is not successful, the Contractor bears the loss.
The first set of PSCs was signed in 1993, followed by those executed in 2001, after the 2000 licensing rounds. Several other models of PSCs have been signed since then. The principles in the PSCs remain largely the same, except for variation in the profit oil sharing formula and cost oil recovery cap.
The Federal Government (FG), in furtherance of its Nigerian Content agenda, encourages MOCs to surrender their marginal fields for assignment to indigenous concession holders. To provide special incentives to marginal field operators, the FG promulgated the Petroleum (Amendment) Act
No. 23 and the Marginal Field Operations (Fiscal Regime) Regulations 2005 on the development of marginal fields.
Generally, a Marginal Field is defined as any field that has reserves booked and reported annually to the DPR and has remained unproduced for a period of over 10 years.
The main objectives of the government for introducing Marginal Field regime include:
(i) Expand the scope of participation by small (indigenous) players in Nigeria’s oil industry.
(ii) Increase the country’s oil and gas reserves base.
(iii) Provide opportunity for portfolio rationalization.
(iv) Enhance employment opportunity.
Award of Oil and Gas Exploration Licenses
Oil licenses are granted to companies by direct negotiation and/or discretionary allocation by the Federal Government of Nigeria (FGN). This approach was prevalent prior to the return of the country to democratic governance in 1999.
However, to facilitate more transparency and increased revenue from award of oil licenses, the FGN has competitive tenders as the preferred mode for the award. With tenders, the process becomes more competitive and brought industry players with the most persuasive technical and financial capabilities to the fore.
The Department of Petroleum Resources (DPR), under the Ministry of Petroleum Resources, is responsible for organizing oil bid rounds. The last bid round was in 2007.
1.2 Downstream Sector
The key segments in the downstream sector are discussed below:
- Transmission and Conveyance
This involves the transportation of oil and gas to the refinery and gas stations. There is a pipeline network from the wellhead to the refinery or plant. Tankers and purpose-built vessels are also used for this purpose
- Refining
Nigeria has four refineries: two situated in Port Harcourt and one each in Warri and Kaduna. The refineries are all wholly owned by the NNPC. The four oil refineries have a combined nameplate capacity of 505,000b/d. However, these refineries are only working at about 30% of their installed capacity; necessitating the importation of refined products to meet growing local demand. The FGN has recently awarded contracts for Turn-AroundMaintenance to be performed on the refineries to boost the level of their production.
The number of refineries in the country is expected to increase in future as new licenses have been granted. In addition, the Government’s strategy of tying award of new oil licences to securing commitment on the part of license holders to build new refineries, railway lines, gas pipelines or power plants should help in this regard.
Distribution and Marketing
Distribution and Marketing of refined petroleum products are complementary activities. Distribution involves the transportation of refined petroleum products from the refineries through pipelines, coastal vessels, road trucks, rail wagon etc to the storage/sale depots.
Petroleum products are supplied in Nigeria principally through the Petroleum Product Marketing Company’s (PPMC) pipeline system, which links the refineries to the about 21 regional storage/sale depots.
The pipelines currently in use by the PPMC are divided into three phases. Phase 1 and 2 have five systems, which are referred to as 2A, 2B, 2C, 2D, and 2E . Phase 3 has three systems which are referred to as 2cx, 2dx and 2ex[1] .
Petroleum product marketing involves the procurement and sale of refined petroleum products. Marketers lift products from PPMC depots and deliver to their various retail outlets. They also import refined products from outside of Nigeria to meet the demands of their customers.
There are however guidelines issued by the DPR to prevent importation of substandard products.
The FGN currently regulates the prices of refined petroleum products. The Petroleum Product Pricing Regulatory Commission (PPPRC) is responsible for fixing the prices of the products. However, as part of the energy sector reform of the FGN, there is a plan to deregulate fuel pricing and privatize the refineries. The proposed energy reforms currently faces stiff opposition from the organized labor and civil society groups in the country.
- Liquefied Natural Gas (LNG)
Nigeria holds the largest natural gas reserves in Africa but has limited infrastructure in place to develop the sector. Nigeria’s first and most ambitious gas project, the Nigeria LNG (NLNG) facility on Bonny Island has six LNG trains currently
operational with a total annual capacity of 31bcm.
It has become an increasingly important supplier of liquefied natural gas (LNG) to European buyers. The LNG facility is currently supplied natural gas from dedicated gas fields. The contract for the construction of a seventh LNG train is under consideration (expected to have nameplate capacity of 8.4mn tpa).
Other LNG projects that are expected to take off in the near future include the Olokola (OK) LNG and Brass LNG projects.
All the companies that operate in the downstream petroleum sector are assessed to income tax under the Companies Income Tax Act, 2004 as amended (CITA) at the rate of 30% of their chargeable profit.
The Oil and Gas industry has generated over N95 trillion into the Nigerian economy since its discovery in 1956. Of this amount, over N92 trillion was generated in the last 19 years while over three trillion naira was made between 1958 when the nation began export of Oil and 1998 just before the commencement of the current democratic dispensation a year later. In other words, in 41 years, Nigeria made a mere N3,207.03 trillion compared to over N92 trillion in less than two decades.
In the last two years, Oil and Gas development in Nigeria has experienced some level of stormy ride, the highpoint of which was the Fuel scarcity debacle that had Nigerians celebrating the 2017 yuletide season in pain. The nation was just recovering from the barrage of attacks on the Pipelines and Oil installations across the Niger Delta region by the Niger Delta Militants.
According to the 2016 Report Statistics released by the NNPC on its website, in 2016, a total of 223.0 sq. kms of 3D Seismic data was acquired while 8,156.0 sq. kms was processed/reprocessed, while Seventy-Four (74) wells were drilled.
In terms of Production, Total crude oil and condensate production for the year amounted to 669,997,933 barrels giving a daily average of 1.83mmb/pd. This is lower than the previous year’s by 13.3%.
In the gas sector, a total of 2,777.79 Billion Standard Cubic Feet (BSCF) of Natural Gas production was reported by Forty-One (41) Companies. This shows a decrease of 5.19% when compared with 2015 production. Of the quantity produced, 2,465.34 BSCF (88.75%) was utilized, while 312.45 BSCF (11.25%) was flared.
A total of 668,163,617.0 barrels (at1.83 million barrels per day) of crude oil and condensate was lifted for domestic and export purposes, showing a decrease of 14.39% against year 2015. Of the total quantity, NNPC and NPDC lifted 255,418,045 barrels (38.23%), averaging 697,863.51 barrels per day for both domestic utilization and export.
UPSTREAM LIQUID GAS PRODUCTION AND EXPORT
Total Natural Gas Liquid (NGL) produced in 2016 was 2,835,361 Metric Tons, reported by Mobil, Chevron and NLNG Companies. A total of 1,031,187 Metric Tons was lifted. The lifting was for NNPC, Mobil, and Chevron equity shares. While there was no NLNG Lifting /export for NNPC, proceeds were paid in dividend.
On the midstream subsector, the local refineries received a total of 32,720,453.86 barrels (4,423,312 mt) of (dry) crude oil, condensate and slops and processed 22,509,393.25 barrels (3,042,321 mt) into various petroleum products. The total production output by the refineries was 2,920,894.00 metric tons of various petroleum products. The combined average refining capacity utilization for year 2016 was 13.82% as against 4.92% in the previous year.
PRODUCTS MOVEMENT
PPMC evacuated 2,735,039.15 mt of petroleum products from the refineries and imported 8,320,829.20 mt of PMS and HHK for distribution through Offshore Processing Agreement (OPA), Direct Supply, Direct Purchase (DSDP) arrangements and On-Spot delivery. PPMC sold a total of 12.66 billion liters of various grades of petroleum products through depots and coastal lifting. During the year, 280.12 million liters of Low Pour Fuel Oil (LPFO) and Naphtha worth about N15.73 billion was exported.
A total of 22,898.67 million liters of petroleum products was distributed nationally giving an average daily consumption of 47.56 million liters of PMS, 10.66 million liters of AGO, 2.51 million litres of HHK, 1.46 million litres of ATK, 0.23 million litres of Fuel Oil and 0.09 million litres of LPG. Out of the total volume distributed, NNPC Retail outlets handled 1,657.43 million litres which is slightly above 7% of total volume.
INCIDENCES
Pipeline vandalism dropped by 8.58% below the previous year. A total of 2,589 line breaks was reported on NNPC pipelines out of which 2,534 was as a result of vandalism, while 55 cases were due to system deterioration such as rupture, resulting in a loss of 80.93 thousand mt of petroleum products worth about N12.36 billion. Also 0.74 million barrels of Crude oil worth about N9,780.21 million was lost in the same period. 23 cases of fire incidents were recorded during the year 2016.
On the upstream terrain, the Niger Delta Militants decided that the new government, which was just about a year old in power had not shown sufficient interest in addressing the cause of the Niger Delta development judging by its body language. So, they went on the rampage and started blowing up government installations across the region and this almost bled the nation’s Oil export to death. The nation was groaning as revenue from Oil, her major source of income, was threatened.
In the Downstream sector, the operational reality of the figures of Petroleum Products processed in 2016 obviously did not add up enough to contain the sociopolitical combustibility of their demand, supply and pricing. Consequently, the familiar monster of fuel scarcity hit the country towards the end of December 2017 and plunged the nation into the usual bitter crisis of fuel scarcity and subsidy debate between government and the Labor Unions.
These two tragic tales accounted for the story of Oil and Gas development in Nigeria within the last two years. It was imperative, therefore, that the NIPS program had to be put together to critically look at the issues involved.
Major Events in the history of the Nigerian Oil and Gas
1908
Nigerian Bitumen Co. & British Colonial Petroleum commenced operations around Okitipupa.
1938
Shell D’ Arcy granted Exploration license to prospect for oil throughout Nigeria.
1955
Mobil Oil Corporation started operations in Nigeria.
1956
First successful well drilled at Oloibiri by Shell D’Arcy
1956
Changed name to Shell-BP Petroleum Development Company of Nigeria Limited.
1958
First shipment of oil from Nigeria.
1961
Shell’s Bonny Terminal was commissioned.
Texaco Overseas started operations in Nigeria.
1962
Elf started operations in Nigeria. (As Safrap)
Nigeria Agip Oil Company started operations in Nigeria
1963
Elf discovered Obagi field and Ubata gas field
Gulf’s first production
1965
Agip found its first oil at Ebocha
Phillips Oil Company started operations in Bendel State
1966
Elf started production in Rivers State with 12,000 b/d
1967
Phillips drilled its first well (Dry) at Osari –I
Phillips first oil discovery at Gilli-Gilli -I
1968
Mobil Producing Nigeria Limited) was formed.
Gulf’s Terminal at Escravos was commissioned
1970
Mobil started production from 4 wells at Idoho Field
Agip started production
Department of Petroleum Resources Inspectorate started.
1971
Shell’s Forcados Terminal Commissioned
Mobil’s terminal at Qua Iboe commissioned
1973
First Participation Agreement; Federal Government acquires 35% shares in the Oil Companies
Ashland started PSC with then NNOC (NNPC)
Pan Ocean Corporation drilled its first discovery well at Ogharefe –I
1974
Second Participation Agreement, Federal Government increases equity to 55%.
Elf formally changed its name from “Safrap”
Ashland’s first oil discovery at Ossu –I
1975
First Oil lifting from Brass Terminal by Agip
DPR upgraded to Ministry of Petroleum Resources
1976
MPE renamed Ministry of Petroleum Resources (MPR)
Pan Ocean commenced production via Shell-BP’s pipeline at a rate of 10,800 b/d
1977
Government established Nigerian National Petroleum Corporation (NNPC) by Decree 33, (NNOC & MPR extinguished).
1979
Third Participation Agreement (throughout NNPC) increases equity to 60%
Fourth Participation Agreement; BP’s shareholding nationalised, leaving NNPC with 80% equity and Shell 20% in the joint Venture.
Changed name to Shell Petroleum Development Company of Nigeria (SPDC)
1984
Agreement consolidating NNPC/Shel1 joint Venture.
1986
Signing of Memorandum of Understanding (MOU)
1989
Fifth Participation Agreement; (NNPC=60%, Shell = 30%, Elf=5%, Agip=5%).
1991
Signing of Memorandum of Understanding & joint Venture Operating Agreement (JOA)
1993
Production Sharing Contracts signed -SNEPCO
Sixth Participation Agreement; (NNPC=55%, Shell=30%, Elf= 10%, Agip=5%).
The coming on-stream of Elf’s Odudu blend, offshore OML 100.
1995
SNEPCO starts drilling first Exploration well.
NLNG’s Final Investment Decision taken
1999
NLNG’s First shipment of Gas out of Bonny Terminal.
2000
NPDC/NAOC Service Contract signed
2001
Production of Okono offshore field.
2002
New PSCs agreement signed.
Liberalisation of the downstream oil sector.
NNPC commences retail outlet scheme
Sources
NNPC
KPMG
CBN
Energy Network 