In 2019, the oil and gas industry was responsible for around 5.8% of Nigeria’s real GDP, 95% of its foreign currency profits, and 80% of its budgetary income.
- In August, NNPC agreed on new terms and conditions for six offshore licences controlled by international oil corporations (IOCs).
- The new legal dispensation does not mean that the majors’ future activities in Nigeria will be easy.
- Even if oil prices stay high, the value of Nigerian oil will never recover to the levels reached only ten years ago.
Landmark legislation in Nigeria’s oil industry
In 2021, Nigerian President Muhammadu Buhari assented to the Petroleum Industry Act (PIA) 2021. The approval concluded a 20-year commitment to overhaul Nigeria’s oil and gas industry. The PIA establishes a more suitable atmosphere for the sector’s growth. The Act also tackles the genuine grievances of groups most affected by the extractive industry.
The PIA is an attempt by Africa’s top oil-producing nation to adapt to the changing global economic climate. In 2019, the oil and gas industry was responsible for around 5.8% of Nigeria’s real GDP, 95% of its foreign currency profits, and 80% of its budgetary income.
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PIA has now been in force in Nigeria for more than a year. This landmark law made slow progress through Nigeria’s parliament for two decades. However, the delay should not obscure its importance for the future of the oil and gas industry.
If correctly and rigorously implemented, the PIA is the gold standard for managing natural resources with defined and distinct duties for the industry’s subsectors. The Act establishes a profit-driven, commercially-inclined National Petroleum Corporation (NNPC). This contributes to the codification of accountability, good governance, and transparency in Nigeria’s petroleum resources management.
Consequently, the PIA will contribute to host communities’ social and economic development via environmental cleanup and a business climate favourable to the growth of oil and gas activities in the nation. However, these outcomes are contingent on Nigeria’s government and oil sector leaders overcoming several significant obstacles.
Fresh agreements with international oil companies
In August, NNPC agreed on new terms and conditions for six offshore licences controlled by international oil corporations (IOCs). The agreement will potentially bring considerable volumes of underutilised production to the market within the next decade.
It also reflects a new, more upbeat atmosphere among Nigeria-focused oil giants. IOCs have been hesitant to sign new production sharing contracts (PSCs) for deep-water assets. However, sector players signed fresh PSCs for Chevron’s Oil Mining licenses (OMLs 127 and 132), Eni’s OML 125, TotalEnergies’ OMLs 130 and 138, and ExxonMobil’s OML 133 in early August.
Over a 20-year timeframe, these five deep-water zones might generate up to 10 billion barrels of oil. Their signings are a testament to the effectiveness of negotiations between NNPC and the majors in smoothing out quirks in previous contracts that had impacted corporate revenues.
Disputes over ExxonMobil holdings
The new legal dispensation does not mean that the majors’ future activities in Nigeria will be easy. Exxon’s proposal to sell a collection of shallow water resources to Nigerian independent Seplat Energy for $1.6 billion suffered a blow on July 6. A judge in an Abuja court granted NNPC interim orders barring ExxonMobil from finalising any divestiture in a unit that resultantly operates four licences in Nigeria.
The NNPC attempts to obstruct the sale because it sees a possible chance of owning the assets. Consequently, there is now a meaningful possibility of prolonged controversy. The controversy will thwart majors’ aspirations of selling off a portion of their onshore and shallow water assets – with Total likely having to wait out Exxon’s divestment procedures.
President Buhari had approved the asset transfer in early August, only for the move to be reversed. Clarity may have to wait until a new president takes office next year.
The authorities seem willing to let the deal to Seplat go ahead. The most significant challenge was NNPC attempting to pre-empt the transaction. If the government had desired that NNPC acquire those assets, it might have created an environment in which that would have occurred.
The crude oil output fall
In May of this year, crude oil output fell by 23.8%, hitting a low of 1.02 million barrels per day. The background will see Nigeria’s oil production diminish continuously.
According to Fitch Solutions’ oil and gas team, Nigeria’s oil production will decline by 9.1% in 2022. The decline stems from historical underinvestment in the country’s oil and gas industry and theft. New output from the Ikike field should temporarily reduce reductions, but it will do nothing to prevent the overall fall in production.
As Fitch’s emerging markets analyst John Ashbourne remarked in an early September webinar, overall prices are growing faster than volumes since many regions have been declining for some time.
Despite a blip in 2026-27, when some offshore capacity will enter the system, Ashbourne does not anticipate that output levels will expand much in the future. But, generally, volumes have been constant and consistently lower than they were. Looking at the 2010 -2015 period, when levels were close to 2.5 million barrels daily, there is no way to return to that level.
Even if oil prices stay high, the value of Nigerian oil will never recover to the levels reached only ten years ago. Moreover, policymaking might be postponed until the presidential poll in 2023. It may take even more time while the next government settles.
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Nigeria’s oil and gas production poised for growth
There is an improvement to report in Nigeria’s downstream, which might enhance exports. According to Fitch, the Dangote oil refinery in Lagos could ramp up Nigeria’s refining capacity by 147%, to more than 1.1 million barrels per day. It also broadens Nigeria’s export portfolio by including more refined items. Nigeria now exports solely crude fuels, although it has the potential to sell goods to neighbouring countries.
Long-term enthusiasm in Nigeria is centred on natural gas instead of crude oil. Nigeria’s annual gas output is expected to increase from 50 billion to 70 billion cubic meters in future. The increase would reflect increased offshore production and improved gas capture. According to Fitch, this enhances the likelihood of Nigeria generating almost as much as Algeria by the 2030s.
The nation’s natural gas potential fascinates majors much more than its troubled crude oil resources in the Delta. The oil and gas sector is expected to remain a future source of export development. Nevertheless, it may still make sense for the most extensive and seasoned IOCs to maintain the course in Nigeria, even if they are downscaling other parts of the continent.
Looking at the oil and gas sector beyond the transition phase
With the 2023 polls approaching, Nigeria wants to stabilise its oil and gas industry. By creating a new architecture for Nigeria’s oil and gas sector, which include two new regulatory bodies, the National Upstream Petroleum Regulatory Commission (NUPRC) and the Nigerian Midstream and Downstream Petroleum Regulatory Authority, the PIA has played an essential role in fostering more robust sector growth.
In addition, it prepares the way for the professionalisation of the loss-making state-owned Nigerian National Petroleum Company. The new law transforms the company to NNPC Ltd, a quasi-commercial organisation that remains government-owned — a process completed in mid-July. NNPC Ltd. is currently focused on increasing productivity.
There is still plenty to accomplish. Even after a year, the PIA is still in a transitional period, with committees deliberating its practical implications. One seasoned Nigerian expert questioned how much the NNPC would change due to its transition into a limited liability corporation. Still, post-PIA data suggests that Nigeria’s oil and gas industry may be moving in the right direction.
