The shale revolution, regulatory challenges, political rifts and underlying security threats pose significant challenges for a Nigerian oil sector in transition, writes Freddie Heritage.
Shale oil and gas production in the US represents the latest challenge for Nigeria’s own oil and gas sector, which in 2014 still accounts for around 95% of export receipts and 80% of fiscal revenue in Africa’s fastest growing economy.
Long-running security threats to oil supplies in the Niger Delta and a beleaguered regulatory landscape underscore a sense of uncertainty amongst investors. International oil companies (IOCs) are moving offshore, choosing to invest in deep-water projects they perceive to be safer and more lucrative. But with more and more indigenous companies acquiring onshore assets and taking control of the sector, Nigerian oil could be at the start of a new chapter.
THE IMPACT OF SHALE
Statistics from the US Energy Information Administration reveal that US imports of crude oil from Nigeria, having hovered in the region of 9 to 11% of total US crude oil imports for much of the last decade, have plummeted more recently.
The share of US crude imported from Nigeria fell to an average of 5% in 2012 and again to 4% in the first half of 2013. By February this year, US monthly imports of Nigerian crude oil fell to just 1,649,000 barrels: their lowest level for at least 11 years. Nigeria has subsequently fallen from being the fifth largest foreign oil supplier to the US in 2011 to eighth in 2013.
In June this year, Nigeria’s minister for petroleum resources, Diezani Alison-Madueke, reportedly stated that Nigeria no longer had any tangible trade in crude with the US as a result of that country’s domestic shale gas boom. “This has literally knocked out Nigeria from the export of oil to the US,” she said.
Simon Cook, a partner at law firm Sullivan & Worcester, whose focus includes trade in West Africa, recognises the rate at which the US has closed its doors to Nigerian oil. “Shale gas exploitation in the US is one of a number things which has had a dramatic impact on the US-African oil trade,” he says.
“About six or seven years ago, the US-African oil trade was worth somewhere in the region of US$100bn, but expectations for 2014 would put the equivalent figure at around only US$10bn to US$15bn. Nigeria was a major African exporter of oil to the US and has been significantly hit by this reduction.”
Negligible demand for Nigerian oilin the US as a result of shale dents export revenues but some argue that it makes relatively little difference when other factors are considered. “What makes the US shale factor different and interesting is the way it impacts globaloil trade dynamics in general,” says vice-president and head of energy and natural resources at First Bank
of Nigeria, Rolake Akinkugbe.
“The significant development is that the US is itself exporting oil outside the domestic market. So when looking at alternative markets to export to, Nigerian crude now faces stiffer competition, because there’s now another big source
This new competition could be compounded both by the fact that US refineries now have access to low-priced feedstock, and because US shale oil is of a similarly sweet grade to Nigerian crude. “We have already seen some of the premiums for Nigerian deals drop a bit because the grade is light and sweet – very similar to West Africa,” explains Akinkugbe.
“And, if you’re buying feedstock at lower prices and selling your end product at significantly higher premiums, you stand to make significant margins. An unintended consequence of the shale gas revolution is that US refineries now have this cost advantage, and they can sell their end product not just domestically but in other parts of the world where demand is significantly higher.”
Meanwhile, Nigeria continues to look towards alternative markets to export its oil. According to figures from the Nigerian National Petroleum Corporation (NNPC), 43% of Nigerian crude oil exports went to Europe – now by far Nigeria’s largest export region – in 2013, with 20% going to the Far East and just over 12% going to South American markets. More than 11% of Nigerian oil exports remained in Africa last year.
In 2006, the China National Petroleum Corporation (CNPC) purchased four Nigerian oil blocks, followed by a further two blocks in 2012. Chinese oil giant Sinopec recently bought a 20% stake in Total’s block OML 138, adding to the 90,000 barrels-per-day (bbl/d) it currently produces through client company Addax.
The Chinese ambassador to Nigeria said in an interview last year that Nigeria still only exports roughly 2% of its crude oil to China. Yet, according to International Association for Energy Economics president, Omowumi Iledare, that amount is set to increase.
“China now buys a lot more Nigerian oil than it did and is exploring market opportunities in Asia Pacific vigorously,” he says.
The continuing uncertainty surrounding the Petroleum Industry Bill (PIB) is a further obstacle to Nigerian oil exports. The PIB aims to address all the issues surrounding Nigeria’s oil and gas sector in one fell swoop: to set up effective regulatory agencies, improve the legal framework, develop new upstream and downstream guidelines and to reform the corruption-prone state-run NNPC.
Yet progress towards ratifying the bill has been slow since it was first proposed in 2008. The PIB’s magnitude and complexity has caused political infighting amongst stakeholders in Nigeria, and IOCs wait to see what tax provisions they may get slapped with, if and when the bill becomes law.
“One of the original purposes of the bill was to make investing in the oil and gas sector attractive,” says Iledare. “Another was to structure the NNPC so that it could better carry out its commercial functions: creating transparency and accountability.
“A new bill was proposed in 2012 and some would say that progress has been made, but the general consensus is that the bill leaves a lot to be desired.”
According to Roderick Bruce, an analyst at IHS Global Insight, it is unlikely the PIB will pass before 2015’s presidential election: “The passage looks increasingly difficult,” he says.
“Simmering tensions within the ruling People’s Democratic Party (PDP) came to the boil in August last year, when several of the party’s governors formed a rival group opposing President Goodluck Jonathan’s leadership.”
Jonathan’s subsequent cabinet re-shuffle, dismissing nine ministers in an attempt to quell the rebellion and regain majority support of his party, demonstrates a volatile Nigerian legislature. Bruce believes the ability of the president to successfully completethe PIB’s passage is doubtful. “He will find it increasingly difficult to exercise any real political power for the remainder of his term, and that bodes ill for the PIB,” he says.
The outcome will be eagerly awaited by IOCs. According to Cook, the government’s take of oil profits would go up significantly, with most commentators predicting that oil tax will increase from around 61% to around 73% under the most recent PIB proposals.
“The legislation in Nigeria was put in place a long time ago and it badly needs updating,” he says. “The most recent proposals for the new PIB will help bring the legislative framework into the 21st century, but some changes won’t help investors looking to achieve a viable return from the oil sector.”
SECURITY THREATS AND SUPPLY-SIDE DISRUPTION
According to Nigeria’s state-run Extractive Industry Transparency Initiative, it is estimated the country lost US$10.9bn in export revenue through oil theft from 2009 to 2011. In August this year, the Nigerian joint task force patrolling the Niger Delta to combat oil theft reportedly intercepted its latest haul: a 33,000 litre truck loading crude illegally from a National Petroleum Development Company-owned pipeline.
Bunkering, which is the theft and trade of stolen oil, has been an increasingly common phenomenon in Nigeria since the mid-2000s. Having reached a peak of 2.44 million bbl/d in 2005, crude oil production has since suffered from increasing levels of violence, sabotage and militant takeover. Supply disruptions hit a record-high in 2008 to 2009, but the start of 2014 has seen a similar bunkering-related slump in production, averaging below 2 million bbl/d.
“The levels of crude theft and sabotage are likely to increase in the run-up to the election,” says Bruce at IHS. “Crude theft is core to Nigeria’s political economy and patronage systems. The resulting loss of revenues to oil companies and the state is estimated at more than US$14bn per year, further compounded by the need to continually repair damaged infrastructure and clean up the spills from illegal pipeline taps.”
Threats to supply remain principally in and around the Niger Delta, where militant groups, including the Movement for the Emancipation of the Niger Delta (MEND), still operate with impunity. Bombings and kidnappings have been commonplace for years: the violence cutting off 28% of Nigeria’s oil output between 2006 and 2009 according to Bloomberg. In January this year, in a statement claiming responsibility for an attack on a government joint task force patrol in the waterways of Bayelsa State, the MEND reportedly reaffirmed their intentions, saying the attack was “a sign of things to come”.
“At the right time, we will reduce Nigerian oil production to zero by 2015 and drive off our land all thieving oil companies,” the statement reportedly reads.
IOCs are divesting their Nigerian onshore assets as a consequence of these threats, choosing instead to invest in deep-water offshore assets. An example is the Shell Development Petroleum Company of Nigeria (SPDC), a joint-venture between Shell (30%), the NNPC (55%), France’s Total (10%) and Italy’s Eni (5%). The SPDC completed the sale of eight onshore oil blocks in mid-2013, and the participating IOCs have focussed investments on projects like the Bonga north-west deep-water project. Shell announced the project’s first oil yield in June this year.
According to Akinkugbe, the commercial risks in the Delta remain but the threat of violence should be viewed with perspective. “The threats in many parts of the Delta are underlying,” she says. “People keep talking about growing security threats, but 2006 to 2007 was the height of militancy in the Delta and we are not seeing that now. What we are seeing now is a more criminalised element: focussed on diverting oil.”
THE ROAD AHEAD
Stakeholders are nevertheless optimistic about the future of Nigeria’s oil and gas sector. IOCs remain present in the country: their strategic movements towards offshore exploration and production creating an onshore vacuum for indigenous companies to step into.
Oando is one such company. In July this year it completed a landmark US$1.5bn acquisition of oil giant ConocoPhillips’s Nigerian business. Another is Seplat, which in March became the first Nigerian oil and gas company to receive a dual-listing on both the London and Nigerian stock exchange. It acquired several onshore blocks from Shell in 2012.
“These companies will prosper and grow,” says Akinkugbe. “A lot of them will leverage on the fact that they have a more extensive local network and are therefore in a better position to weather the security threats and operational issues faced with onshore production.”
“This is a positive step for the diversification of the sector,” agrees head of oil, gas and chemicals at Standard Chartered, Peter Gaw. “It will be very interesting to see whether production increases as these new Nigerian players take over these assets.”
Savvy financing strategies will be the key to developing oil and gas infrastructure. “There needs to be further partnerships between local and international banks,” Akinkugbe argues. “The networks of international banks is very extensive. And traders will increasingly provide additional sources of funding for projects.”
“It’s tough because the sector is so capital-intensive,” agrees Gaw. “You need the local and international banks to work together. The ECAs are an important component of oil and gas infrastructure development too.”
The challenges are significant but Nigeria doesn’t face them alone. Growing energy demands across Africa require better regional infrastructure, and in Akinkugbe’s view it is as much the responsibility of other financial institutions, including international banks, as it is for Nigeria itself to make progress on this front. “It makes commercial and economic sense to come together to build the necessary infrastructure,” she says.
“Total infrastructure demand around Africa in the next decade is around US$93bn a year so funding is going to be needed from both public and private sectors. Intra-African trade and co-operation needs to grow, and there’s plenty of vested interest in making sure it does. But in terms of obtaining finance for these projects and implementing them, it’s difficult wading through all the stakeholders.”