In August, yet another phase in the construction of the West African Gas Pipeline was launched, at the power facilities in Ghana. The ambitious 681km, $500m project – which when completed and operational in 2007 will provide natural gas to customers not only in Ghana, but also in Togo and Benin – will be a boon for these countries because they will be able to import greater levels of gas at affordable prices. It will also propel Nigeria’s gas exports far beyond their current levels.

Nigeria is well known for its immense oil reserves. It is the largest oil producer in Africa and the 11th largest in the world, averaging 2.5 million barrels per day (b/d) in 2004 and 2.6 million in 2005. There is no doubt that Nigeria – through legislation, infrastructure development in new deepwater facilities and initiatives to attract investment to even marginal development sites – will remain a global oil powerhouse.

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The majority of Nigeria’s crude oil exports go to markets in the US and western Europe. Sales to the US

average 1.1 million b/d. In recent years, countries in Asia and Latin America – China particularly – have stepped up purchases as well. Last year, the president of Nigeria, Olusegun Obasanjo, announced his intention to supply up to 15% of US oil imports.

The potential of Nigeria’s gas reserves are nearly as huge but have been largely unexploited until recently. The pipeline is changing that, as are the country’s initiatives to develop facilities for liquefied natural gas (LNG), a gas by-product that is easily transported.

“Nigeria has realised that gas can be as important and profitable in world markets as oil is, depending on where it is sold and how easily it can be exported. They clearly have a very strong interest in selling gas,” says Claudette M Christian, a Washington DC-based partner at international law firm Hogan & Hartson, citing the government’s goal of increasing its gas exports significantly by 2010.

“I think gas exports might outpace oil revenues in 20 years,” says Bob Linden, a managing consultant in the Global Energy Practice of PA Consulting Group.

As Nigeria gets down to the business of seriously exploiting its gas reserves, it is clear that its gas could become as significant as its oil is to markets around the globe today, making it a major commodity source in the world economy.

Light and sweet

Africa, and Nigeria in particular, is becoming more important strategically to the European and US markets because of its oil. The volatility in the Middle East is a consideration, as is the nature of African-sourced oil itself. Generally, it is a lighter crude, more easily obtained.

The industry refers to this consistency as light and sweet, meaning that it has a low sulphur content. About 65% of Nigerian crude oil production is considered to be of this quality, according to industry statistics.

Nigeria’s proven oil reserves are estimated to be 35.2 billion barrels. The government has launched ambitious plans to expand these reserves to 40 billion barrels by 2010. It also aspires to attain a daily crude oil production of 4 million b/d by the same year.

Most of the production is based along the coast, in the Niger River Delta. The fields have been developed by the largest oil and gas conglomerates in the world, along with the Nigerian National Petroleum Corporation (NNPC), which is the country’s national oil producer. As with most such investments in oil-rich nations, these endeavours are structured as either joint venture or production sharing contract (PSC) arrangements, with the joint ventures accounting for the vast majority of the crude oil production. There has been some dispute recently over the structure of these agreements but, for the most part, observers say they work well for both country and companies.

Joint ventures

The largest joint venture is operated by Shell Petroleum Development Company of Nigeria (SPDC) and is majority owned by the NNPC, producing close to half of Nigeria’s crude oil. Another investor is ExxonMobil, which produces about 570,000 b/d compared with Shell’s 1.1 million b/d. The company is investing several billion dollars in its production facilities to increase that figure to 1.2 million b/d. The investments are expected to become operational by 2006. ChevronTexaco, Total, Agip, and ConocoPhillips also have operations in Nigeria, with varying rates of production.

Then there is China. Unlike Shell et al, China is not investing in Nigeria so that it can export to third countries. It is interested in tapping the country’s reserves to fuel its own needs. As a result, it has been “flooding” Nigeria as well as other oil-producing nations in the region with money, says one trade finance banker familiar with the market. “It is clear that the Chinese believe Nigeria to be an important source of oil to them,” confirms Ms Christian.

Out of the Delta

The future of Nigerian oil production, however, is not likely to centre on the Niger Delta area, which, unfortunately, has been beset with security risks and ethnic violence over the years. Instead, many investors and exploration experts view the country’s deepwater reserves as attractive opportunities, not only for their potential for oil but also for their distance from local unrest.

Dating back to 1990, oil exploration has gradually shifted away from the Niger Delta into ‘frontier areas’ (as the NNPC calls them), including the deep-offshore and the inland basins of Anambra, Benin (Dahomey) and Benue, where acreages have been awarded to several multinationals through PSCs with the Nigerian oil entity.

In February, in one such notable transaction, the NNPC and ChevronTexaco Nigeria signed agreements for the award of a $1bn contract for the construction of a floating, production, storage and offloading (FPSO) vessel for the Agbami deep-offshore oil field. The FPSO is designed to process about 250,000 b/d of crude oil and 450 million standard cubic feet of gas per day.

Licensing round

Most recently, Nigeria concluded in August its 2005 oil licensing round with awards made on 43 of the 75 blocks put on offer. Of the 12 deepwater blocks offered, seven have been awarded.

“There is a sentiment in the exploration and production industry that if you go deeper, you will find even bigger prizes,” says Mr Linden. “After all, the Niger river has been dumping sediment in the ocean for millions of years.”

That said, according to Mr Linden, Nigeria has lagged behind other oil producing nations in Africa, such as Angola, in developing its deepwater reserves. Onshore and near-offshore gas production, gathering and liquefaction capacity development has been the priority instead for various reasons, not least of which is the government’s insistence on producers meeting an upcoming deadline for the cessation of gas flaring from oil fields.

Another area of intense interest to investors is the presence of large amounts of untapped crude oil in the Gulf of Guinea, between Nigeria and the island nation of Sao Tome and Principe. The two countries have agreed to share drilling rights to the seabed between their coasts.

“I think you will have FDI interest in those fields, as well,” says Ms Christian. “It is an additional source of oil production for the big companies.”

Innovative measures

 

Roy Reynolds, a Houston-based partner at international law firm Haynes and Boone, notes that the Nigerian government has been very creative in enticing investors to invest outside of the Niger Delta. “Legislation was passed several years ago to try to develop areas that had not been developed by major oil companies,” he says. “It is called the Marginal Fields Program.” It is aimed at fields that have oil but not a great deal of it.

“The large companies would not want to spend money developing it. But Nigeria would still like those marginal fields productive as well.” The Marginal Fields Program was formed to encourage mid-sized companies to develop the fields, he says.

The Nigerian government has also passed legislation giving oil producers until 2010 to stop flaring gas, a process in oil production in which the gas is burned off instead of being collected for use. “It is completely wasted,” says Mr Reynolds. “Gas is becoming a valuable commodity in the world market. The Nigerian government wanted to see that further developed.”

Besides the pipeline, the Nigerian government has other projects under way to enhance delivery systems so that it can move gas more efficiently to export markets. Some projects are looking into converting gas into other materials, such as diesel fuel, to transport.

But the development of the LNG industry is probably the government’s main focus. The Nigerian LNG company (NLNG) began operations in 1999 with the inauguration of a liquefaction plant on the Bonny River. The facility now produces 8.7 million tonnes of LNG per year for sale to buyers in Turkey, France, Portugal and Spain that have long-term contracts. It is also a player in the short-term LNG markets.

“LNG production and export volumes will build rapidly over the next few years,” Mr Linden predicts, especially as the government is quite insistent on producers meeting the deadline for the cessation of gas flaring from oil fields.

Unrest and disputes

 

There are obvious drawbacks to investing in Nigeria, whether in oil and gas or other sectors. Social and political problems are deep-rooted, says Mr Linden. About 75% of the population lives below the poverty line – untouched, it would seem, by the oil and gas export revenues that are flooding into the government treasury. Corruption in the oil and gas industry is also known to be widespread.

Some of the oil multinationals have taken issue with the government’s plans to increase the petroleum profits tax (PPT) from 50% to 85%, taking the stance that such a move is a breach of contract. “There is definitely a downside to investing in Nigeria,” Mr Linden says, citing these reasons as well as the violence that can be targeted at onshore production facilities.

Steps to reform

The Nigerian government, however, is trying to rehabilitate its image among world investors, observers say. For a start, disputes over the PPT often occur between foreign direct investors and the governments of the countries in which they operate.

“Part of it is growing pains because Nigeria is trying to increase the level of overall production, and trying to balance the interests of Nigeria and foreign investors in terms of who controls production and how the royalty and tax payments will be allocated,” Ms Christian says. “It is not that unusual to have these conflicts. The question is how peacefully they are resolved.”

The lack of transparency in the government’s management of oil revenues has been a serious problem for Nigeria as it has continued to push to do more business globally. Ms Christian says that the government is trying to correct this, too.

Starting in 2006, she says, the operating budget for the NNPC will be brought into the general federal budget in an attempt to promote transparency in oil revenues.

“The government is definitely taking a new look at stemming the corruption in the oil sector,” she says. It is also trying to prevent some of the ethnic unrest in southern Nigeria, she adds.

Ultimately, though, it is unlikely that Nigeria’s success – or failure – with these measures will affect the intense interest that foreign investors have in its oil and gas industries. “Nigeria is sitting on an immense amount of reserves, both in oil and gas,” Ms Christian says. “So it is not strange that foreign investors continue to invest despite the problems.”