Nigeria’s state-dominated oil industry is declining, afflicted by systemic corruption, starved for international investment, and hard hit by declining oil prices. When President Muhammadu Buhari signed a measure to change Nigeria’s agreements with multinational oil companies; the president touted the bill amending the Deep Offshore (and Inland Basin Production Sharing Contract) Act as a landmark moment that will bring billions of dollars into state coffers as the country belatedly claims an “equitable share” of its vast natural resources.
“Nigeria will now receive its fair, rightful and equitable share of income from our own natural resources for the first time since 2003,” Buhari said in a statement on Twitter. But oil industry insiders have slammed the change as a pig-headed attempt at arm-twisting and extorting the oil majors, warning that the move could prompt an exodus of investments as foreign firms turn their backs on Nigeria.
The changes redraw the Production Sharing Contract (PSC) Act which been in force since 1993 when Nigeria was under military rule. The law mandated that the split of revenues between the state and the international oil firms should be reviewed if prices climbed over $20 per barrel. But while crude has soared far above that point over the past two decades, a revision of the formula for revenue sharing was never carried out. Buhari’s government have accused previous Nigerian lawmakers of having vested interests in making sure the bulk of oil revenues remained in private hands.
The new law sets a staggered “royalty rate” on crude oil sold above $20 – rising to the highest rate of 10% if the price reaches more than $150 a barrel – with the revenue due to the government increasing in line with oil price rises. In a second revenue stream, oil companies will also pay a flat tax of 10% on off-shore fields and 7.5% on inland fields, within specified depths. As the substantive Oil Minister, Buhari’s office has estimated the change will bring in at least $1.5 billion in added revenue by 2021.
But according to experts, oil companies involved in off-shore production have been reviewing their investments, reducing the revenue boost Nigeria hopes to achieve. As oil prices slid in recent years, meaning a drop in revenue for the government, Buhari has been steadily increasing pressure on the oil majors -Shell, Exxon Mobil, Chevron Eni, Total and CNOOC – who extract most of the crude oil in Nigeria.
But oil industry sources told Huhuonline.com that Buhari’s signing of the PSC bill into law jolted many International Oil Companies (IOCs) who felt sidelined before the bill was signed. Indeed, a source at the Nigerian National Petroleum Corporation (NNPC), which has stakes in most of the projects alongside IOCs, said the agency is confused and unclear on the current status of their stakes in the IOCs. Worse even, the NNPC has been unable to ascertain the future of the investments, which would have increased oil reserve to about 40 billion barrels; daily production to around three million barrels and fast-track domestic utilization of gas-to-power in households and industries.
Last October, the federal government controversially claimed oil majors owed Nigeria $62 billion in back revenues, which the oil firms disputed. “We have no idea how the government arrived at such an amount,” a representative of one of the major oil firms told Huhuonline.com on condition of anonymity.
The source warned that because of what he qualified as “Buhari’s coup” against the oil majors, the might be the “beginning of the decline of deep water investments” in Nigeria. “Oil companies have already started to pull out investments out of Nigeria,” he said.
Some in the oil industry claim that extracting oil from off-shore basins, drilling below the sea in Nigerian territorial waters, is already expensive and that the new amendments could make them unprofitable.
“It is possible that this new tax will push costs over the break-even point,” the source noted. Industry sources told Huhuonline.com that Nigeria’s oil and gas sector is already facing a dismal future as projects worth over $163 billion remain in limbo amid worsening investment drought.
The development, which has already created a booming market for other emerging oil and gas countries is threatening Nigeria’s leading role as Africa’s net oil producer, but also undermine its oil reserves, production projection and create job losses. “With new discoveries and investor-friendly policies in neighboring countries like Ghana, Niger, Uganda, Kenya, Senegal, Mozambique, Mauritania and South Africa, Nigeria is fast losing its attraction,” the source noted, adding: “while most gas projects are idle in Nigeria, Mozambique with its Coral Floating LNG project is at the verge of becoming the world’s largest gas producer with an estimated $128 billion flowing into the country’s gas sector alone before 2025.”
NNPC sources also confided to Huhuonline.com that there are strong indications ExxonMobil, Chevron and Shell might divest their upstream assets in Nigeria. While the Federal Government is looking to recover the controversial $62 billion from IOCs from the 2018 Supreme Court ruling on PSCs, which was recently amended and assented by Buhari, Total is reportedly seeking to sell its 12.5% stake in a deep-water oilfield and expand into other business-friendly African countries.
One of the oil majors, in an interview with Huhuonline.com, said the firm was yet to take a final investment decision on the over 200,000 bpd project because it was concerned about Nigeria’s regulatory environment. According to the operator, fiscal stability is crucial to attracting foreign direct investments in the oil sector and the investment climate needs to be able to magnetize capital. Other stakeholders who have raised concerns over the inability of the Buhari administration to reach Final Investment Decisions (FIDs) on a single critical project five years after taking office, have also sounded the alarm over the failing investment climate, which is already forcing oil firms to divest their interests.
The Minister of State for Petroleum Resources, Timipreye Sylva has been quoted as saying FIDs on at least four key projects within the nation’s oil and gas industry would be delivered before the end of 2019. Similar promises by his predecessors have yielded no meaningful positive results. With volatility in the industry, the concern for most stakeholders is that changes to the global economy, oil and gas prices, capital expenditure and other germane factors could undermine the projected economic value of investments and projects in Nigeria.
Many projects, for instance, are still at the planning stage or bogged down by legal hurdles years after initiation. They include Shell’s Bonga South-West and Aparo, which is expected to add about 225,000 bpd; Bonga North (100,000 bpd); Eni’s Zabazaba-Etan (120,000 bpd); Chevron’s Nsiko (100,000 bpd); ExxonMobil’s Bosi (140,000 bpd); Satellite Field Development Phase II (80,000 bpd) and Ude (110,000 bpd). These projects are estimated to cost around $100 billion, boosting the nation’s production by as high as 875,000 bpd and revenue by about $1.5 billion.
The Ajaokuta-Kaduna-Kano (AKK) pipeline, a 614 km-long natural gas stretch developed by NNPC at $2.8 billion and scheduled for commissioning in 2020 is yet to commerce, though NNPC originally announced tenders for its development as far back as July 2013. Also mired in obscurity are the $20 billion Brass LNG project in Bayelsa; the $9.8 billion Olokola LNG in Ogun; the 5000 km Nigeria-Morocco offshore gas pipeline which in current market price would cost an estimated $20 billion; and the expansion of LNG Train-7 plant, a Nigerian Liquefied Natural Gas project, expected to attract $10 billion in FDI.
Analysts told Huhuonline.com that the Federal Government and regulatory agencies have failed to address drawbacks to the growth of investments in the country and unveil incentives to encourage investors to the oil and gas sectors. “Most of the investment package that this administration met has not taken off for the past five years. The attitude of government is irresponsible, especially pushing companies away in the name of revenue generation,” one analyst noted.
He regretted that investors’ confidence has been lost in the oil sector as a result of uncertainties, insecurity and unfriendly business environment. According to him, the current administration might cripple the sector before realizing the implications of its inaction. He said a lot of factors that could have propelled private sector players to take quick decisions on some of the project are yet to be addressed, due to the lack of political will by the President, who appointed himself as the substantive oil minister.
The source who is a former top management member of the NNPC, said it was worrisome that the oil majors were divesting because of the challenges they were facing in the country. He complained that President Buhari, rather than finding ways to deal with the problems, was rather compounding them. “Government needs to draw the companies closer. There is the need for government to continuously have dialogue with the oil companies, especially now that there is competition. There are other places of opportunity for investment,” he said.
President Buhari, meanwhile, has continued his lamentations and blaming his predecessors, saying had Nigeria followed its own program for exploiting gas reserves, the country would have been earning more money from the product than it does from petroleum. “We share a lot of things in common with Equatorial Guinea. These include geographical neighborliness and neighborliness in terms of resources. Nigeria is more of a gas-producing, rather than oil-producing country. That fact had long been established. If we had followed our own plans, laid out in the 1970s, for the gas sector, we should have had 12 trains by early 1980s, instead of being on just six trains now,” Buhari said, while hosting the Equato-Guinean Minister of Mines and Hydrocarbons, Gabriel Mbega Obiang Lima; special envoy to the President Teodoro Obiang Nguema Mbasogo, at State House, Abuja. The envoy and had brought a message from his principal on the forthcoming meeting of Heads of State of gas exporting nations, which Equatorial Guinea would be hosting.
Emerging market experts insisted that the “fiscal crisis, with the federation forced to dedicate a larger and larger share of its revenue to paying off its debts” is a factor in Nigeria changing its agreements with the oil majors. The latest changes in the PSC law signal a more stringent economic environment for the oil multinationals, whose response could significantly impact Nigeria’s oil-reliant economy. A report by the Nigeria Extractive Industries Transparency Initiative (NEITI) said if contracts with oil companies were reviewed in 2008 Nigeria would have earned at least $16 billion in extra government revenue over the following decade.
But with Nigeria’s economy at a breaking point, Buhari may be forced to adopt unprecedented liberal reforms to spur economic development. Nigeria boasts the world’s worst performing stock market and is the world’s poverty capital with the greatest number of people living in what the World Bank calls “extreme poverty” – 87 million Nigerians live on less than $1.90 per day. Since Buhari took office in 2015, unemployment has ballooned from 8% to 23% and inflation has grown, now at a painful 14%. Poor energy infrastructure also means that the continent’s largest oil producer must rely on imports to meet its refined petroleum demand, and has paid out $5.8 billion since 2017.
Nigeria could be a top global natural gas exporter; the country has the 11th largest gas reserves in the world, measuring 187 trillion standard cubic feet (tcf). According to Royal Dutch Shell, however, only about 25% of those reserves are utilized today. Like the oil sector, poor legal and regulatory frameworks, inadequate financing, and mismanagement by the dominant national energy companies are to blame. It doesn’t have to be this way. Nigeria can still become a model of African energy development if President Buhari decides to be a force for good in the country’s economy. But for that to happen he must loosen his grip on Nigeria’s energy sector by removing himself as the substantive oil Minister and appointing a technocrat to oversee and manage the Oil ministry. Doing repeatedly what was done in the past and expecting a different result is the trademark definition of insanity.
