The significance of the above exploration and appraisal drilling figures is that exploration and appraisal activity in 2010/11 is a leading indicator for the level of oil and gas production in, say, 10 years’ time. The disastrously low level of exploration activity in Nigeria is borne out by the following data.
Some 67 percent of announced deepwater discoveries over the period 2009-2011 are concentrated in six countries:
1. Brazil 40 discoveries, representing 20 percent of the global total
2. Australia 25 discoveries
3. The US 24 discoveries over the three years
4. Norway 20 discoveries
5. Angola 12 discoveries from 2009- 2010
6. Ghana 9 discoveries
7. Nigeria 4 discoveries
In total, 37 countries announced deepwater discoveries over the period 2009 to 2011, of which 7 were newcomers.
The above statistics suggest that Nigeria is not attracting a commensurate share of global exploration dollars taking into consideration its current production ranking and resource base. This is a huge problem because it will have a negative impact on oil and gas production and associated state revenues in 10 to 15 years’ time. Against the background of a large and growing population, the lack of economic diversification away from oil and gas and the expensive administrative machinery, this is not a state of affairs that will lead to the accomplishment of developmental aspirations by 2020. It is useful to discuss how we have arrived at this state of affairs.
There are a number of complex factors that have impacted Nigeria’s inability to attract exploration dollars in recent years:
a. Emergence of new oil and gas basins with lower political risk
In the last 5-10 years, the options for exploration dollars has widened considerably. In Africa, hydrocarbon discoveries have been made in new basins in Uganda, West African Transform Margin (Ghana, Liberia, and Sierra Leone), East Africa (Uganda, Mozambique, Tanzania, and Kenya) and Angola Pre Salt. Angola’s pre-salt blocks share promising geological similarities with Brazil’s prolific Santos and Campos Basins, where in recent years, major discoveries have been made. Outside Africa, Australia, Brazil and North American Resource plays (shale oil and gas) are attracting oil and gas investment dollars that could have been deployed in the Niger Delta.
One outcome from the above development is that the super majors that dominate Nigeria’s oil and gas industry now have other options for E&P investment. For instance, Total now has a big position in Uganda and Angola pre-salt plays while ENI has a huge position in Mozambique and is present in Ghana as well as the Angola pre-salt play. Chevron is in Liberia and heavily involved in Australian LNG projects. Shell is also heavily exposed to Australian gas and has made entry into the Tanzanian gas plays and considering entry into Mozambique. ExxonMobil has consolidated its position in the North American shale plays via corporate acquisition of XTO Energy for circa $40 billion as well as secured entry into Tanzania. Statoil has also entered the Angola pre-salt play as well as Tanzania and Mozambique.
Nigeria’s traditional oil and gas players have all got bigger and more accessible fish to fry elsewhere, which implies that they have less investment dollars for Nigeria. This state of affairs is accentuated by the fact that Nigeria has not been able to attract many quality new players due to perceived lack of transparency in bidding rounds, uncertainty around fiscal terms, militancy, kidnapping, equipment sabotage, painfully slow decision making and bureaucracy, security premium, lack of investment liquidity, etc. All these factors have combined to create formidable barriers for quality players looking to enter the Nigerian oil and gas industry.
The sabotage of facilities and equipment by citizens and/or militants not only discourages FDI, but these costs ultimately come out of the pockets of the Nigerian taxpayer because repair/rebuild costs are cost recoverable. The wanton destruction of oil and gas infrastructure by citizens therefore has grave financial consequences and must be tackled seriously along with bunkering and kidnapping, etc.
These adverse factors are self-explanatory, but one issue which may not be as obvious concerns the issue of liquidity of investment.
b. Liquidity of investment
Liquidity of investment is the fuel that keeps global oil and gas basins growing across the constantly evolving economic and asset development cycles. In 2011, oil and gas asset transactions worth $2.5 billion were completed in Norway. It is inevitable that some asset holders in Nigeria would want to exit for a variety of reasons, say, a change in strategy, etc, while other players will be looking to enter the Nigerian market for different reasons. Holders of Nigerian oil and gas assets that are unable to sell their assets for reasons to do with bureaucracy, etc, will hardly make further investment in those assets. It is therefore very important and healthy to have an oil and gas sector where assets can be freely traded and where those transactions are completed in a timely fashion without costly bureaucracy. The government can also capture economic rent from a buoyant oil and gas asset trading environment through a Capital Gains Tax mechanism which can be entrenched in the PIB.
c. Fiscal terms
The reliance on seven super majors for the bulk of the investment in Nigeria’s upstream sector is clearly sub-optimal, especially since all these players have found more lucrative arenas to invest their investment dollars. This state of affairs therefore accentuates Nigeria’s failure to attract quality new entrants into its oil and gas industry. To address this issue, i.e., to increase the number of quality new entrants into the Nigerian oil and gas industry to compete with the incumbents, the PIB will need to ensure that the revised fiscal terms are attractive and realistic in this new world of North American shale oil and gas, deepwater gas in East Africa and East Mediterranean, pre-salt oil plays in Brazil and Angola, emerging West African Transform Margin play in Ghana, Sierra Leone, Liberia and LNG projects in Australia, Mozambique and North America, etc.
The key message is that there are plenty of emerging basins to invest in and traditional oil and gas producing countries such as Nigeria, Algeria and Libya need to tweak their fiscal terms to compete for investment that would otherwise go to the new emerging and frontier hydrocarbon prone countries where there is possibly more growth potential.
The idea that high oil and gas tax rates necessarily lead to higher government take is a fallacy because higher tax rates generally lead to fewer projects reaching FID. Also, a complex taxation regime is not necessarily a positive development because it can encourage tax avoidance, low level of compliance and creative tax planning where field production is driven by taxation rather than reservoir fundamentals. From the perspective of investor optics and ease of compliance, there is also a case for fewer categories of taxes, even if this does not result in a lower overall government tax take.
Improved transparency in the licensing process is required. To increase the number of new entrants, a reduction in the size of the Niger Delta and deepwater blocks on offer could also be considered. In 2011, Norway awarded a total of 78 licences across 36,579 km2 of acreage. This is an average of 470 km2 per licence.
d. Manpower development
Nigeria’s oil and gas industry will never achieve the desired growth rates without development of indigenous manpower and enforcement of local content regulations. It will therefore be useful if the PIB contains provisions for a quid pro quo employment of expatriates in Nigeria and Nigerians in overseas postings. On manpower, local content, etc, it is useful to put in place a reciprocal arrangement whereby the number of expatriates hired by an IOC has to be related to the number of indigenous staff sent for overseas training by the IOC. For instance, if an IOC employs 5 expatriates for 5 years in Nigeria (25 expatriate years), they should be obliged to send 1 indigenous staff overseas for training for 5 years or 2 staff for 2.5 years. This kind of scheme will accelerate the training of local staff and create a pool of staff which NNPC/NPDC may be able to poach. It will also discourage IOCs from employing expatriates for jobs that can be done by local staff, thus improving the dire unemployment situation.
This is a general theme that can be fine-tuned as appropriate in the PIB.
It took a long time for Nigeria’s profitable LNG industry to get off the ground. However, once it took off, growth became the norm and the industry is only second to Qatar which has a production capacity of 77 mtpa vs. Nigeria’s name plate capacity of 22 mtpa.
Countries that have the potential to overtake Nigeria’s LNG business over the next 10 years are Australia, USA, Canada, Mozambique, Israel and Algeria. For Nigeria to maintain market share in this lucrative segment of the international gas business, Nigeria will need to work quickly towards FID on Brass LNG, NLNG Train 7 and OK LNG. This is important because the fleet-footed players will capture the most lucrative off-take contracts which underpin the profitability of LNG projects.
Financial pragmatism dictates that domestic gas commercialisation projects should be developed in tandem with export projects.
The power woe in Nigeria is perhaps the single most important impediment to economic growth. The above chart shows that Nigeria is perhaps understandably over-reliant on gas and diesel for electricity generation. This is a natural temptation based on the abundance of oil/gas resources in Nigeria. However, a more sustainable and effective mix of electricity generation sources is required. The above chart shows that the USA and UK do not rely on oil and gas for power generation in spite of owning considerable hydrocarbon resources.
Nigeria needs to take a cue from these countries by diversifying its electricity generation portfolio away from gas-fired power stations into coal-fired facilities, and to a lesser extent, wind power which admittedly can be an intermittent source of power generation. Different groups of states within Nigeria should rely on different types of power sources. The 36 states can be grouped into, say, 6 zones, with each zone pursuing at least two different sources of power. Hydroelectric power generation will be appropriate for some of the middle-belt states while it makes sense for the Niger Delta to rely on gas-fired power generation, while coal-bearing states like Anambra and surrounding states should be relying on power from clean coal-fired facilities. States that have a marine environment such as Lagos should have offshore and onshore wind power facilities in addition to the traditional sources of power. It has to be said that offshore wind is not cheap at about $4.5 billion for a 1,000-MW facility, but it aids decarbonisation and is proven technology. However, it can only be applied as part of an energy mix.
Overall, a more diversified mix of power generation sources is required to significantly improve the robustness and efficiency of the power supply in Nigeria. Exclusive reliance on gas-fired power generation, as seems to be the case, is sub-optimal. Solar energy continues to be quite expensive for the time being while Nigeria has not yet demonstrated that it will be able to apply nuclear technology in a safe and environmentally-friendly way. The inability to operate run of the mill refineries and iron and steel plants doesn’t provide the confidence that the nuclear power generation option is realistic at this stage. The international political hurdles are also a complication.
Nigeria has an abundance of oil/gas and coal resources to justify subsidised and, in fact, low energy prices but unfortunately, current oil/gas and coal production per capita is relatively very low. This implies that Nigeria cannot currently afford to maintain low energy prices for its people. New Foreign Direct Investment is therefore required to significantly increase hydrocarbon/coal production and reserves. There is a requirement to attract more financially capable and technically competent oil and gas upstream, midstream, downstream and power players and also promote an investor-friendly business environment for existing players. A fiscal regime that is simple, unambiguous, competitive, progressive and stable is required to create a vibrant oil and gas business in Nigeria. These attributes and a Capital Gains Tax regime should be reflected in the PIB. Fiscal incentives for the development of non-associated gas resources are also required.
The key takeaway is that there is no such thing as cheap energy. The concept of cheap energy is a contradiction in terms. Oil and gas, clean coal, wind, nuclear, hydro and solar energy are all very expensive to develop. End-user energy prices have to reflect this development cost, especially in a country like Nigeria that has very limited FX income per capita.
A self-reliant approach should be considered to prioritise the development of critical infrastructure such as new refineries, power stations, gas and pipeline infrastructure. Nigeria should therefore consider funding same from proceeds of oil and gas asset sales.
Given Nigeria’s high hydrocarbon reserves to production ratio, the future of the Nigerian oil and gas business can be very bright subject to resolution of sustainability and security issues and creation of an investor-friendly environment.
However, with Nigeria’s large population, diversification of the economy away from oil and gas is required for real sustainable growth and much needed poverty alleviation. Reliance on the current relatively low oil and gas production per capita is unlikely to catapult Nigeria into a sustainable position in the top 20 economic league.