- Investments in deepwater to rise
Nigeria recorded a major breakthrough, with the erstwhile Petroleum Industry Bill (PIB) on Monday, August 16, 2021, when President Muhammadu Buhari signed it into law on after it was passed by both chambers of the National Assembly. The signing of the Petroleum Industry Act (PIA) was immediately followed by the approval of an implementation committee, headed by the Minister of State for Petroleum Resources, Chief Timipre Sylva, to immediately commence implementation. The committee, which has since swung into action, will see to the effective and timely implementation of the PIA in the course of transition to the oil and gas industry envisaged in the reform programme, and ensure that the newly created institutions have the full capability to deliver on their mandate under the new legislation.
Valuechain reports that, with the signing of the PIA, the industry now has a legal, governance, regulatory and fiscal framework. The key objective, particularly of the fiscals, is to establish a progressive fiscal framework that encourages investments, provides clarity, enhances revenues for the government, while ensuring a fair return for investors.The signing of the law, and subsequent implementation is particularly important for the upstream sub-sector of the industry, because of the significant importance of that segment of the industry. The upstream – specifically the exploration and production of crude oil and/or natural gas from underground or underwater fields – is Nigeria’s lifeblood, and is the single most important sub-sector of the industry.
Valuechain analysis of industry data shows that the delay in the enactment of the law accounted for massive drop in investments, and stalled projects in the upstream sector, because of the uncertainty it had heightened among operators and prospective investors. Major upstream development projects in Nigeria, accruing to billions of dollars, were stalled or suffered delayed Final Investment Decision (FID), as a result of delay in the enactment of the PIA. Leading market data provider, Mordor Intelligence’s report of Nigeria’s upstream market, as of January 2021, said the number of rigs working in the offshore and onshore fields reduced drastically in the country, owing to the lack of investments.
The International Oil Companies (IOCs) could not afford to invest in explorations to make new finds, because there were unclear fiscal terms to work with. Consequently, Nigeria’s dream to hit 40 billion barrels from 37 billion barrel reserves and four million barrels of oil per day production within the next decade, seemed unrealisable. To make matters worse, the nation’s existing 37 billion barrel reserves continued to be depleted much faster than expected.
The delay in the enactment of the law cost the industry as much as $15 billion in investments annually, according to Financial Derivatives Company (FDC) in a recent report. According to the IOCs, new investments in the industry would wait till the uncertainties associated with the absence of acceptable financial and operational terms were sorted out.
However, with the signing of the PIA, some of the stranded upstream projects in the oil industry may be on the verge of taking off. Prior to signing of the PIA, many of these projects initiated in the industry had remained at the planning stage, or bogged down by legal hurdles, years after initiation. Some of the projects include: Shell’s Bonga South-West and Aparo, which is expected to add about 225,000 barrel per day (bpd); Bonga North (100,000bpd), Eni’s Zabazaba-Etan (120,000bpd), Chevron’s Nsiko (100,000bpd), ExxonMobil’s Bosi (140,000bpd), Satellite Field Development Phase Two (80,000bpd), and Ude (110,000bpd).
Experts from the Nigeria Association of Petroleum Exploration (NAPE) put the cost of some of these projects, still awaiting Final Investment Decisions (FIDs) to take off, at over $30 billion. During inauguration of the PIA implementation committee in Abuja, Sylva said that these projects are estimated to cost around $100 billion, with the capacity to boost the nation’s production by as high as 875,000 bpd, and revenue by about $1.5 billion. Also mired in obscurity are the $20 billion Brass LNG project in Bayelsa State, $9.8 billion Olokola LNG in Ogun, 5000-kilometre Nigeria-Morocco offshore gas pipeline, which in the current market price, would cost an estimated $20 billion.
But now, discussions are reportedly being finalised already on Shell’s Bonga South-West and Aparo, and Eni’s Zabazaba. With the new legislation, there are expectations that a sizable increase in foreign direct investments, among other benefits, will happen soon. New projects in the country, including one of the most ambitious ultra-deep offshore projects, the Egina oil field by Total in water depths of between 1,400 and 1,700 meters, which started production in the first week of 2019, are expected to witness further investments in the Egina field, which may significantly boost production and cash flow.
While it is expected that the signing of the new law would unlock enormous investment opportunities in the industry, attract much-needed investments, as well as significantly raise the country’s oil revenue, investors would approach the situation with caution. Certain segments of the industry remain cautious, even with the signing of the law, as it has not addressed the issue of energy transition from fossil fuel to clean energy. The key question remains whether those investments awaiting FID would pay off, or would they be a risky bet?
“With the global shift from fossil fuels to renewable forms of energy picking up pace, the passage of the PIB may just be too little, too late,” according to the FDC report.
Valuechain reports that IOCs are already squarely in the thick of the energy transition, while some are on well laid-out paths that would see them fully evolve to clean-energy companies. The IOCs have stated that Nigerian onshore business is incompatible with their long-term strategy, which focuses on climate change and net-zero carbon emissions by 2050.
For instance, the French oil giant had, on May 28, 2021, transformed into TotalEnergies, in a move it said would undermine its strategy to become a net zero emissions company by 2030. Oil products are expected to fall from 55 per cent to 30 per cent of sales in that timeframe, while the growth of energy production will be based on the two ‘pillars’ of LNG and renewables and electricity.
Fitch Solutions Country Risk & Industry Research said in a recent report that attracting new oil and gas investments to Nigeria over other destinations is likely to be a race, as decarbonisation efforts divert more capital to alternative energy and high margin barrels.
“On the upstream side of things, Nigeria is competing for investment on global stage with newcomers Guyana, Senegal and Kenya, while industry stalwarts Brazil and Norway continue to attract investment due to outsized reserves and friendly investor environment. Next quarter’s RRI should show Nigeria’s upstream position improve, although attracting new investment over other destinations is likely to be a race, as overall investment is likely to decline in the long-term, as decarbonisation efforts divert more capital to alternative energy and high margin barrels,” it said in the report titled, ‘Investment uptick expected as Nigeria’s Petroleum Industry Bill becomes law’.
Some leaders in the Niger Delta have criticised the 3 per cent annual allocation to host communities from the operator’s operating expenditure. They described it as a “meagre portion”, compared to the level of environmental degradation and development in the region. Some even frowned at the 30 per cent allocation that is contained in the Petroleum Industry Act (PIA) for the search of oil and its discovery.
Even the Nigeria Governors’ Forum (NGF) also expressed concern about the 30 per cent and the three per cent.
The NGF Chairman, Dr. Kayode Fayemi, who spoke in an interview with the Arise News Channel, said those provisions greatly depleted the Federation Account.
“This is a matter that the entire forum has discussed extensively, and we have come to certain conclusions about what is called frontier funds. Whether it is three per cent or not, our concern there is that whatever you are taking into these places is a depletion of the federation account. That money will not go to the federation account. It would be spread across the few areas that you described as (a) volunteer basis, rather than to the entire federation,” Fayemi, who is also the Governor of Ekiti state, explained.
The misinformation comes from the rhetorical question: How can PIA allocate a mere 3 per cent to host communities, while giving a whopping 30 per cent of the profit of the Nigerian National Petroleum Corporation (NNPC) to frontier exploration, which is absolutely in favour of the North? The unfortunate understanding is that this amounts to further stealing the resources of the traumatised people of Niger Delta. It could further lead to the demand that the Niger Delta militants should start bombing pipelines again to fight this grave injustice and total disrespect for the region.
One thing is clear: those who believe this are probably victims of misinformation. Despite these, some oil sector governance experts have expressed optimism that the Act, though not perfect, is a step in the right direction. “Definitely, signing of the law is a step in the right direction. Like all laws, it’s not perfect, but it’s what we have for now. We will work with the authorities to make implementation smooth, and hopefully address areas of concern,” Chairman of the Major Oil Marketers Association of Nigeria (MOMAN), Adetunji Oyebanji, said.
The NNPC Group Managing Director (GMD), Mallam Mele Kyari, also clarified that the allocation for host communities has a low percentage but a bigger value.
“For instance, when you say 30 per cent profit (from) oil and gas from NNPC shares or from PSC, it is a very small number. The percentages appear very outrageous, but 30 per cent of what? Nobody has sat down to look at it. When you say profit oil 30 per cent, it probably comes down to less than $400 million per annum.
“But when you come to the host communities, you have three per cent of our operating (expenses). We spent about $16 billion in fiscal 2020 in our operating (expenses) across the industry. So, when you take three per cent of that number, it comes to $500 million, which is far above the budget of NDDC (Niger Delta Development Commission).
“You can see that those percentages don’t reflect the realities that we are trying to achieve by this. And for profit oil, there are lots of uncertainties around it, because if you don’t make profit it is zero, but you must spend money to (meet) operating (expenses),” Kyari said when he appeared on an NTA interview programme on Tuesday, August 24.