TOYIN AKINOSHO examines how a culture of rent has reduced the potentials of what could have been the largest hydrocarbon industry in Africa
At an industry conference in early August 2011, Austen Oniwon-CEO of NNPC, the Nigerian state hydrocarbon company-made a 23 -slide presentation to a roomful of ranking Nigerian petroleum engineers,
Mr Oniwon took his gaze back from the screen to the 200+ delegates attending the main roundtable session of the Society of Petroleum Engineers’ conference, in the Banquet Hall of the Hilton in Abuja.
“Everybody talks about the Petroleum Industry Bill (PIB)”, Oniwon declared. “I think we should agree that the PIB would be passed and when the PIB comes, all of us would just have to re-adjust to whatever the new PIB comes out with. “Therefore, we should stop procrastinating and saying we are not going to take decisions because the PIB has not been passed”.
Oniwon knew he had just the right audience. Flanking him, on the panel, were chief executives of the country’s two largest oil producing companies. Mutiu Sumonu, chairof the Shell Companies in Nigeria (2010 average operated production~l,000,000BOPD)and Mark Ward, chairof ExxonMobil companies in Nigeria (2010 average operated production~750,000BOPD). Together, Shell and ExxonMobil, in joint venture with NNPC, delivered around two thirds of Nigeria’s output.
The NNPC chieftain dangled some carrot: ” I can tell from what I know from the PIB, that the fiscal regime that will emerge is not going to be any worse than what operates in the West African sub- region. I believe if you can do business under these regimes, then, those that would do business under the regime, would be very happy to business in Nigeria, under the new PIB when it emerges.
Then he brought out the stick: “Opportunities available in the industry would not wait for the joint- venture partners and their colleagues, as others would come and fill the gap, if they failed to act promptly.”
To rephrase the last statement: ‘Nigeria was a great opportunity that everybody was keen to get into. If those who held its assets today did not appreciate what they had, there were others waiting to grab these opportunities’.
Coming from the CEO of the state hydrocarbon company, such utterance requires close examination. The immediate question is that: is Nigeria what it’s cut out to be? “The three leading indices of a healthy oil and gas landscape are: rig count, production growth and foreign direct investment”, says Jerry Tolkien an E&P analyst based in Cairo. “These are not at this point happening in Nigeria”.
Nigeria produced an average of 2.42MMBOPD in 2010, with capacity for far less than 3.5MMBOPD. The figures are a significant shortfall of its 2010 target, which envisaged capacity for production of at least 4MM- BOPD, but things could have been worse, as the ensuing story shows, and government officials, in public, have been recently expressing the view that the country is at least producing more crude oil per day than Angola. Such views are suggestive of a low water mark in Nigeria’s expectations of its main industry. What exactly happened?
The Boom Years: 1995 To 2005 The state of Nigeria’s E&P industry today is the result of several actions of state and non state actors in the last 15 years. But in the 10 years leading to 2006, the country experienced a sort of hydrocarbon boom.
• Bouyed by very generous incentives, including close to zero % royalty, lOCs plucked a series of deepwater discoveries between 1996 and 1999, putting Nigeria squarely on the global deepwater radar. By 2002, there were confirmed six billion barrels of new oil, in water depths between 200metres and 1,500 metres. Whenever the energy press reported that the Gulf Of Guinea was racing ahead of Brazil and the Gulf of Mexico as the deepwater exploration hot spot, they were largely referring to Nigeria and Angola.
• As the country returned to democracy in 1999, it was also commissioning a $3.8Billion Liquefied Natural Gas plant.
• Nigeria held an open transparent bid round in 2000, a widely subscribed lease sale, which featured such distinguished newcomers as Devon Energy, the large American midsized independent and Petrobras, the Brazilian giant.
• The same year, the government set up an Oil and Gas Reform Implementation Committee (OGIC), to carry out a comprehensive reform of the oil industry. This, in effect, led to the Petroleum Industry Bill.
• A rigorous, comprehensive bid round for marginal fields was conducted between 2002 and 2003, for the purpose of awarding undeveloped discoveries, located in the acreages of oil majors, to Nigerian entrepreneurs, in order to build indigenous capacity in wholesale E&P operations and in effect, boost the percentage of oil production that’s attributable to homegrown firms.
• Three deepwater fields came on stream, at a total of around 450,000BOPD on average, between 2003 and 2006. The country recorded its highest crude oil production in history in 2005, at roughly2.5MMBOPD.
• An ambitious local content programme, launched in 2002, picked up speed between 2005 and 2007, with the state enforcing, and operators committing, to “utilization of Nigerian human and material resources”. A key plank of the programme was domiciliation of goods and services supply. One deepwater project committed to the fabrication of approximately 6000 tonnes of equipment and structural modules at fabrication yards in Nigeria, a landmark development. Engineering design services continued to increase; one engineering contractor completed over 50,000 man-hours of engineering design in Nigeria between 2006 and 2007. One major operator commenced a redevelopment project of a cluster of fields which outlined a very aggressive Nigerian Content plan, including the design and construction of whole new flowstations and integration of substantial module in Nigeria, a marked departure from the token structural fabrication that had been done in the past.
The Decline: 2006 To-?
• The Emergence of MEND and the semi-official Resistance. It was in the midst of this tempo, in February 2006, that the Movement For The Emancipation of Niger Delta announced its emergence, with bomb blasts of strategic installations, especially the Escravos River part of the pipeline that delivers natural gas to the country’s largest power plant as well as the major industries in Lagos, the coastal city that is the country’s financial hub. The attack heightened the sense of urgency about what has always been termed “the Niger Delta crisis”. The damage on the gas pipeline, part of Nigeria’s domestic gas artery, took out Chevron’s daily supply of 150Mil- lion standard cubic feet (MMscf) to the Escravos-Lagos Pipeline System (ELPS), which feeds all the Thermal Power Plants in the southwest and midwest of the country, including Egbin, Papaianto, Omotosho and Delta Power stations, with combined nameplate capacity of about 2,000Megawatts (MW) of electricity.
But it also initiated a significant wind down on crude oil production on the shelf, as well as any meaningful progress that the national content programme was beginning to make. As attacks on facilities were launched after more severe attacks, with kidnappings of international oil workers and slaughtering of Nigerian soldiers, crude oil output fell to as low as 2.06MMBOPD in 2009; a figure that would have been far less, had two new deepwater fields not come on stream between 2008 and 2009.
In spite of the low intensity war on the production field, which curbed even the willingness to do exploration work, a new government, elected into power in 2007, sought as policy, a revision of ongoing hydrocarbon projects. A raft of gas to power projects were stopped on suspicion that too much money had been spent without any visible activity on ground. Two proposed Greenfield LNG projects, totaling 30Million Tonnes Per Year in scope and expected to be delivered latest 2013, were held up for scrutiny as government’s body language signaled increased commitment to domestic gas production, in favour of export projects, even without clear fiscal consensus between government and producers for domestic gas output.
Several deepwater projects have fallen victims of extended negotiations and back-and forth between officials of the National Petroleum Investment Management Services (NAPIMS), the subsidiary of the Nigerian state hydrocarbon Company (NNPC), which interfaces with Joint Venture partners.
It is known that the so-called “NAPIMS approval process” is one of the most drawn out in the global oil patch.
Between January 2010 and August 2011, NAPIMS muscled in on small gas -flare- out projects that were to be awarded to small contractors by oil majors who consider them quite uneconomic to be incorporated into large scale gas processing facilities.
• Bid Round Quality Deteriorated: Meanwhile, the quality of acreage bid round has declined since 2004, such that, even the Department Of Petroleum Resources, the industry regulator, declared the 2007 lease sale as largely a failure.
• The trickster God of Geology heralds Exploration Fatigue: One other culprit has been geology. While Nigeria’s deepwater exploration profile had been on to a good start in the mid 90s, there has been a series of disappointing dry holes, especially in the western and southern flanks of the basin, the so -called outer toe thrust belt. Chevron’s Iroko- 1(OPL 250)ENI’s Dou-1 and Emein-l(OPL 244), Devon Energy’s Pina 1 and Tari 1, (OPL 256), Petrobras’s Erinmi 1(OPL 324), Phillips’ Onigun 1(OPL318), all were either dry holes or have encountered marginal gas or little oil shows between 2001 and 2006, setting the stage for some sort of exploration fatigue in Nigeria’s deepwater, at a time when deepwater exploration success was about to break out in the marginal basins of the Gulf Of Guinea, including the Cape Three Points Sub Basin (Ghana) and the Sierra Leone-Liberian Basin.
Still, the difficult challenges of geology can be managed by host government, with the right politics. BG’s two dry holes in deepwater Nigeria (between 2008 and 2009) cost the company around $200Million, a vast sinkhole, but the UK independent’s enthusiasm about the country was already suffering reverses with the lack of progress of OK LNG and Brass LNG. Suddenly, its portfolio looked extremely lean. With these grim prospects, BG left Nigeria, some would say, in haste.Devon Energy, Pioneer and Occidental, three significant American independents, who showed up with the promise offered by Nigeria’s return to democracy at the turn of the 21st century, have largely left on this basis.
• Cash Call Debacle Fouls Up Things Add to this potent mix mounting cash calls: the continuous inability of the NNPC to fund its share of approved budgets, for projects by its JV partners. And yet government bureaucrats, blissfully ignorant that this was a cake that was not growing, kept coming up with statements like Oniwon’s: “If you can’t do it, get out: others are waiting”. Centrica, the UK gas company, took the cue. It sold its assets to Newcross, a Nigerian company.
• PIB Became the Scapegoat..As debate over the PIB was fought in the media, perception of Nigeria as an investment destination for oil and gas is what has suffered the most. But, as is obvious from above, PIB is only a part of the story. Nigeria was having all the challenges of a third world hydrocarbon economy that it could have. The uncertainty in the passing of the PIB merely added to these challenges and became the calling card.
• Shell Divestment: How NNPC Arrested the Revolution. Then came the decision by Shell to divest from a number of assets in Nigeria. In 2008, the company sold its participating interest in two non- operated interests in the deepwater terrain. In 2010, Shell announced that it had started selling acreages on the shelf (land, swamp and shallow water) too. It sold its 30% stake in OMLs 4, 38 and 41, three acreages on land and in swamp of the Midwest part of the country along with partners ENI and TOTAL, who had agreed to also sell their combined 15% stakes to a local company named Seplat(an incorporated joint venture of two indigenous companies Platform and Shebah and French minnow Mauriel et Prom). Shell & Co came out less than a year later to sell their interests in another lease, OML 26, to First Hydrocarbon Company, a local subsidiary of Afren, the UK listed producer. While these divestments, led by the largest operator in the land, may indicate a surge of uncertainty in the Nigerian petroleum sector, the underlining message has been that it is an opportunity for Nigerian private sector companies to weigh in as E&P operatives.
Shell then went on to call for a bid, by Nigerian companies, for four more of its acreages, including Oil Mining Leases (OMLs) 30, 34, 40 and 42.
A close look at what has transpired since that bid process came to conclusion, clarifies the notion that the Nigerian government, through its ranking officials at both the Ministry Of Petroleum and the NNPC, have been active participants, all along, in sending the signals that the Nigerian space was not friendly to investors.
The insistence of NPDC, the operating arm of NNPC, to step in and claim operatorship of four acreages sold to Nigerian companies by Shell, ENI and TOTAL is a clear statement that Nigerian government, as an incorporated entity, is competing aggressively against those to which it should otherwise be opening its doors.
A noteworthy trend of the years of the locust(2006-2011) for Nigeria’s hydrocarbon industry has been the strengthening of the spirit of local content, even if it means, an increasing sense of self entitlement(sometimes worrisome) among the country’s bourgeoning business class.
Although Conoil, the country’s first truly independent, growth-conscious, indigenous E&P company, emerged after a discretionary lease award to local businessmen in 1991, it wasn’t until after the Marginal field exercise of 2003, that a class of homegrown E&P companies started to take shape. By January 2010, there existed, in the country, at least five companies, producing anything from 1,000 to 20,000BOPD each. They were generally small, but had gradually amassed significant experience in upstream operatorship of hydrocarbon property -acquired in the process of raising fund to drill wells, running oil field operations, evacuating oil to export facility, building gas processing facilities, even constructing topping plants all with money invested by Nigerians. There is nowhere else in Africa that this is happening.
Shell had made it clear, with the example of Seplat, that there were local companies that could be relied on to run with the torch as local champions.
When, around mid 2010, Shell invited a number of similar companies to purchase the same percentage stake in four other acreages, out of its remaining 35 operated leases, industry analysts began to predict the emergence of Nigerian midsized independents, with capacity to produce as much as 40,000BOPD each on average in the medium term to 2015. Companies in this class were coming in with money sourced from abroad and this time they partnered in incorporated joint ventures, not as passive venturers who collect rent and leave the foreigners to maximize experience and build capacity while Nigerians remain on the margins as was the case in the earliest period of the indigenous ownership policy (1975 to 1998). In effect, what the sale of Shell’s assets to Nigerian companies was meant to do was to get on the next stage of the ladder from where the marginal field exercise had reached.
With Seplat’s operated production zooming off to 35,000BOPD by 2012, about doubling the volume itinherited from Shell in August 2010 and the company targeting 135,000BOPD in the medium term, an elaborate example had been set.
It seemed, by commonsense, that government would be all out to encourage this kind of company: a class of nifty, midsized independents operating a number of oil fields in Nigeria and writing an alternative story about Africa’s private sector capability to venture into E&P investment not as contractors, but as producers. For once, it doesn’t have to be one huge, all-powerful National Company driving everything. It would be an enlarged space, a mix of majors and minors and the mandatory national company, all co-existing. But the Nigerian government didn’t see it that way. The NNPC saw the Shell divestment as an opportunity to increase NNPC’s operated production, in effect choking off the burgeoning, private Nigerian E&P enterprise.
On Tuesday May 24, 2011, NNPC took out full page adverts in newspapers warning investors to beware of buying interests in certain hydrocarbon assets in the country. The statement, headlined “Nigerian National Petroleum Corporation CAVEAT EMPTOR”, was published in at least three widely circulating Nigerian dailies.
What has been most instructive is how far NPDC was prepared to go to show it could “operate”. As a rule, the NNPC, which is NPDC’s parent company, had struggled in the previous 10 years to pay its share of the cost of projects with its partners. So it is understandable that the NPDC would have issues funding its own share of field development and ongoing production in the leases sold by Shell and Co.
But the divestment itself was an opportunity for NPDC to work with Nigerian companies to find a way out of the funding dilemma. It was an opportunity for NPDC to build its own technical capacity, through working with Nigerian companies who had bought and were keen on operating these acreages within the ambit of the incorporated joint ventures that they had formed with European lOCs.
Instead, NPDC signed a strategic agreement with Atlantic Energy Drilling Concept, which had never featured in E&P activities either in Nigeria or elsewhere, “to provide funds for carrying out Petroleum operations arc support NPDC with technical expertise”. The terms of agreement were executed in an unethical patronage manner.
But what’s important in the context of this article is how the state hydrocarbon company considers it so crucial to undermine the enthusiasm of a collection of Nigerian companies to build Nigerian E&P capacity outside of the purview of the state.
In the event, what could have been the exception to the rule of failed initiatives and projects in the Nigerian oil industry from 2005 to date, was disrupted by the state.
As the NPDC took over, none of the four companies which bought into the Shell assets after Seplat could increase their production the way Seplat did.
Next week, we should continue the discussion about the inherent contradictions and deliberate options for failure by state actors, in running the Nigerian hydrocarbon industry, from 2006 to 2016.