Reform of Nigeria's Oil and Gas Sector Begins to Take Shape

Joint Ventures to Be Converted into Corporations

The reform of Nigeria's oil and gas sectors has finally begun and should eventually transform the entire energy industry. Dr Emmanuel Egbogah, the Financial Adviser on Petroleum to the President, was quoted by Dow Jones as saying that Nigeria will convert its JVs with foreign oil companies into corporations in order to alleviate the government’s funding problems. The new corporations will instead raise funds on the capital markets and Egbogah said that "This brings the Nigerian oil and gas industry into a completely new era". The change in structure will please the oil companies involved and should boost morale in the sector.

It would appear that this represents only the start of a raft of changes in Nigeria with the government saying, for a number of months, that it would be revising its existing oil contracts with a number of IOCs to tighten up some of the “generous terms” currently enjoyed by foreign companies, according to Rilwanu Lukman, the chairman of the oil and gas reform committee.

Gas to Be Made a Domestic Priority

Last week, President Umaru Yar'Adua announced a new gas policy, which is set to make the country's reserves more readily available for domestic consumers and businesses. The new National Gas Pricing Policy and Regulations are aimed at ensuring short- and long-term gas availability at an affordable rate. Domestic newspaper ThisDay reports that the Federal Executive Council (FEC) has now approved the blueprint for the future direction of the country's gas sector. Olatunde Odusina, Minister of State Responsible for Gas, said that “henceforth, investment in gas infrastructure will be guided by this blueprint; this will ensure that synergies are maximised and infrastructure is aligned to deliver the aspirations of Nigeria.”

A Department of Gas is to be established to oversee the implementation of the new gas policy. Global Insight has long emphasised the necessity for the federal government to utilise the country’s 187-trillion cubic feet reserves of gas more effectively. Under the new gas pricing policy approved by the president, Nigeria's gas will be supplied at the lowest commercially sustainable prices to the strategic domestic sector, which provides electricity for residential and light commercial users and also for industries that require gas as their main feedstock, such as fertiliser and methanol producers.

According to Dow Jones, Nigerian power companies can buy gas at 12 cents per thousand cubic feet, whereas LNG fetches US$2.16 for the same amount. While Reuters reports that Nigeria exports about 3 billion cubic feet (bcf) of gas per day in the form of LNG and flares about 2.5 bcf/d as a result of a lack of gas infrastructure and local demand. Nigeria supplies only 0.5 bcf/d to the domestic power sector, but 15 new gas-fired power plants are under construction and domestic gas reserves will now be prioritised to provide feedstock in order to increase generating capacity to 10,000MW by 2010

Outlook and Implications

It appears that Nigeria’s hydrocarbon industry is entering a new era in which it should become far more efficient and profitable. The aggressive stance taken by the FEC on announcing the new gas measures is commendable and much needed. In order for the gas policy to reach the implementation stage, the federal government will be forced to act strictly on gas flaring, with companies incurring fines if they continue to flare beyond the end of 2008. In November last year, the director of the Department of Petroleum Resources (DPR), Tony Chukwueke, said the government would not budge from its 2008 deadline and would increase the penalty for flaring to US$100 per million cubic feet of gas.

It is believed the new gas policy will force all oil companies operating in the country to allocate a specified amount of gas from their reserves and annual production to the domestic market, which will be utilised as feedstock for many new and planned independent power projects (IPPs) and may provide the key to ending Nigeria's recurring power cuts.

With the new gas policy, the government faces a difficult balancing act in ensuring there is plentiful gas supply for the lucrative LNG export projects. As domestic demand is now being prioritised, it will buy time for the oil companies involved in the planned LNG export projects to decide how best to move forward. The operators of the US$8.5-billion Brass LNG facility located in Bayelsa State said at the end of last year that the security situation in the Niger Delta could delay the project’s final investment decision past 2008. Global Insight expects the Brass project to go ahead (although the first LNG export cargo should not be expected before 2013), but the new gas policy is likely to set back development of the Olokola LNG facility and the Trans-Saharan pipeline even further.

Further changes in the oil sector should now be expected in the coming weeks. On 29 August last year Yar'Adua announced that the NOC, the Nigerian National Petroleum Corp. (NNPC), was to be scrapped and that a new NOC, to be known as NAPCON, which will have seven directorates (Upstream, Refinery & Petrochemical, Marketing & Investments, Gas & Power, Engineering & Technology, Finance & Accounts, and Corporate Services), will replace it. The president has made it clear that he wants to shake up the oil industry and see the state oil firm develop into a truly international company.

It is hoped that the reform of the oil sector will also help reduce the amount of crude being shut-in, but the key issue here lies in solving the problem of security in the oil producing Delta region. Shell alone has been shutting in at least 477,000 barrels per day (b/d) since February 2006 and Global Insight believes the country as a whole to be shutting in around 732,000 b/d, although the Minister of Energy (Oil) Odein Ajumogobia last week claimed that Nigeria was currently shutting in 1 million b/d of crude and producing only 2.23 million b/d.

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