Economic Update

22 Jul, 2010

Wide-sweeping changes to Nigeria’s energy sector are under review as the federal government considers concerns from international oil companies over a reform bill meant to modernise the sector and improve transparency.

The Petroleum Industry Bill, backed by President Umaru Yar’Adua, will restructure the state-owned Nigerian National Petroleum Corporation (NNPC) as a profit-driven company to include three regulatory bodies: the National Petroleum Assets Management Agency to regulate upstream commercial activity; the Petroleum Products Regulatory Agency to regulate downstream; and the Department of Petroleum Resources to oversee all technical aspects. The new legislation is being touted as a means to increase efficiency in a sector burdened with cumbersome laws for operators. In addition, it seeks to redistribute oil fields owned by foreign oil companies that are not being used, raise taxes and royalties, and increase employment of Nigerians in the sector.

“The goal is to ensure a fair share to Nigeria, comparable to other important oil-exporting countries,” the minister of petroleum resources, Rilwanu Lukman, told international press in July. He added at an Organisation of Petroleum Exporting Countries (OPEC) meeting that he hoped the bill would “enhance the confidence of potential investors” by raising the sector to international standards of transparency and fair competition.

However, opponents say that the bill, which has been a decade in the making, needs more input from stakeholders, with some multinationals threatening to curtail investments if the legislation is not reconfigured. “The aggregate impact of multiple taxes, high royalties and loss of incentives under the Petroleum Industry Bill as currently proposed will have a significant negative impact,” the head of Shell in Nigeria, Basil Omiyi, told the Nigerian senate at a public hearing in July. Chevron also expressed concern that its deep-water offshore fields would not be viable under the new law, while Exxon threatened to pull the plug on a $60bn investment plan if the proposed amendments were implemented.

Following the outcry, the government agreed to review some of the specific clauses within the bill. “There may be some modifications here and there to take into account what we have heard at the public hearing especially, but the fundamental objectives of the bill remain the same,” Lukman told OPEC.

The long-heralded legislation would be the largest reform in the Nigerian petroleum industry’s 50 years of existence. Nigeria, sub-Saharan Africa’s second-largest economy, receives up to 85% of its revenue from the oil and gas sector. As of August, over $600bn in revenue has been generated since oil was discovered in the Niger Delta in the 1960s. Yet, according to the government, it receives proportionally less money than other energy exporting countries due to an outdated fiscal regime containing unfair terms for Nigeria.

In recent years, oil production has been volatile due to funding problems at NNPC and Niger Delta militants targeting oil production facilities. A new rash of militant attacks broke out at the beginning of this summer, disrupting world oil supplies. Shell, the largest operator in the Niger Delta, stated on June 30 that it was producing at half-capacity due to the attacks. Crude oil production dropped to about 1.3m barrels per day in July and August according to industry sources (the federal government estimated it at 1.6m), causing new OPEC member Angola to surpass Nigeria as Africa’s top oil producer. At the end of August, Lukman indicated that output had rebounded to 1.7m barrels per day, closing in on its 1.94m-barrel daily average in 2008.

The financial crisis has added another layer of difficulty for the Nigerian petroleum industry. Export revenue plummeted at the start of the year as worldwide crude oil prices fell to $33 a barrel, from a July 2008 high of $147. While they have since rebounded to around $70, the World Bank is urging Nigeria to wean its economy off an oil dependency. “The crisis is an opportunity to diversify and re-position the economy for steadier long-run growth,” commented World Bank managing director Ngozi Okonjo Iweala in March. Foreign direct investment, the bulk of which goes to the energy sector, is expected to drop this year to $6bn from $8.2bn in 2008 on the back of the crisis.

The sector is also facing a patch of uncertainty following the recent disclosure that one of China’s national oil companies, the China National Offshore Oil Company, had submitted a proposal to buy stakes in 23 premium production blocs, many of which are partially or wholly-controlled by American and European oil majors. The total number of reserves it is seeking is an estimated 6bn barrels, larger than all of its current African blocs combined. However, while licences for 16 of the sought-after blocs are due to expire, the remaining blocs are still under contract, which makes the allocation of additional stakes difficult. Some of the current stakeholders have explored options to fend off the Chinese bid – which, according to news reports, ranges between $30bn and $50bn – including, as Shell has done, seeking judicial recourse.

The Nigerian energy sector is in dire need of both increased investment and regulatory stability to help ensure sustainable production, which means the Petroleum Industry Bill, depending on its final structure, could prove to be a much-needed palliative.