A new agreement signed between Dubai and Nigeria is set to dramatically boost investment in the African oil giant's energy infrastructure, helping to improve upstream output and limit production drops.
The $16bn deal was inked between Dubai Natural Resources World (DNRW), a subsidiary of state-owned conglomerate Dubai World, and the government-owned Nigerian National Petroleum Company (NNPC). The agreement, a first for DNRW in the developing world, represents one of the largest planned investments in Nigeria.
Speaking at the signing ceremony in Abuja, Sultan Ahmed Bin Sulayem, the chairman of Dubai World, said that the agreement would cover "infrastructure projects, with the main emphasis in oil and gas", though the deal also covers plans for increased investment in the real estate and agriculture sectors.
The timing of the DNRW agreement seems particularly ambitious, given the impact of the global financial crisis on Dubai. In recent months, a number of publicly-owned companies in the emirate have seen their credit ratings slashed as the economic slowdown spreads. However, in an attempt to increase their geographic diversification, Dubai World's subsidiaries have launched an increasing number of infrastructure projects across Africa. The conglomerate now has over 30 projects on the continent, including an $800m port terminal in Dakar and $1.1bn worth of investments in Djibouti.
According to press reports, the planned projects include new domestic gas pipelines to industrial areas and increased financing for Liquefied Natural Gas (LNG) infrastructure. DNRW will also reportedly help fund new drilling and exploration projects, in addition to subsidising the construction of 1000 MW of gas-powered generation stations.
The majority of the projects will be concentrated around the Niger Delta, which produces almost all of Nigeria's 2m barrels a day (bpd) of oil - catapulting the country to the top ranks of the continent's producers. According the US Department of Energy, Nigeria boasts proven oil reserves of over 36bn barrels, and natural gas reserves of over 100trn cubic feet, the seventh largest in the world.
The success of the oil and gas industries since the 1970s has filled the state's coffers and created a heavy dependence on upstream development Combined, the two sectors are responsible for nearly 90% of government revenues. However, security issues, notably volatile relations with local communities in the Niger Delta oil region, have hampered production and output has dropped below the country's Organisation of Petroleum Exporting Countries (OPEC) quota as a result.
Citing the lack of economic opportunities in the impoverished Delta communities, militants have led a violent campaign over the past three years against oil producers, in a bid to increase their share of federal funds and crude profits. The unrest has restricted exploration activity and, in some cases, shut down production completely. In 2006, a series of attacks cut the country's overall crude output by a fifth.
The government, which has spent an increasing amount of its annual budget on stabilising the Delta region, looks set to try to stimulate local growth by using some of the financing opened up by the Dubai deal.
Nigeria's Justice Minister Michael Aondoakaa told the local press that the $16bn agreement "will further complement government's budgetary efforts in bringing development...to the Niger Delta."
A new ministry for the region was inaugurated to try to speed up the development of the long-neglected area.
The DNRW deal comes on the back of an agreement signed last year by local officials in Port Harcourt, the capital of the state of Rivers. China Harbour Engineering, in conjunction with the Africa Finance Corporation (AFC) development bank, signed a Memorandum of Understanding (MoU) last July to construct a 125km six-lane motorway around Port Harcourt. The $1bn deal will improve the state's transit infrastructure while at the same time upgrading the region's electricity generation, transmission and distribution system.
While the country boasts a wealth of hydrocarbons resources, a combination of factors, including under-investment and mismanagement, have resulted in missed output targets and increasing production costs. The influx of foreign investors from the Gulf and China should help improve efficiency and lower costs, while raising the overall profile of the sector. Nor could the investments come at a better time - given Nigeria's dependence on oil revenues, maintaining a healthy output is crucial, particularly following the drop in crude prices.