The role of locally-owned firms in Nigeria’s oil sector is expected to expand further in coming years, even as international producers move away from onshore and littoral fields. However, there are some who query if the local industry is ready to take the step up.
The government has supported the development of indigenous capacity for more than a decade, first through its “marginal fields” initiative. Launched in 2003, the programme was designed to transfer small, unexploited fields from international oil companies (IOCs) to local firms. Domestic players were further boosted by the Nigerian Oil and Gas Indigenous Content Development Act (known as the Local Content Act), which was passed in 2010 and requires, inter alia, that local buyers be given preference in oil field auctions.
“The awarding of marginal fields to indigenous oil companies and the divestment by IOCs from some of their onshore assets has been broadly positive for local players in terms of building their capacity, credibility and expertise,” Ladi Bada, CEO of Shoreline Natural Resources, a Nigerian-owned exploration and production company, told OBG.
Around 10% of Nigeria’s output of 2.5m barrels per day (bpd) is accounted for by locally owned firms. This is a figure that ABC Orjiako, chairman of Seplat Petroleum Development Company, which is majority-owned by domestic investors, believes will rise sharply before the end of the decade.
“In the next five years, indigenous companies will contribute 20% of the nation’s oil and 40% of domestic gas supply,” he said while taking part in an industry conference in Accra, Ghana, in mid-October. “They are likely to be responsible for 100% of the supply for domestic refining by 2020. These figures point not just to the significance of the indigenous exploration and production players but their rising profile and the need to pay more attention to their activities.”
A second bidding round for marginal fields is key to domestic players’ growth prospects. Local firms estimate the coming round, which was originally expected after the 2011 elections but since delayed, will offer up to 50 marginal fields, of which more than 90% are expected to be onshore.
IOCs shift their activities
In addition to benefiting from on-going government initiatives, local firms received a major boost following a structured divestment programme led by Shell in 2010. Other IOCs that have sold some of their Nigerian holdings or are moving to do so include Italy’s Eni, France’s Total and two US-based companies, Chevron and ConocoPhillips. Among the assets up for sale now are five shallow-water blocks from Chevron, while Shell has said that it is considering divesting four onshore Nigeria Delta blocks with a combined production of about 70,000 bpd.
The reasons for the divestments vary according to each block, but Andrew Yakubu, the group managing director of the state-owned Nigerian National Petroleum Corporation, suggested that the divestments presented an opportunity for local producers.
“These are not withdrawals in the real sense of withdrawals,” said Yakubu in mid-October. “The fact is that a number of these IOCs are moving into more challenging frontiers in the deep offshore and are leaving the onshore blocks, which they consider less challenging.”
With many of the blocks being sold not having been developed fully or lying fallow, it was only fair that the IOCs released their hold on the sites so that indigenous operators could access the blocks and grow in the upstream business, Yakubu said.
“This indeed is a good development and I think we are moving in the right direction,” he said.
Nigeria’s independent oil firms may find it difficult to take the next step up, moving from a relatively small production base to become major suppliers operating extensive fields. Their output to date has been modest – six of the fields licensed as part of the 2003 marginal fields auction have yielded oil production, while one produces gas.
However, the blocks being offered now present a significant chance for local firms to boost their output and contribute to the Nigerian government’s goal of 3m bpd production by 2020, according to Rolake Akinkugbe, the head of energy, oil and gas research at Ecobank Research.
“These divestments represent the single largest opportunity for indigenous Nigerian firms with the requisite expertise, partnerships and capital to ascend into the league of major upstream players,” she told the international media in September.