The trading price for oil has fallen from a peak of $147 a barrel in July 2008 to around $40 a barrel recently. As a result, the Nigerian National Petroleum Corporation (NNPC), which control around 60% of the country's oil production of about 2m barrels per day (bpd), is now under severe pressure to raise funds for exploration and production in Nigeria's proven reserves of over 36bn barrels of oil and over 100tn cu ft of natural gas. The state-owned company was even forced to borrow millions of dollars in May 2008 from foreign oil firms Royal Dutch Shell, ExxonMobil and Total to finance its share of investment in their joint venture projects.
Additionally, security disturbances in the Niger Delta, both in production and transportation by tankers and pipelines, have hampered Nigeria's production up to 25%. Recent strikes by oil workers in the Niger Delta compounded the industry's difficulties.
With falling oil prices and output threatening to slash Nigeria's state oil income - which makes up 90% of the country's foreign exchange revenue - the federal government considers reform of the oil and gas sector a top priority.
Nigeria has set itself the ambitious target of raising oil production to 4m bpd by 2010. But given the recent drop in the price of oil, significant projects that had been planned during the era of high oil prices are now facing the daunting task of finding financing.
In response, the government is backing a reform bill to radically overhaul the state oil firm, which critics say currently mismanages billions of dollars in oil revenues every year. Following recommendations from the Oil Sector Implementation Committee, the reform will establish NNPC as an independent, profit-driven company operating in the same fashion as Petronas in Malaysia and Petrobras in Brazil. The legislation, if passed, would enable NNPC to raise funds by investing in the capaital markets, rather than relying solely on government revenue.
The reform also seeks to restructure the company into three separate entities: a national oil company (National Petroleum Assets Management Agency -NAPAM), a hydrocarbons distribution authority, and a national gas company (National Gas Assets Management Agency - NAGAM), thereby increasing the transparency in NNPC's operations. The bill is also set to create a Nigerian Petroleum Inspectorate (NPI) designed to regulate the technical aspects of both upstream and downstream activities for the whole of the industry.
Industry insiders welcome the proposed legislation, given that lack of funding is one of the biggest obstacles to improving performance in the industry as a whole.
"Nigeria's oil and gas industry has never achieved its full potential because of shortfalls in Federal Government funding, which reached $6bn last year," Emmanuel Egbogah, Special Adviser to the President on Petroleum Matters, told OBG. "By restructuring and incorporating joint ventures in the oil and gas industry, we will be allowing them to raise funds directly on the capital markets. Once the legislation is passed, I expect it will take between 24 and 30 months for the JVs to achieve a full transition," he added.
The oil reform bill was presented to the National Assembly back in August 2008 and has since faced months of discussion. In a legislature where debate has often been slow-moving, Egbogah stated that it was encouraging to see that the draft bill passed a first reading in February.
"Deliberation on the oil and gas industry reform package has moved quite rapidly in the National Assembly," Egbogah told OBG. "I expect the reform bill to be passed within the next three months."
The stated national goal is to increase reserves to 40bn barrels of oil and the equivalent in natural gas by 2010. According to industry insiders, these figures are realistic. However, the second goal, which is to raise oil production to 4m barrels per day (bdp) by 2010, appears to be more of a stretch, although the start of production at a number of sizeable oil fields over 2008 and 2009 could help the Federal Government reach its target.
Nigeria also has significant areas where exploration has yet to be undertaken, which will strengthen the sector after a flurry of new block bidding rounds from 2005 to 2007, no new blocks were offered up for tender in 2008. Egbogah told OBG that the Government had put new bidding rounds on hold until standardised and transparent systems for bidding were put in place. The government expects the next round of block bidding to take place in 2010.
While potentially resolving Nigeria's persistent financing crisis is a positive development for the oil industry, the exact details of the NNPC restructuring have yet to be worked out. A number of other proposed reforms and policy changes contribute to making Nigeria an increasingly complex and demanding environment for the Western oil majors, but the industry appears to be getting its house in order for the years to come.