Nigeria remains a key global energy player, exporting significant amounts of crude oil and natural gas. In 2021 it had Africa’s second-largest proven crude oil reserves – at 36.9bn barrels – after Libya. Although the export of hydrocarbons has gradually become a key source of revenue, wider economic headwinds and governance challenges have continued to impede the full development of the energy sector. Russia’s invasion of Ukraine in February 2022 disrupted global energy supply chains and drove up the market price for crude oil, natural gas and other fossil fuels. While this benefitted many oil-producing countries, the war also caused the prices of staple foods to increase, a trend that was seen in Nigeria.
Opportunities & Challenges
The authorities expect that the Petroleum Industry Act (PIA) 2021 will improve security in Nigeria’s oil-producing areas, increase oil output in line with the quota set by the Organisation of Petroleum Exporting Countries (OPEC) and renew investment inflows to the industry. Oil theft and security challenges have impacted the volume of crude oil exports, depriving government coffers of billions of dollars annually.
Other challenges include structural incompatibility between the upstream and downstream segments that have left Nigeria dependent on fuel imports, which has weighed on public budgets and continues to prevent the country from fully leveraging its natural resources. Enhancing domestic refining capacity will be critical to improving the financial situation and international bodies have recommended curbing or eliminating fuel subsidies. Alongside these challenges in hydrocarbons production, electricity generation and electrification rates are below their potential. In order to improve the power sector, the authorities are investing in the modernisation of generation and transmission infrastructure.
Oil Production
Nigeria’s oil and gas production remains an important component of the economy. It has historically accounted for 10% of GDP. As of August 2021 it accounted for 86% of total export earnings and 40% of public revenue, according to government figures. As one of the largest oil-producing countries in Africa, Nigeria was expected to see its economic earnings increase due to elevated energy prices in 2022. However, the potential windfall has mostly been lost because of increasing import of energy products at higher prices. More refining capacity is thus needed to meet demand and reduce imports. Moreover, fuel subsidies to keep prices artificially low have proven to be a burden on the budget, a trend that has only worsened due to high global energy prices.
Furthermore, rising security issues around pipelines and other energy facilities, and increased oil theft have prevented Nigeria from delivering consistent oil output levels. Total oil production – including crude, blended condensates and unblended condensates – was at 1.1m bpd in September 2022 before rising to 1.4m bpd in December of that year. Crude output reached its lowest level in September 2022, averaging 938,000 bpd. Because of this, Nigeria was overtaken by both Angola and Libya on the list of the continent’s largest oil producers. However, total oil production surged upwards in January and February 2023 to around 1.5m bpd for both months.
Nigeria’s output has remained well below its OPEC quota because a large portion of what is produced is diverted to the informal economy. For example, in July 2022 OPEC’s production quota for Nigeria was nearly 1.8m bpd. However, the country’s total oil production at the time was 1.3m bpd. Bridging the gap between its production capacity and allotted output will be critical in helping the country tackle its financial and budgetary challenges.
In addition to being a major driver of the economy, the sector is a main foreign exchange earner. “The non-oil sectors in Nigeria contribute relatively little to the country in terms of US dollar revenue, and, as such, it is expected that foreign exchange reserves will continue to fall,” Usoro Essien, research analyst at financial services firm Rand Merchant Bank, told OBG.
Main Players
Although some of the sector’s biggest actors have been attempting to reduce their footprint in the country in recent years, international oil and gas companies remain the major hydrocarbons producers in the market. Companies such as Shell, TotalEnergies, Chevron, Eni and ExxonMobil have been operating in the country for several decades. In onshore fields, these firms typically operate joint ventures in which the Nigerian National Petroleum Corporation (NNPC) has a 55% stake. Although security challenges have led several major oil producers to re-evaluate the extent of their presence in Nigeria, the macroeconomic impact of Russia’s invasion of Ukraine – which led to a sustained increase in global energy prices – could encourage foreign players to reassess their plans to exit Nigeria.
A key goal of energy authorities has been to increase the involvement of domestic firms in the sector. In mid-2020 the Department of Petroleum Resources opened the bidding process for 57 plots in marginal fields, areas abandoned by major international oil firms due to their limited commercial viability. The bidding round ended in June 2022, with the government announcing it had awarded the 57 fields to 49 investors, generating N202.9bn ($483.4m). The authorities have promoted marginal field operations as a means for domestic energy operators to increase their exploration and development experience and capacity. Nigeria’s marginal fields tend to have a viable lifespan of eight to 15 years and can produce up to 30,000 barrels of oil.
Building on these efforts, the government launched a process to attract international investment from major oil firms. In January 2023 a mini-bid round commenced for seven offshore oil blocks. The round, covering a total area of 6700 sq km, was the first held by the country since April 2007, when bid rounds were held for 45 oil blocks. The winners of this round are expected to be announced by July 2023.
Structure
One of the energy sector’s main players is the government-owned NNPC, which has key activities spanning the upstream, midstream and downstream segments. One of the organisation’s main roles is to act as the government partner to foreign operators engaged in hydrocarbons exploration and production activities. Although the NNPC used to participate in some regulatory activities through its Petroleum Inspectorate, an overhaul of the sector in 2021 replaced the body with Nigerian Upstream Petroleum Regulatory Commission (NUPRC). However, the NNPC still plays a role in industry oversight, allocating petroleum production quotas with the NUPRC.
The NNPC’s oil exploration arm, the Nigerian Petroleum Development Company (NPDC) was established in 1988. As of 2021 the NPDC had stakes in 38 hydrocarbons blocks, either through complete ownership, majority shareholding or as a minority participant. Additionally, the NUPRC is charged with monitoring upstream activities by private operators to ensure they are in accordance with sector laws, as well as health, safety and environmental regulations. Its mandate also includes collecting rent, license fee and royalties owed to the government, and data management for exploration and production blocks, oil and gas reserves, and exports.
Additionally, the Nigerian Content Development and Monitoring Board (NCDMB) was established in 2010 through the Nigerian Oil and Gas Industry Content Development Act in order to accelerate the transfer of knowledge and skills to the local workforce, and ensure wider economic benefits throughout the supply chain. The body oversees and approves foreign companies’ plans to include domestic content in their operations and projects. The NCDMB also manages the Nigerian Content Development Fund, which receives a share of 1% of the value of each oil and gas contract.
Regulatory Overhaul
Sector oversight is likely to evolve further after the approval of new regulations. Following years of anticipation by sector participants, the PIA was signed into law in August 2021. A key change was the gradual shift of the NNPC to a fully integrated commercial entity in 2022. The next step is likely to be an initial public offering, which the government has stated is expected as early as 2023.
The legislation also aims to improve the NNPC’s transparency and lower accumulated losses to attract investment. To that end, two new sector watchdogs were created: the NUPRC, and the Midstream and Downstream Petroleum Regulatory Authority, which is responsible for the regulation of the midstream and downstream petroleum operations, including technical, operational and commercial activities.
Oil Theft
One of the most urgent matters affecting oil production is security. Despite the central role Nigeria’s vast energy resources play in public finances, security continues to be a challenge. In September 2022 the NNPC estimated that Nigeria loses 470,000 barrels of crude per month, or $700m, to oil theft, with the industry having lost $4bn in 2021 due to theft. However, in February 2023 the NUPRC reported that a forensic audit had shown that roughly 40% of crude oil losses were the result of inaccurate measurements. “While there has traditionally always been a small amount of theft at the pipelines, at around 10-15% of output, this figure appears to have increased in recent years, resulting in a loss of revenue,” Essien told OBG.
Oil theft in Nigeria takes place in mainly two ways: through the understatement of formal oil shipments, or through diversion from pipelines. In the latter, oil is often diverted to illegal refineries before sale on the black market. Theft and vandalism have resulted in a spate of interruptions, leading the authorities and private operators to reduce or completely halt shipments of crude oil through pipeline infrastructure.
Security problems have prompted a number of foreign firms to reduce their activities in onshore fields. In 2019 US major ExxonMobil announced its intent to divest from some of its onshore and offshore assets in Nigeria, a move initially estimated to generate roughly $3bn. In February 2022 the company announced plans to sell stakes in its Nigerian subsidiary, Mobil Producing Nigeria Unlimited, to a domestic oil and gas firm, Seplat Energy. However, the NUPRC temporarily halted ExxonMobil’s divestment plans due to procedural hurdles. US firm Chevron, too, has been attempting to offload its stakes in two of its oil and gas assets in Nigeria, oil mining licence (OML) 86 and OML 88, first putting them on the market in 2015, and then relaunching the process in 2019.
In late January 2023 Norwegian major Equinor announced plans to sell its 20.2% stake in the Agbami oil field, in which it had partnered with Chevron. Equinor also operates two exploration licences – OML 128 and OML 129 – with a 53.85% share in both.
In a similar move, in May 2021 oil major Royal Dutch Shell announced plans to divest from its onshore assets in Nigeria. Shell’s joint venture in the region, the Shell Petroleum Development Company of Nigeria. Its management justified its divestment strategy as being in line with its plan to reduce its exposure to the area’s security problems as it had been exposed to oil theft, vandalism and oil spills. However, in mid-2022 the process was interrupted when a court ruled that the company had to wait for an appeal regarding a 2019 oil spill in the Niger Delta.
Rising Production
The authorities have managed to improve security through the use of new pipelines, enhanced surveillance – especially in the Niger Delta – and the seizure of infrastructure and equipment used by criminal groups. The resumption of operations at both the Trans-Niger Pipeline, which had halted supply in mid-2022 due to oil theft, and the Forcados Pipeline System will add to output in 2023. Production is also expected to receive a boost with the start of operations at the Ikike oil field in late 2022. The plot is operated by TotalEnergies and has an output of 50,000 bpd.
Gas
While oil production will remain an important aspect of the country’s energy strategy, natural gas development has emerged as a key priority in the government’s plans. Nigeria is already a significant gas exporter, and had 206.5trn cu feet of gas reserves as of 2021. This is especially important, as not only is domestic demand on the rise, but there is an opportunity for the country to take advantage of increased international demand – especially in Europe, as it diversifies away from importing natural gas from Russia. These trends are opening up new opportunities for the segment. However, additional investment in production and development, as well as new transport infrastructure, will be required for Nigeria to leverage its untapped natural gas potential (see analysis).
Electricity
Gas reserves are critical to improving generation capacity. Access to reliable electricity is limited, leaving many businesses and private homes to use fuel-powered generators to meet their needs. As many as 85m Nigerians did not have access to electricity in 2021, according to the World Bank. The country’s power sector comprises both private and public entities. Although private companies are permitted to produce and distribute electricity, the transmission sector is controlled by the government-owned Transmission Company of Nigeria.
Nigeria’s electricity generation capacity is largely provided by 23 power plants. The majority of its installed capacity, at nearly 12,000 MW, is based on gas generation, with an additional 2062 MW sourced from hydropower. Wind and solar capacity offer an additional 10 MW and 7 MW, respectively. However, as of March 2023 generation capacity was below its potential. Power plants in the country regularly underperform due to maintenance issues or interruptions in the supply of natural gas. The US Agency for International Development estimated that Nigeria could generate over 12,500 MW from its existing power plants, rather than the average output of 4000 MW.
Another challenge is non-payment by customers that have access to power, which has aggravated financial problems in the segment. An estimated 50% of energy consumed by customers is unmetered, making it difficult for electricity distribution companies to follow up on billing and payments. In April 2021 the World Bank approved a $500m finance mechanism to help electricity distribution companies to install metering systems across the country. The authorities expect that by increasing the revenue stream of distribution companies, firms will be able to reinvest in the improvement of the distribution infrastructure. Inadequate or unreliable electricity access in the country leads to annual losses of $26.2bn, according to a World Bank press release published in February 2021.
Refining
Despite expected rise in oil and gas output in the coming years, balancing Nigeria’s energy trade deficit will require an overhaul of refining output. Refining capacity, based on four existing refineries, has remained steady at around 445,000 bpd. However, the lack of maintenance of facilities has kept output below the country’s needs. For instance, in mid-2019 refining output was at 5.5% of national capacity.
The government has been working to revamp its refineries in order to reduce the country’s dependence on imported fuels. In March 2021 the authorities approved the renovation of the Port Harcourt refinery, which has the capacity to produce 210,000 bpd, a project that is estimated to cost $1.5bn. The modernisation is expected to be completed by 2025, and will include renovation of the smaller Warri and Kaduna refineries, which have processing capacities of 125,000 bpd and 110,000 bpd, respectively. The new Dangote refinery is another upcoming project that will contribute to the country’s refining capacity. As of October 2022 the 650,000-bpd facility was 97% complete. Once fully operational, the refinery will double Nigeria’s refining capacity, and create 4000 direct and 145,000 indirect jobs. The NNPC estimates that Nigeria will need a refining output of roughly 1.5m bpd by 2025 to meet its requirements.
Fuel
With roughly 40% of Nigerians living on less than $2 per day, the authorities use subsidies to keep fuel prices affordable. In addition to the burden on government finances, the low prices have continued to encourage consumption and are regressive, in that they have traditionally provided affluent segments of the population with more benefits. Fuel consumption increased by 20.7% from 58m litres per day in 2021 to roughly 70m litres a day in 2022. However, these calculations do not account for smuggling, driven by the price differences between Nigeria and its bordering countries. “Domestic demand for petroleum products remains around 60m litres per a day. But these figures are generally higher when borders are open,” Essien said. “The real daily fuel consumption in Nigeria is probably closer to 35m-40m litres daily.”
According to the NNPC, the country spent N4.4trn ($10.5bn) on petrol subsidies in 2022. In its February 2023 Article IV Consultation report, the IMF recommended that the government move forwards with plans to eliminate fuel subsidies in 2023, reduce the fiscal deficit, increase targeted social spending programmes and bolster tax compliance.
Outlook
Recent developments have highlighted how much Nigeria stands to gain by fully leveraging its natural resources through the introduction of timely reforms and the strengthening of related infrastructure. Energy prices will likely decrease over the 2023-25 period, but even so, Russia’s invasion of Ukraine upended energy markets and may have created new opportunities for Nigeria. As European countries move to secure alternative gas supplies, Nigeria stands in an advantageous position to attract the necessary investment to upgrade its energy infrastructure.
The ongoing implementation of the PIA, coupled with government efforts to improve security around energy sector installations and transport pipelines, will be key contributors to determining whether Nigeria is able to revive interest in the development of its hydrocarbons reserves over the coming years.
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