Nigeria: Unleashing the oil giant’s enormous potential
Nigeria has substantial reserves of both oil and gas, even when compared on a global basis. It accounts for around 95% of export receipts, around 15% of GDP and over 80% of fiscal revenue. As a result, the Nigerian economy is left vulnerable to oil price or crude production volatility.
Nigeria – a top oil producer in Africa and globally
Nigeria’s oil industry is supported by two important advantages:
- Firstly, the country’s oil is of a high quality and generally sells at a premium to Brent, the North Sea benchmark crude. Nigeria’s light crude is popular with US and European refiners as it is easily processed into fuel products.
- Nigeria is well located to supply oil markets in North America, a major source of global demand.
Future expansion in the sector
The majority of Nigeria’s reserves are found along the country’s Niger River Delta and offshore in the Bight of Benin, the Gulf of Guinea and the Bight of Bonny. Current exploration activities are mostly focused in the deep and ultra-deep offshore areas with some activities planned in the Chad basin, located in the northeast of the country.
The reality is that Nigeria’s onshore oil reserves are gradually declining as these oil fields age, while new development is concentrated at offshore oil fields. Although the Niger Delta remains home to most of the country’s oil production at around 60%, the future for expanding oil reserves is likely to be in deep offshore fields.
Our baseline assumption is that Nigeria’s oil production will trend mostly sideways over the short- to medium-term. There obviously is enormous upward potential, but the uncertainty about the delayed passing of the Petroleum Industry Bill (PIB) has capped investment into the oil sector, while Nigeria also continues to fight some battles in terms of the trade in stolen oil.
In terms of the PIB, the regulatory and fiscal terms that it will impose on the oil industry will, to a large extent, determine foreign investment into the oil sector. The PIB is a vast piece of legislation which represents a key reform for Nigeria as certainty about the oil sector is needed for new deep water investment – where potentially the most scope is for further oil exploration.
PIB – a necessity for progress
The key point here is that until the PIB is passed, a number of upcoming projects will be delayed, which will cause oil production to plateau over the shorter-term. The reality is that the PIB will need to be passed before significant investment flows return to the oil sector. Oil executives have repeatedly said that the delay in passing the PIB has put on hold billions of dollars-worth of investment in Nigeria’s energy sector.
Following the amnesty agreement of the government of Nigeria with the Movement for the Emancipation of the Niger Delta (MEND) in mid-2009, Nigeria has now made most of its post-conflict catch-up in production. But now the challenge is to create the necessary incentives for developing new oil fields, while there also seems to have been a shift from blatant vandalism for political purposes to increased levels of theft of crude from pipelines.
About David Okwara
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