Making Hydrocarbons Work

Nigeria has pursued an ambitious programme to develop its ‘local content’, ensuring that the international oil companies (IOCs) that have dominated the marketplace since the 1960s work actively to deepen the participation of Nigerian enterprises and individuals in the hydrocarbon supply chain.

Although oil and gas revenues make up around 90% of the government’s budget, the sector employs a proportionally very small amount of the Nigerian population. Since the government set a target of 75% local participation across the entire sector, Nigeria has made major strides towards creating an industry that is mutually beneficial for all stakeholders.

The Nigerian Oil and Gas Industry Content Development Bill was signed into law in 2010, creating the Nigerian Content Development and Monitoring Board (NCDMB). This was designed to promote skills development and capacity building within the Nigerian oil and gas industry. Indirectly and directly, around 250,000 jobs have been created as a result of the local content regulations. Over the past few years, the shape of the industry has started to evolve, with Nigerian-owned and operated business increasingly taking on a leadership role in the industry.

Nigerian domestic oil companies cut their teeth in so-called ‘marginal’ fields – oil and gas assets that were considered uneconomic by the IOCs. Often onshore in difficult geographies, these fields were ideal training grounds for businesspeople and engineers to develop the expertise needed to grow.

“We started by running a marginal oil field. That is how the opportunity was created for professionals to step into the oil and gas industry and build capacity and expertise from a very small background,” says Austin Avuru, the CEO of Seplat. “We were very clear that from the beginning we wanted to build a world-class company.”

Over the past half decade, the IOCs have begun to reduce their exposure to Nigerian onshore assets, preferring to focus on the offshore business, and have sold off $5 billion worth of assets to local companies.

“The Nigerian oil and gas industry is maturing, from a geological point of view. We are reaching a point where there are mature fields that are beginning to fall below the profitability threshold of the multinationals,” Avuru says.

“Regulatory changes also ensure that multinationals don’t have the luxury any more of sitting on large tracts of acreage for so long. The combination of those two means that you are seeing the rationalisation of assets by multinationals, and the indigenous companies who have gained experience in marginal fields are moving in to take on those opportunities. That’s the platform for our growth.”

In 2010, domestic oil companies controlled less than 10% of the Nigerian upstream oil and gas sector. Today that figure is more than 30%, with companies such as Oando, Afren, Lekoil and Seplat becoming important parts of the country’s upstream growth.

In 2014, Seplat joined Lekoil in listing on the London Stock Exchange, taking the company’s growth international and finding new funding for the sector. It is an endorsement of the growing international reputation of Nigerian businesses, and of their commitment to corporate governance. Through their better understanding of local communities and of the political context of their investments, Nigerian oil and gas companies are expected to suffer less from the social challenges faced by IOCs. Oil theft and instability have reduced the profitability of some operators, and it is hoped that local players will be better placed to mitigate these issues.

Gas
Perhaps the most fundamental and socially far-reaching change to the Nigerian energy industry in the past half decade could be the transformation of the gas sector. Once seen as a by-product of the oil industry and flared off, causing considerable environmental damage.  Nigeria has more than 5 trillion cubic metres of proven gas reserves – the largest on the African continent – but these resources have rarely been exploited.

In the 1970s and 1980s the resource was often discussed as a solution to the country’s perennial undersupply of power, and as an alternative to more polluting sources of energy for household use. However, despite some investments in refineries and liquefied petroleum gas (LPG) infrastructure, the sector remained underdeveloped throughout the 1990s.

Since 2008, however, the government has entirely redesigned its gas policy, with the aim of driving electrification, growth and industrialisation. The Gas Master Plan, which includes an enormous investment in pipeline infrastructure and industrial parks, coupled with the privatisation of the power sector, has changed the investment climate for gas.

Promoting a local market for gas, and enabling major investment from international and domestic players into building gas power stations, has changed the equation for domestic hydrocarbon players, who have managed to secure long-term supply contracts. Companies, including Seplat, say that they foresee that gas for domestic use, rather than for export, is going to become a massive part of their business. In fact, as Avuru says, the demand over the next five years will outstrip supply unless there is considerable investment in production.

Downstream
Although Nigeria remains sub-Saharan Africa’s largest exporter of oil, the country’s domestic refining capacity has lagged behind production for years. As a result, Nigeria imports the majority of its fuel and petrochemicals. The Nigerian National Petroleum Company has four refineries: two in Port Harcourt, one in Kaduna and one in Warri, with a combined installed capacity of around 445,000 barrels per day.

However, these refineries currently operate at around 20% of their capacity, and the government hopes that the private sector will invest in the rehabilitation of these facilities and in the construction of new ones.
The sector received a major endorsement in late 2013, when one of Nigeria’s leading conglomerates, the Dangote Group, announced that it had secured financing from international and Nigerian banks to build a $9 billion refinery and petrochemical plant. With $3.3 billion of the company’s own money flowing into the project, and with the participation of global financial institutions, including Standard Chartered, in the deal, it is a sign that the downstream business in Nigeria has a secure future.

Investing in the downstream business is a matter of great political and social importance in Nigeria. The government budget is stretched by the provision of subsidised fuel to the people, the high cost of which is a function of the country’s dependence on imports. In 2012, the fuel subsidy cost around $5.5 billion, while Nigeria imported around 350,000 barrels of gasoline, diesel and other petrochemical-related products per day that year. Breaking the cycle of import dependence is an important aim that will impact on the government’s future financial and development goals and offer jobs and better livelihoods for Nigerians.