Summary
Nigeria is in a quandary when it comes to energy. Its onshore and
shallow-water oil reserves are maturing, and increasingly being eclipsed
by the potential of the country's deep-water oil reserves. Yet, having
neither the technological know-how nor the finances to develop
deep-water wells, the Nigerian government relies on international oil
and natural gas companies such as ExxonMobil and Shell to exploit its
offshore fields. Nigeria has been trying since 2008 to renegotiate its archaic contractual terms
with the companies it has come to depend on. There are deep-seated
concerns that the Nigerian government in Abuja is missing out on
billions in oil revenues. Though keen to maximize its revenue share,
Nigeria has historically faced difficult market issues that have
constrained its ability to negotiate the best terms.
An announcement last week by the head of the Nigerian National
Petroleum Company (NNPC) that contract negotiations were underway is
revealing, but perhaps premature. Speaking at a Nigeria-France business
forum in Paris, general managing director Ibe Kachikwu said that
contractual terms with international oil and natural gas companies
(IOCs) were under review, especially those relating to deep-water
offshore fields. Nigeria has been in discussions for some time, but will
have to tread carefully to avoid alienating the very companies it so
desperately needs, which will take finesse.
Analysis
Nigeria has long been considering how best to reform its
contractual terms with IOCs. Yet, any previous attempt by the National
Assembly in Abuja to push through legislation supporting new fiscal
terms has resulted in political gridlock and opposition from IOCs.
Unfortunately, the Nigerians are not in a position to delay. Like the
majority of oil producing nations, Nigeria is suffering as a result of low oil prices.
The price of a barrel of oil is almost at $40 and is unlikely to
recover in the immediate future. The corporate finances of the NNPC as
well as the coffers of the Nigerian treasury are increasingly depleted.
This depletion has led to widespread austerity measures throughout the
country and a reinvigorated desire to increase revenue from oil
companies operating in Nigeria.
But first, parliament must agree on how best to proceed, which is problematic in itself. The ill-fated Petroleum Industry Bill
floundered for over six years before it was effectively nullified as a
result of former Nigerian President Goodluck Jonathan's polarization of
Nigeria's key energy stakeholders. Now it is unlikely to be considered
in its entirety because of the serious complications associated with
reforming Nigeria's oil industry as a whole. The NNPC is the conduit
through which the government regulates energy production and interacts
with the global industry. It is far from a transparent organization.
Nigeria has also come to depend on the same coterie of oil companies to
handle the bulk of its energy extraction. These are the same IOCs that
are expecting to be called upon to develop the new deep-water fields.
Abuja is aware that drastically modifying or cancelling existing
contracts is a good way to alienate the companies that Nigeria
desperately needs to access its enduring oil reserves. Still, low oil prices
will likely force Abuja to proceed on the contract reform aspect of the
Petroleum Industry Bill separately. Nigeria relies on oil for over 70
percent of its overall revenues and wants to ensure a greater return,
but any renegotiation of contracts will not come quickly or easily.
The Difficult Road to Change
Nigeria's oil production can be loosely grouped into three areas:
onshore production, shallow-water production and deep-water production.
Each area produces roughly one third of Nigeria's oil. However, onshore
production is waning as the most important fields reach the final stages
of their lives. As a result, IOCs are starting to withdraw from the
depleted onshore developments. Royal Dutch/Shell finalized a divestment
plan in March, and Total completed a similar plan in the same month, to
the tune of $1 billion. In July, Eni announced that it was considering a
divestment of its onshore fields in Nigeria. In response, the Nigerian
government has encouraged the development of its indigenous oil and
natural gas operating environment. Increasingly, Nigerian operators are
partnering with 2nd and 3rd tier international companies to take the
place of the supermajors onshore in Nigeria.
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