Sector Focus

Oil & Gas Upstream

in Nigeria

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Briefing Paper Overview

Nigeria is Africas largest exporter of crude oil and intends to increase its production and reserves of crude oil and gas. This represents an opportunity for investors to assist the Nigerian government to reach its targets. The Nigerian government wants indigenous Nigerian companies to have an interest in the upstream oil and gas industry, but these companies often lack the finance / expertise to develop oil assets. This presents an opportunity for foreign companies to provide the required finance and technical know-how. There are also opportunities for the big International Oil Companies (IOCs) to focus on large reserves in the deep offshore, which require considerable investment. The Nigerian government wants to monetize gas reserves, much of which is being flared and this represents an opportunity for investment in the infrastructure. While security has been a problem, especially in the Niger Delta where much of Nigerias oil and gas reserves are located, the situation is much improved since an amnesty was proclaimed on June 25th 2009. Selecting the correct Nigerian partner is key to entering the Niger Delta to take advantage of upstream opportunities. There are also opportunities for the big IOCs to participate in bidding rounds for deep offshore oil blocks.

Upstream oil and gas reserves in Nigeria

Crude Oil
Nigeria is Africas leading producer and exporter of crude oil. It has 37.2 billion barrels of proven reserves, as of January 2011 and produced an average of 2.1 million barrels of oil a day in April 2012. In a recent speech, the Minister of Petroleum Mrs Alison-Madueke explained that the Federal Government of Nigeria plans to increase oil production capacity to 4 million barrels a day by 2020 and expand its crude oil reserve to 40 billion barrels.

Natural Gas
With respect to natural gas, the country has huge potential; There are proven reserves of 5.292 trillion cu m , as of January 2011. The majority of crude oil and gas reserves are found along the countrys Niger River Delta in Southern Nigeria and offshore in the Bight of Benin, Gulf of Guinea and Bight of Bonny.

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Legislation has been introduced in an attempt to add greater Nigerian content to all aspects of the oil and gas industry in Nigeria. The much-delayed Petroleum Industry Bill (PIB) has not yet been passed into law but aims to resolve most of the problems associated with the oil and gas industry in Nigeria.

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The Nigerian governments plans for oil and gas upstream

Marginal Fields
In recent years the Nigerian government has encouraged participation of indigenous Nigerian companies in marginal fields; these are usually proven crude oil reserves but are smaller oil-producing assets that are not especially attractive to the larger upstream players such as Shell, Agip, Chevron, Total or Mobil. However, because of advances in technology, upstream operators have developed ways to extract the maximum from these marginal fields and while not attractive to the big players the marginal fields are much more attractive to the small to medium-sized independent oil operators. The challenge for most of the indigenous Nigerian companies that have acquired marginal fields is that they lack the required technical expertise and funding to bring these assets to full production. This represents a big opportunity for foreign companies to enter the upstream sector of the Nigerian oil and gas industry. There is a large reservoir of marginal oil fields in Nigeria, which have been conservatively estimated to contain over

2.3 billion barrels of stock-tank oil, initially in places spread out over 183 marginal fields. Marginal fields tend to be based mainly onshore or in shallow water areas of the Niger Delta.

Deep Offshore
Most of the large International Oil Companies (IOCs) currently operating in Nigeria have now decided to focus on the deep offshore where there are large reserves both for exploration and production. The offshore is considered attractive by most IOCs because there is less perceived risk of attack by militants or criminals operating in the mainland Niger Delta areas or shallow water areas. As Nigeria seeks to increase its crude oil reserves and production, there are opportunities for the big IOCs to participate in the offshore exploration and production in Nigeria.

Gas
Nigerian government policy towards gas has been influenced in part by the fact that so much gas is currently being flared in Nigeria. The Nigerian government plans to find, develop, process and distribute sufficient gas to Nigerian industries and homes so that it will be regarded by the average Nigerian as the

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Suggested Ways to Enter Upstream

As stated earlier, marginal fields offer opportunities for foreign companies to enter Nigerian oil and gas upstream. There are many joint-venture and farm-in opportunities in Nigeria, as there is a big demand for foreign investment and technical expertise. Experience shows that it is important to choose a Nigerian partner very carefully; in this respect it makes sense to select a Nigerian partner with a good reputation and good relationships in the Niger Delta communities in which they operate. Partnering also makes sense in Nigeria because of the greater push by the Nigerian government towards local content in the Nigerian oil/gas industry; and a local partner gives access to key contacts and knowledge of how the market works. The Nigerian government is looking

Recently, the Minister of Petroleum Mrs Alison-Madueke mentioned that the Federal Government plans to expand Nigerias Liquefied Natural Gas (LNG) production capacity by 20 million tonnes per year (MTPA) and this will increase the nations capacity in LNG production to 46 MTPA.

Considerations for new entrants

Security Challenges
The main challenges facing IOCs operating onshore in the Niger Delta in recent years have been presented by the activities of militants who attack the IOCs oil facilities and kidnap foreign oil personnel as a way to bring their various grievances to the attention of the international community, or to receive monetary compensation

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energy and feedstock of choice. Also required is transportation of gas to power stations as the feedstock of choice to increase power generation in the country. These activities will, however, require a great deal of investment in the necessary infrastructure. Increasingly, the Nigerian government is adding the requirement to develop infrastructure as a condition to the award of licenses for upstream oil and gas exploration activities.

from the IOCs or the Nigerian government. The situation is much improved since the former President of Nigeria, the late Alhaji Umaru Musa YarAdua, proclaimed an Amnesty on June 25th 2009, as a means to resolve protracted insecurity in the region.

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for long-term investment in the oil/gas industry in Nigeria but also wants to empower the indigenous population to become active participants in the industry. The nature of oil/ gas contracts in the upstream aspect of the industry are very long term, so both the government and the IOCs need to approach them on the basis of a win-win situation, where both sides benefit and nobody loses. Another way for IOCs to enter Nigeria is by participating in one of the bidding rounds. These are like auctions, usually held for the deep water oil blocks, but they are generally expensive and hence attract only the big IOCs. There is the additional issue of paying signature bonuses on winning a bid, which can also add a considerable amount to the investment required. Recent news reports suggest that the government may be planning to hold a bidding round in 2012, although a date has not been set.

projects, operations, activities or transactions in the Nigerian oil and gas industry. This local content is very relevant and needs to be considered by all potential foreign participants in the Nigerian oil and gas industry. For example, Section 3(1) of the Act states that Nigerian independent operators shall be given first consideration in the award of oil blocks, oil field licences, oil lifting licences and all projects for which contracts will be awarded. Petroleum Industry Bill The Petroleum Industry Bill (PIB) has faced many delays and has still not been passed into law. The PIB is intended to address many of the current problems faced in the oil and gas industry in Nigeria. The aim is to put an end to Nigerian National Petroleum Corporation (NNPC) conflict of interest. The PIB is to introduce a new company to replace the NNPC that will engage in solely commercial activities and function as an integrated national company that can raise money on the stock market in order to carry out its operations. Not surprisingly there are many vested interests who would like to retain the status quo, and many feel that is the reason for the delay in the PIB becoming law. It is worth keeping an eye on the situation as it may change at short notice.

Petroleum Industry Bill and Local Content

Local Content The Nigerian Content Act established the Nigerian Content Monitoring Board (the Board) which is the regulatory agency vested with the responsibility of regulating Local Content. The Board will implement the provisions of the Act with a view to ensuring a measurable and continuous growth in Nigerian content in all oil and gas arrangements,

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Conclusion
Nigeria clearly offers many opportunities for an IOC that is interested in expanding overseas, given the large reserves of oil and gas available in the country. While there are clearly risks and challenges associated with venturing into the upstream oil and gas business in Nigeria, the experience of successful foreign operators in Nigeria shows that with the correct planning, strategy and due diligence, it can prove to be a very profitable venture.

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Platinum Integrations Ltd (Pi) is a one stop international consulting firm that assists companies wishing to do business in Africa. We provide International (or aspiring International) companies with assistance in trading with Africa. To discuss your companys strategy for entering or expanding in Africa please call +44 208 204 4962 or see our website at www. platinumintegrations.com.

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