1.

0 OVERVIEW

Oil in general has been used since early human history to keep fires
ablaze, and also for warfare. Its importance in the world economy
evolved slowly, with wood and coal used for heating and cooking, and
whale oil used for well into 14th century.

An early industry was established in the 8th century, when the street of
Baghdad was paved with tar, derived from petroleum through destructive
distillation.

In Nigeria, Oil was discovered in 1956 at Oloibiri in the Niger-Delta after

half a century of exploration .The discovery was made by Shell BP, at the
time the sole concessionare.Nigeria joined the ranks of oil producers in
1958 when its first oil field came on stream producing 5,100bpd.After
1960, exploration rights in onshore areas adjoining the Niger-Delta were
extended to other foreign companies. In 1965, the EA field was
discovered by Shell in shallow waters south –east of Warri.

Nigeria joined the Organisation of Petroleum Exporting Countries

(OPEC) in 1971 and established the Nigerian National Petroleum
Corporation (NNPC) in 1972; a state owned and controlled company
which is a major player in both upstream and downstream sectors. By the
late sixties and early seventies, Nigeria had attained a production level of
over 2 million barrels of crude oil a day. Although production figures
dropped in the early eighties due to economic slump; 2004 saw a total
rejuvenation of Oil production to a record level of 2.5million bpd and
Current development strategies are aimed at increasing production to
4million bpd in the year 2010.

So far, it has been discovered that Nigeria has abundant Gas reserve
which in energy terms, are in excess of twice the quantity of crude oil
reserves. The country’s Associated Gas reserves are currently estimated
at about 127 trillion cubic feet.However, a US Geological survey (USGS)
study estimate that gas potentials in Nigeria could be as high as 600
trillion cubic feet.

Gas production, which stood at 25.05 million tons in 1989, increased at

an average annual growth rate of 4.8 percent to 37.44 million tons in
1993 making Nigeria the 7th largest reserve of gas in the world.
2.0 INTRODUCTION

The Nigeria oil and gas industry has continued to evolve since inception
in the fifties. The time from the late fifties to early seventies was a period
marked by the control of the industry by international Oil companies.
State involvement was restricted to quasi regulation, primarily for control
of price of refined products, collection of fees, rental and royalties.

Active state involvement started in the early seventies and was marked by
Nigeria joining the OPEC member countries. During this period, the
Nigerian National Oil company was established, and government
acquired 60% interest equity participation in the asset and operations of
the international oil companies for the first time.

Starting from the late seventies to late eighties, the industry witnessed the
era of expansion, growth and reforms. The ministry of petroleum
Resources was merged with the Nigerian National oil company to form
the present Nigerian National Petroleum Corporation (NNPC).Internal
restructuring of NNPC and commercialization of its operation started in
the eighties.NNPC was subsequently transformed into a Holding
company with 11 subsidiaries, with the transfer of the Petroleum
Inspectorate to the Ministry of Petroleum Resources.

Despite the evolution, reforms and internal restructuring, the public sector
of the Industry has yet to fully meet the aspirations of the Federal
government and key stakeholders. The existing structure of the industry
and enabling legislation were no longer consistent with global standards.
In parallel, the private sector of the upstream sector of the industry,
dominated by and operated by international oil and gas companies(In
joint ventures with NNPC) equally continue to face new challenges
mainly with funding and cash call problems, as well as challenges in the
Niger-Delta

In the quest for coordinated and sustained growth of the Oil and Gas
Sector, the government embarked on a reform programme for the sector.
The objective of the reform programme are to maximize the net economic
benefit to the nation from the oil and gas reserves and to enhance the
social and economic development of the people of Nigeria while meeting
the nation’s needs of fuels at a competitive cost accomplishing all in
environmentally acceptable manner.
3.0 VIEWS ON PETROLEUM SECTOR REFORM

International Oil markets have evolved significantly, and a competitive

market has emerged that is setting internationally accepted prices for
crude and refined products.

In many developing countries, structural reform of petroleum markets has

become a critical component of macroeconomic liberalization policies.
The role of the Government in the petroleum sector is being redefined,
and markets are being deregulated i.e. State interventions such as Special
treatment of state owned oil companies, price controls, and restrictions to
trade are being removed and monopolies are being broken up.
Increasingly, the private sector is participating in more competitive
petroleum markets.

Opinion about Petroleum and Gas sector reform in Nigeria covers wide
spectrum, and cuts across all sides of the argument. “One school of
thought strongly believe that the present regime has completely imbibed
the imposition of what has become known worldwide, as the
“Washington consensus” propagated by the World bank, The IMF and
the western imperialist powers, in order that they will continue to control
and direct the economic policies of countries that have no independent
economic policies of their own.

A variant of this school holds that” Nigerian petroleum Industry must not
be liberalised, deregulated, or privatized completely for whatever reason,
and that the status quo should remain, maybe some minor fine-tuning
made, “here and there”, to improve efficiency as appropriate” In the
overall national interest. This is the implied position of the Nigerian
Labour Congress (Braide, 2003)

A related view contend that “Government has being grossly ill advised,
most possibly by some multinational oil cartel who are so desirous of
dumping the products of their refineries in Europe and Americas into our
country with the aim of finally capitulating our poor struggling
economy”(Ojieghe,2001)

However, another view holds that “The sorry state of disrepair, neglect
and repeated vandalisation of the state-ran petroleum product pipelines
and oil movement infrastructure nationwide………and large-scale cross
border smuggling of petroleum products, all of which are the root causes
of protracted, and seemingly intractable severe fuel crisis that have
bedevilled the country relentlessly, for close to a decade now, are all
predictable outcomes of government involvement in the downstream
sector of the Nigerian petroleum industry, over the quarter of a century
(Braide, 2003). Hence, deregulation of the petroleum industry in Nigeria
should be implemented in phases, so as to enable the state-owned
monopolies to regain efficiency, before their full privatization (Braide,
2003)

A stronger version of this view “insist that complete deregulation,

including the total, and final unbundling, and subsequent wholesale
privatization of all state-owned petroleum business, should proceed
without further delay, with maximum despatch, for the continued, and
meaningful survival of the Nigerian petroleum industry in the 21st
century. In short …the benchmarks of globalisation, not nationalisation
dictate the tempo of the new world order in international petroleum
market transactions.

Moreover, “production limitations are in force…..with fixed annual

production being imposed as a ceiling. In Libya and Nigeria, variable
limitations have been imposed at times with respect to particular areas or
Fields. The cumulative effect of such production limitation is to withhold
from the market a potential supply, the precise quantity of which
certainly exceeds 5million bpd (Parra, 1979)
“The tight quota had made many wells remain undeveloped, while
holding it responsible for the slow response to call for more oil supply”,
which could prove the main hindrance to rapid development of Nigeria’s
deepwater resources” (Oduniyi, 2004).
4.0 PETROLEUM INDUSTRY REFORM: KEY ISSUES

The OGIC report is intended to facilitate managing and overseeing all the
phases of the oil and gas sector in Nigeria more effectively than before by
assigning functional responsibilities to separate institutional structures.
The institutional framework is based on the policy mandate to separate
the commercial/operations (private sector culture) of the oil and gas
sector from the policy-making and regulatory aspects (public sector
administration) in Nigeria. The success of the restructuring, therefore,
will depend on the implementation of these institutions’ policy functions.

National Petroleum Directorate (NPD)

The National Petroleum Directorate (NPD) is designated as the primary
institution to initiate, create, and implement the petroleum policy
governing the oil and gas sector in Nigeria. The predecessor, the Ministry
of Petroleum Resources (MPR), has not been up to these tasks of oil and
gas policy initiation, formulation, and implementation. The ineffect
-iveness of MPR in its functions as a policy-making institution, however,
has never been because of its location in the ministry of environment or a
lack of competent and highly skilled manpower, but is due to a lack of
institutional empowerment and the putting of a “round peg in a square
hole” by the central government. Thus, the oil and gas industry policy
initiation and implementation functions ended up being assumed by
NNPC to the detriment of its commercial and operational responsibilities
over the years.

Nigerian Petroleum Inspectorate (NPI)

The National Petroleum Inspectorate (NPI) is the regulatory institution
for the upstream segment of the oil and gas industry in Nigeria. NPI will
assume the functions of the Department of Petroleum Resources (DPR)
and it will be the upstream industry operation and technical regulator. It
will have operational autonomy from the NPD unlike its predecessor the
DPR, which traditionally derives its operational directives from the
Minister of Petroleum Resources. The extent of NPI’s strategic autonomy
from the NPD, which serves as the secretariat of the Minister of
Petroleum Resources is not clear. The undeveloped nature of the oil and
gas industry regulatory framework in Nigeria is, therefore, not surprising
to many industry observers.
Petroleum Products Regulatory Authority (PPRA)
The Petroleum Product Regulatory Authority (PPRA), which has been
designated to regulate the downstream sector of the oil and gas, is a
stand-alone institution with no functional relationship with NPI.
PPRA should be directed by a technically competent Deputy Director
General (DDG) and not a political appointee to enhance the institutional
performance of PPRA for the ongoing reform efforts are to be successful.

Nigerian National Petroleum Company (NNPC Ltd.)

There is no doubt that restructuring the Nigerian National Petroleum
Corporation (NNPC) is the focal point of the ongoing oil and gas sector
reforms in Nigeria. The general observation by the public that NNPC has
failed woefully to fulfil its charge is perhaps justifiable. It must be
recognized, however, that its failure to attain the prospect to drive the
national economy has not entirely been the corporation’s error of
judgment. For example, there has been as many NNPC CEOs as were
Heads of State or Presidents in Nigeria from 1976 to 2007. Thus, the
degree of operational and strategic autonomy of the old NNPC from the
national government in comparison to successful global NOCs is
appalling.

Therefore, the new goal is to reposition the new Nigerian National

Petroleum Company, NNPC Ltd, on a level comparable to the status of
successful National Oil Corporations (NOCs) worldwide, such as the
Malaysia NOC (Petronas), Venezuela NOC (PdVSA), Norway Statoil,
Algeria NOC (Sonatraco), Mexico NOC (PEMEX), Brazilian (NOC) and
Saudi Aramco. The desired goal is to get the new corporation to a level in
which the degree of operational and strategic autonomy from the
government is similar to the Norway Statoil. The separation of
commercial and business operations from regulatory and policy-making
functions in the oil and gas sector in Nigeria will help NNPC Ltd. to be
more focused. The identity and corporate culture, NNPC Ltd., is expected
to operate along the entire petroleum supply chain. This will make NNPC
Ltd. a fully integrated oil and gas company. The envisioned ownership
structure will enhance its ability to function as a purely commercial and
capitalized business.
National Petroleum Assets Management Agency (NAPAMA)
The National Petroleum Assets Management Agency (NAPAMA), like
NNPC Ltd., is a commercial and operational institution empowered to
undertake cost/commercial regulation of the oil and gas industry. It is
conceived to manage all national assets and investments in exploration
and production ventures to ensure maximum government returns and take
statistics.

National Petroleum Research Centre (NPRC)

The National Petroleum Research Centre (NPRC) is to be responsible for
research and development in the petroleum industry in Nigeria. It is
expected to pay a great deal of attention to upstream exploration and
development issues and problems. However, All the NPRC policy
functions could easily be handled by existing federal institutions. This is
the rationale for the establishment of the existing Petroleum Technology
Development Fund (PTDF) and the many departments of petroleum
engineering and geosciences in Federal Universities and the Centre for
Petroleum Studies in Nigeria.

4.1 PROBLEM

4.1.2 UPSTREAM

Beyond the new architecture of state institutions, the PIB

outlines a number of operational changes for the sector.
Chief among hydrocarbon operators’ concerns is that
current tax exemptions remain in place, particularly those
that incentivize associated gas production earmarked for
domestic utilization projects. While no specific contract
continuity clauses are outlined in the PIB, JV and PSC
holders want contract sanctity for Projects under
development.

For new projects, the proposed fiscal term changes are

likely to impact operators’ investment decisions moving
forward.

The PIB calls for existing JV contracts to be turned into

incorporated JVs (IJVs) with the new NOC; it also treats oil
and gas separately for a multitude of purposes in the bill;
it mandates that licenses will be for either oil or gas, and if
a contractor wishes to produce both, two separate licenses
are needed. Moreover, gas and oil are treated separately
for cost and taxation purposes.

Infrastructural limitation has continued to hamper

domestic market development for gas which is a direct
consequence of dispersion of gas demand centres over
several kilometres apart, inappropriate gas pricing, unfair
competitive advantage in favour of other fuel by keeping
them at artificially low price compared to gas, lack of
awareness of fiscal incentives.Currently,gas flaring emits
some 400 million tonnes of carbon dioxide(CO2) which
contribute to global warming and huge waste on of a
cleaner source of energy.

The multinationals operating in the oil sector are undermining basic

international standard regarding outsourcing for their organisation
with casualisation policy that run against the norms in major economies
of the world coupled with a shift from land and swamp to deep offshore
operation which consumes more of hi-tech strategies than manpower. The
decision was purely driven by profit maximization compounded by
government privatization and deregulation policy.

For many years the Niger-delta has being a flash point with communities
rightly demanding improvement to their standard of living. The region
has witnessed a spate of attacks on oil and gas facilities, hostage taking to
press for demand has become rampant. The achievement of the goal of
the reform depends on the resolution of the Niger-Delta crisis.

4.1.3 DOWNSTREAM

It is possible that in the short term unemployment may arise due to price
increases and the attendant problem of potential job losses by workers in
the refinery, this will be done by investors who aim to maximize
efficiency, once they acquire control.
Schipke (2001) notes, “Countries in which government was a dominant
player in terms of both ownership and intervention are also likely to have
highly regulated labour markets. Hence, a reduction in government
ownership without the simultaneous liberalization of the labour market
will lead to increases not only in temporary but also permanent
unemployment.”

4.2 PROSPECT

Industry analyst believe that the high quality content of Nigerian

crude(about 37 API)has been responsible for the interest now generated
by the Asian in her crude.