Introduction

Oil and natural gas are major industries in the energy market and play an influential role in the global economy as the world’s primary fuel sources. The processes and systems involved in producing and distributing oil and gas are highly complex, capital-intensive, and require state-of-the-art technology.

The O&G industry in Nigeria has always been a major source of income in the country; it is currently the source of 95% of Nigeria’s foreign exchange earnings. It is therefore obvious that oil and gas companies play a significant role in the Nigerian economy. In this article we look at the future of the oil & gas sector in Nigeria, it covers a brief history of the oil and gas industry in Nigeria, what the future looks like and what that means for Nigeria and other African countries. Investors looking to enter the oil and gas industry can quickly be overwhelmed by the complex jargon and unique metrics used throughout the sector. Nigeria is the biggest exporter of oil and gas in Africa. According to the USA Energy Information Administration, the oil reserves of Nigeria is somewhere between 17 and 22 billion barrels; some other sources claim this figure could actually be up to 35 billion.

Federal Republic of Nigeria, is a country in West Africa bordering Niger in the north, Chad in the northeast, Cameroon in the east, and Benin in the west. Its southern coast is on the Gulf of Guinea in the Atlantic Ocean. It is a federal republic comprising 36 states and the Federal Capital Territory, where the capital, Abuja, is located. Lagos is the most populous city in the country and the African continent, as well as one of the largest metropolitan areas in the world.

History of oil in Nigeria

Oil was first discovered in Nigeria in the mid-1950s after decades of fruitless exploration. The country’s first field began producing in 1958 at a rate of 5,100 BPD. Production grew fast, and today, Nigeria pumps close to 2 million BPD, which makes it the largest producer of crude oil in Africa. Nigeria joined OPEC in 1971 before it even had its own state oil company. That was formed in 1977 under the name National Nigeria Petroleum Company.

According to its OPEC file (Organization of the Petroleum Exporting Countries, the West African nation is home to 36.97 billion barrels of proven oil reserves as well as 5.675 trillion cubic metres of natural gas. The country exports most of the oil it produces even though it has a refining capacity of almost 450,000 BPD. While in the past it used to transport the most oil to the United States, now Nigerian oil goes mostly to Asia, Europe, and South America.

The oil and gas industry is often divided into three segments:

  • upstream, the business of oil and gas exploration and production;
  • midstream, transportation and storage; and
  • downstream, which includes refining and marketing.

Upstream

Upstream businesses consist of companies involved in the exploration and production of oil and gas. These are the firms that search the world for reservoirs of the raw materials and then drill to extract that material. These companies are often known as “E&P” for “exploration and production.”

The upstream segment is characterized by high risks, high investment capital, extended duration as it takes time to locate and drill, as well as being technologically intensive. Virtually all cash flow and income statement line items of E&P companies are directly related to oil and gas production.

Midstream

Midstream businesses are those that are focused on transportation. They are the ones responsible for moving the extracted raw materials to refineries to process the oil and gas. Midstream companies are characterized by shipping, trucking, pipelines, and storing of the raw materials. The midstream segment is also marked by high regulation, particularly on pipeline transmission, and low capital risk. The segment is also naturally dependent on the success of upstream firms.

Downstream

Downstream businesses are the refineries. These are the companies responsible for removing impurities and converting the oil and gas to products for the general public, such as gasoline, jet fuel, heating oil, and asphalt.

The current state of the upstream petroleum industry in Nigeria portrays an optimistic outlook. According to the Oil and Gas Journal (OGJ), Nigeria ranks among the top 10 nations in proven oil and natural gas reserves, worldwide. As of January 1, 2007, the estimated crude oil and natural gas reserves are 36.2 billion barrels and 181.9 trillion cubic feet (TCF). The upstream oil and gas industry outlook in Nigeria is robust, nearly 200% of proved reserves produced in Nigeria from 1970-2005 have been replaced by new reserves, indicating that the petroleum business environment in Nigeria compares favorably with the global environment.

Regarding the state of Nigeria’s economy, petroleum, especially oil, has been its main driver since the end of the civil war in 1970, contributing nearly 80% of government revenues and 90-95% of its foreign exchange earnings, on average, over this period. These facts notwithstanding, the impact of Nigeria’s industrial sector (petroleum sector inclusive) to the overall GDP remains abysmal.

The oil and gas industry is used to the highs and lows of economic cycles. The downturn caused by COVID-19, however, is unlike any other. With the survival of many companies at risk, coupled with a longer-term decline in petroleum demand, the next decade could look very different for the oil and gas market. Global oil demand fell by 25% in April last year, but it has rebounded sharply since then, cutting its losses to just 8%. Looking ahead, 2021 oil demand is expected to recover strongly but remain lower than it was at pre–COVID-19 levels—about 4% lower in the base case, and about 7% lower in Rystad Energy’s second-wave scenario. Similarly, oil prices and energy stocks have under performed base metals by about 10% and 25% and 6% and 10%, respectively, since July 2020. Mass layoffs and heightened cyclicality in employment continue to challenge the industry’s reputation as a reliable employer.

The main players

A joint venture of Shell and BP was the first to discover oil in Nigeria. To date, in addition to these two companies, the international players in the country’s oil industry include Exxon, Chevron, Eni, and Total.

The super-major with the most prominent presence in Nigeria is Shell. The company, through its joint venture with NNPC and the local divisions of Total and Eni, accounts for half of Nigeria’s oil production.

Exxon comes next: the U.S. company has a 40-60 joint venture with the NNPC, which is the majority shareholder, and stakes in several offshore fields, including several deep-water blocks that have yet to be developed.

The third-largest oil player in Nigeria also comes from the United States. Chevron has stakes in both onshore and offshore fields through a JV with NNPC that has the same percentage distribution as Exxon’s.

Eni’s Agip, Total, and ConocoPhilips have a smaller presence in Nigeria, but they are nevertheless important players. Total, for instance, started production from one of the most significant newly discovered offshore fields in Nigeria – Egina – at the end of 2018 with plans to ramp up production to 200,000 BPD. The operator of Egina is China’s CNOOC: Chinese oil companies are expanding internationally, and Nigeria is one of the destinations, despite the challenges.

Nigeria’s upcoming projects are a testament to the potential of the evolving and prosperous oil and gas sector. The national government is willing to invest about $9-10 billion annually over the next five years. In today’s rapidly evolving marketplace environment, key business issues are converging with impacts felt across multiple industry sectors.

As regards warnings that if they have to spend a lot more on future Nigerian projects, the new normal for Big Oil indeed is to choose the lowest-cost and fastest-return projects. Yet it is also true that the choice of proven and untapped large deposits of oil around the world is dwindling. In the end, Big Oil would need to choose between expensive and more expensive, rather than between cheap and costly, these untapped resources are the key to their future earnings.

Nigeria is a powerhouse of Africa in many sectors, but oil and gas has been the hallmark of the country’s economy for decades. For this reason, the Nigerian government is encouraging and facilitating special investment in gas so that the country may increase supply to power companies and move the economy from over-dependence in oil, which currently drives the majority of revenue in the country.

The Nigeria oil and gas downstream market is expected to grow at a rate of approximately around 1% during the forecast period of 2021 – 2026. The COVID-19 pandemic has affected the market severely as the demand for refined petroleum products in the country decreased due to lockdown restrictions. Moreover, refinery and petrochemical projects also got delayed during Q1 and Q2 2020 owing to supply chain disruptions and travel restrictions across the globe. However, an anticipated recovery in the refined petroleum products demand and the government’s plan to make the country a regional hub for refined petroleum products is expected to drive the market during the forecast period. However, the high volatility in crude oil prices is expected to restrain the growth of the market in the coming years.

  • The upcoming refinery projects are expected to drive the demand in the market during the forecast period.
  • The concept of small and modular refineries is gaining popularity in the country. This, in turn, is expected to create significant opportunities for the market players in the near future.
  • Improving the existing downstream infrastructure and encouraging private sector investment for the refineries and petrochemical plants is expected to drive the studied market during the forecast period.

Opportunities in the oil and gas sector in Nigeria

Foreign and domestic investors are being encouraged through improved fiscal incentives in the Nigeria oil and gas sector. In the Upstream and Downstream sectors, the following are some of the of the areas where there are pressing needs for investors.

UPSTREAM ACTIVITIES

Search for development of local substitute for such items as Medium pressure valve, pumps, shallow drilling equipment, Drilling mud, bits fittings, drilling cements etc.

Petroleum Exploration and Exploitation.

  • Manufacturing of consumable materials in exploration such as explosives, detonators, steel castings, magnetic tapes etc.

Other areas in the services sector of the upstream are:

1. Construction and Installation
2. Maintenance
3. Pipelines
4. Well Services and
5. Transportation Support Services.

DOWNSTREAM ACTIVITIES:

  • Domestic Production and marketing of Liquefied Petroleum Gas (LPG)
  • Manufacturing of LPG cylinders, valves and regulators, installation of filing plants, Retail distribution and development of simple, flexible and much less expensive gas burner to encourage the use of gas instead of wood and other fuels.

Establishment of processing plants and industries for:

– The production of refined mineral oil, petroleum jelly and grease.

– The manufacture of bituminous based water/damp-proof building materials such as roofing sheets, floor tiles, rubber products, tarpaulin. Building of asphalt storage, packaging and blending plants to handle the product for export.

  • Establishment of chemical industries such as distillation units for the production of naphtha and other special boiling point solvents used in plant and other food processing industries.
  • Establishment of industries for processing Linear Alkyl Benzene, Carbon Black and Polypropylene.
  • Establishment of small-scale industries to produce chemicals and Solvents, for example Chlorinated methane, Formaldehyde, Acetylene, etc., from natural gas.

Having traced the historical evolution of the Oil and Gas sector, and what the future looks like, it is rather obvious investing in this sector will be profitable and help to boost the economic sector.

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By Uaaruka Kandjii