Nigeria: Primed for growth

In spite of the ongoing uncertainty fed by the still-pending passage of the long-awaited Petroleum Industry Bill, stronger forecasts for offshore production and a renewed focus on processing facilities bode well for Nigeria’s ever-important energy sector.

UK-based Afren reported in early March positive test results from Okoro East, the offshore fields it discovered in January in the country’s southeast. The latest data showed that the oil, which lies in excellent reservoir sands, is of high quality, and the company expects the field will be capable of yielding between 4500 and 7000 barrels of oil per day.

“The proximity of Okoro East to the existing producing Okoro field means that we are well positioned to efficiently monetise this discovery, both in terms of our detailed understanding of the subsurface and proximity to existing infrastructure,” Afren’s CEO, Osman Shahenshah, said at the announcement of the field’s discovery.

The British company plans to drill two production wells on the Okoro East field in the latter half of 2012 and up to eight in the future. According to the company’s estimates, initial production from the two wells combined could reach as much as 14,000 barrels of oil per day.

The new discovery comes on the back of increasing output amongst some of the country’s other major blocks. In late February, Total announced the first oil production from its offshore Usan field. The field, discovered in 2002 and located nearly 100 km from the coast at a depth of 750-850 metres, has the potential for daily gross production of up to 180,000 barrels.

Perhaps of greater import, however, are the country’s continued attempts to strengthen its downstream sector, long an Achilles heel for one of Africa’s most hydrocarbon-rich countries. On March 6 the government announced it would work to raise the country's refineries' capacity utilisation to some 80-90% and support the building of new plants.

These developments are welcome news for a sector that began the year with a worrisome outlook. Oil production and profits have suffered recently from civil unrest and theft. The state oil company, the Nigerian National Petroleum Corporation (NNPC), told Bloomberg in early March that the country was losing 150,000 barrels of oil per day because of violence and theft.

Moreover, a number of major accidents have marred the sector recently. On January 16, a natural gas rig owned by Chevron exploded before falling into the sea. The blast resulted in the deaths of two workers and an ocean fire that lasted 46 days. The blaze came less than a month after Nigeria’s worst oil spill in 13 years, when Royal Dutch Shell spilled 40,000 barrels of crude oil 75 miles off the coast of the Niger delta.

One of the greatest hindrances to sector growth, however, is the delay in the passage of the Petroleum Industry Bill. First proposed in 2008, the bill, which aims to streamline the sector and introduce more transparency, has undergone 165 amendments, with groups as diverse as the World Bank and labour unions weighing in.

One possible effect of the bill would be to incorporate currently unincorporated joint ventures between international oil companies such as Shell, Total, Mobil, Agip and Chevron and the NNPC, facilitating their listing on the Nigerian Stock Exchange, thus deepening the country’s capital markets and bringing in more revenue.

As long as the Petroleum Industry Bill remains in limbo, however, the renewal of existing licenses is also in question. Eni, Shell and Chevron, for example, are all waiting to renew licenses on shallow water onshore oil, and several international oil companies are putting billions of dollars of investment on hold. This is worrying for the country, which relies on the energy sector for more than 80% of revenues and 95% of foreign currency earnings.

Although the bill’s continued delay represents perhaps the single biggest constraint on spurring growth in Nigeria’s energy sector, the steady increase in both commercial discoveries and output, along with a renewed focus on improving domestic refining, emphasise the vast potential on offer – in spite of the country’s regulatory uncertainty.