Nigeria’s energy sector pivots to refining and natural gas

Nigeria is Africa’s top oil producer and possesses the largest proven gas reserves on the continent, making it a key player in the global energy market. However, despite its wealth of resources, the country is unable to meet domestic demand and has one of the lowest net electricity generation rates per capita in the world. The nationwide electrification rate stood at nearly 60% in 2020, while 39% of the rural population had access to electricity.

The country relies on fuel imports – the result of a structural gap between its upstream and downstream segments. To remedy this, the government is committed to rehabilitating state-owned refineries, supporting the construction of new complexes and developing greenfield projects to facilitate Nigeria’s transformation into a net exporter of petroleum products over the medium term. At the same time, the government has made concerted efforts to reduce gas flaring and boost gas utilisation, with Timipre Sylva, the minister of state for petroleum resources, declaring 2020 “the year of gas”.

However, the energy sector was severely impacted by the effects of the Covid-19 pandemic that year, which saw a decline in global demand for petroleum products. While the crisis also impacted foreign direct investment (FDI) inflows in 2020, these had already been falling over the years, with industry stakeholders citing a lack of competitive regulatory and fiscal reforms as barriers to investment in energy, in addition to a weak macroeconomic environment, corruption and militant attacks on infrastructure. Given the potential of the long-awaited Petroleum Industry Bill to address these issues and spur significant reform, its passage by Parliament in July 2021 is a positive sign for the industry.

Structure & Oversight

The state-owned Nigerian National Petroleum Corporation (NNPC) operates in the upstream, midstream and downstream segments. It functions as a partner to private exploration and production companies, and, in some cases, acts as a regulator. After a reorganisation in 1988 the NNPC’s regulatory arm, the Petroleum Inspectorate, was transferred to the Ministry of Petroleum Resources and renamed the Department of Petroleum Resources (DPR). The NNPC still exercises certain regulatory powers, however, such as the ability to approve the work plans of upstream companies. The NNPC’s upstream oil exploration and production subsidiary, the Nigerian Petroleum Development Company (NPDC), has an interest in 28 blocks, five of which it owns completely and 13 in which it has a majority stake of 55% or 60% through joint ventures (JVs) with private operators.

Another key authority is the Nigerian Content Development and Monitoring Board (NCDMB), which was established in 2010 through the Nigerian Oil and Gas Industry Content Development Act. Operators are required to create plans for using Nigerian content and submit them to the NCDMB for approval, as well as pay 1% of the value of each awarded contract to the Nigerian Content Development Fund, which is overseen by the NCDMB. “Local content is a good initiative for the development of Nigeria’s oil and gas industry, as long as it is implemented fairly throughout the sector and among all companies,” Eugenio Fogli, country manager for Nigeria at Vallourec, a tubular solutions provider, told OBG.

Oil Producers

The biggest oil producers in Nigeria are international oil companies (IOCs), namely Royal Dutch Shell, ExxonMobil, Chevron, Total and Eni. Onshore oil is typically extracted through JV companies established by the IOCs, in which the NNPC has a 55% stake and the foreign partner exercises operational control. JVs accounted for 42% of crude oil production in 2019, according to the NNPC’s most recent annual statistical bulletin.

In an effort to boost local participation in the upstream segment and provide foreign investors with technical and financial partnership opportunities, in June 2020 the Department of Petroleum Resources launched the bidding process for 57 marginal fields located on land and in swamp and shallow offshore terrain. Marginal fields are areas abandoned by IOCs due to limited commercial potential that local companies can use to gain experience in exploration. Nigeria’s marginal fields have an average economic life of eight to 15 years, and can produce 4000 to 30,000 barrels of oil equivalent per field. In the second half of 2020 there were nine marginal fields producing oil in Nigeria. In a February 2021 statement, the DPR said that it expected to raise over $500m from signing bonuses related to the award of the 57 fields. Bidding closed at the end of March 2021.

Oil Performance

The oil and gas sector accounts for roughly 10% of GDP, 65-70% of government revenue and more than 80% of foreign exchange earnings. According to BP’s “Statistical Review of World Energy 2020” report, Nigeria had 37bn barrels of proven crude oil reserves at the end of 2019 – second on the continent to Libya, whose reserves stood at 48.4bn barrels. BP estimates put production at 2.1m barrels per day (bpd), up from 2m in 2018 and outpacing Libya’s 1.2m bpd.

However, more recent statistics show a slowdown in oil production, largely precipitated by the economic impact of the Covid-19 pandemic: the crisis caused the third price collapse in the Nigerian oil and gas industry in 12 years. Crude oil production fell from 1.8m bpd in 2019 to 1.6m bpd in 2020, according to the February 2021 “Monthly Oil Market Report” published by the Organisation of the Petroleum Exporting Countries (OPEC). This performance was in line with that of other OPEC markets during the period. In January 2021 Nigeria’s crude oil production fell further, to 1.3m bpd, down from 1.4m bpd of output the previous month.

OPEC decisions also impacted Nigeria’s oil production in 2020. Members and allies agreed to lower their output to address the global oil crisis triggered by the pandemic. Nigeria cut its oil production benchmark volume twice in its 2020 budget revisions, and agreed to lower its production levels to 1.4m bpd, 1.5m bpd and 1.6m bpd for the periods of May-June 2020, July-December 2020 and January 2021-April 2022, respectively. However, the country only met about 52% of its compliance target in May 2020, managing to cut production to 1.6m bpd from a reference volume of 1.8m bpd. In early June the authorities noted that Nigeria would comply with the agreed concept of compensation by countries that are unable to attain full conformity in the May-June 2020 period. The shortfall was to be carried over and compensated for by December 31, 2020.

Refinery

While Nigeria’s oil refining capacity has increased modestly over the years, from 339,000 bpd in 2017 to 344,000 in 2018 and 350,000 in 2019, oil refinery throughput has declined significantly, from 81,000 bpd to 44,000 and 7000, respectively. On paper, the country’s four oil refineries have the combined capacity to process 445,000 bpd, which is more than enough to meet domestic demand; however, output has fallen over the years due to unmaintained and outdated facilities. As Nigeria’s refinery output surpassed 100,000 bpd only once in the decade to 2019, the country remains dependent on fuel imports to meet local needs – in fact, it is the only OPEC member that imports petrol. In 2019 the country imported 28.9bn litres of petrol and other petroleum products, according to the National Bureau of Statistics. In the first quarter of 2020 it imported 7.2bn litres of petroleum products, up from 6.5bn litres in the same period of 2019.

To boost local refining, the country moved ahead with plans to rehabilitate its facilities. In January 2021 the NNPC concluded talks with lenders to raise $1bn in prepayments to revamp the 210,000-bpd Port Harcourt refinery in a bid to reduce the large import bill. The project was set to begin in the first half of 2021 and falls under a broader rehabilitation programme that is estimated to take 18-24 months. Upgrading the 125,000-bpd Warri and 110,000-bpd Kaduna refineries is included in the undertaking.

Co-locating site infrastructure is also expected to boost Nigeria’s refinery capacity. Sharing facilities such as crude pipelines would lower start-up costs, as well as help the authorities to monitor activity more effectively. The NNPC introduced the co-location initiative in 2018 when it sought to relocate a refinery once owned by BP from Turkey and install it near the Port Harcourt complex.

More recently, the Waltersmith Refining and Petrochemical Company, a JV between Waltersmith Petroman Oil and the NCDMB, commissioned the first phase of its refinery at the Ibigwe marginal oil field in November 2020, which will boost refining capacity by an initial 5000 bpd and deliver an estimated 271m litres of refined petroleum products per year. At the virtual launch, President Muhammadu Buhari said the country was ramping up momentum in the rehabilitation of its refineries, while also moving ahead with its co-location and greenfield refinery plans. In September 2020 Nigerian conglomerate BUA Group chose France’s Axens as the technology provider for its multibillion-dollar, 200,000-bpd greenfield refinery and petrochemicals plant in Akwa-Ibom State. The project will produce Euro-V fuels and polypropylene for local and regional markets.

Crude Exports

Crude oil export earnings fell by 77% between January and April 2020 amid the onset of the Covid-19 pandemic. Earnings gradually improved over the rest of the year and were up 166% in November 2020 when compared to April, Mohammed Sanusi Barkindo, secretary-general of OPEC, said at the virtual Nigerian Oil and Gas Conference and Exhibition held on December 8, 2020. The US has historically been the primary buyer of Nigerian crude oil, accounting for 40-50% of total exports. However, demand from the world’s largest economy has declined over the years, mainly due to the boom in shale oil production in the US and, more recently, the pandemic. The country reduced its imports of Nigerian crude oil from just over 21m barrels in the first five months of 2019 to approximately 9.4m barrels in the same period of 2020.

While the US is unlikely to return to its previous level of demand for Nigerian oil, global appetite for fossil fuels is expected to remain high over the medium term, standing Africa’s largest oil producer in good stead. According to Barkindo, global primary energy demand will increase by 25% by 2045. That year crude oil is forecast to account for almost 28% of the global energy mix, followed by gas at 25%.

Challenges & Reform

Beyond the effects of the pandemic, corruption and militant attacks are two long-standing factors that have limited growth in the oil industry. Alleged corruption has tied up an untapped oil field in a court trial for a decade. Eni and Shell acquired the OPL 245 field in 2011 for about $1.3bn from Malabu Oil and Gas, a company owned by Dan Etete, a former minister of petroleum. In September 2020 the lawyer representing the Nigerian government called for the IOCs to pay $1.1bn in immediate advance payment for damages, an amount of the field’s purchase price that the prosecution alleges was siphoned off to intermediaries and politicians, including Etete.

Meanwhile, frequent attacks by militants in the oil-rich Niger Delta are damaging infrastructure and slowing production, as well as hampering foreign investment. FDI in the oil sector has steadily declined over the years and, alongside the pandemic, saw total capital inflows decline to $6.6m in the second quarter of 2020, down from $10.1m the previous quarter. This equated to 0.51% of total foreign investment in the Nigerian economy during the three-month period, and was the lowest inflow since 2015. For the whole of 2019 the industry received $216.2m in capital inflows, up 61% on the $133.5m recorded in 2018, but lower than the $331.4m and $720.2m recorded in 2017 and 2016, respectively. According to a statement made by Mele Kolo Kyari, group managing director of the NNPC, in February 2021, theft and sabotage have cost the country an average of 200,000 bpd of crude oil. In 2019 the Nigeria Extractive Industries Transparency Initiative, the country’s oil industry auditor, noted that crude oil lost to theft over the past decade amounted to $40.1bn. Indeed, IOCs such as Shell, ExxonMobil, Chevron and Total have cited oil theft as a reason for divestment in many offshore assets. The government continues to make amnesty payments to manage militancy, adding pressure to an already strained fiscal balance.

The Petroleum Industry Act, which was signed into law in August 2021 after being under review since 2008, is expected to address many of the challenges undermining the energy sector’s competitiveness. Overhauling the legal framework for oil, it includes restructuring government agencies within the industry – specifically, the NNPC – and reforming the royalty regime (see analysis).

Natural Gas

Unlike oil, Nigeria’s gas potential has yet to be fully realised. The country is home to the world’s ninth-largest gas reserves, at 90.4trn standard cu feet (scf) – or 5.4trn cu metres – in 2019, when it accounted for 2.7% of the global total, according to BP figures. Production amounted to 49.3bn cu metres that year, up from 48.3bn in 2018, while liquefied natural gas (LNG) exports grew by 3.3% from 27.9bn cu metres in 2018 to 28.8bn in 2019. The largest purchaser of Nigerian LNG is Europe, which imported 15.8bn cu metres in 2019.

Nigeria has been making strides to develop its gas industry after decades of focus on oil, and aimed to become self-sufficient in the production of gas by the first quarter of 2021. At the beginning of that year Nigeria LNG, the company that owns and operates the LNG facility on Bonny Island, began to use its 450,000-tonne-per-annum gas supply to boost the domestic production of liquefied petroleum gas (LPG), more commonly known as cooking gas. At the same time the National Gas Expansion Programme and Autogas Initiative was launched by President Buhari, which seeks to buttress the economic impact of deregulating the petroleum industry’s downstream segment by encouraging Nigerians to use gas instead of petrol. More specifically, the government intends to boost the country’s use of LNG, LPG and compressed natural gas, which are cheaper and cleaner alternatives to oil products.

The deregulation of the petroleum industry was announced by the government in March 2020, following a decade of subsidy payments amounting to over N10trn ($26.7bn) that could otherwise have been invested in maintaining existing or developing new energy infrastructure. According to Sarki Auwalu, director of the DPR, the deregulation would protect consumers while stimulating business growth and creating attractive investment opportunities.

Flaring

In a bid to reduce flaring and increase gas supply, the government launched the Nigerian Gas Flare Commercialisation Programme in 2016, with the goal of eliminating flaring in 2020. The programme’s first phase was rolled out in the early months of that year, which saw the DPR shortlist 200 companies to bid for control of 45 gas flaring sites; however, developers were unable to access the sites due to movement restrictions stemming from measures to contain the Covid-19 virus. In 2020 Nigeria flared 318m scf of gas, according to the National Oil Spill Detection and Response Agency. Between 2012 and 2020 that figure amounted to 1.7bn scf across eight states, representing a loss of about $6bn.

Train 7

Anthony Adegbulugbe, chairman of local energy company Green Energy International, has drawn attention to another hurdle to gas development: investment in distribution infrastructure to more easily transport gas to households and industrial plants. “One of the challenges with gas in Nigeria is the lack of infrastructure. The government is addressing this issue and gas is being channelled for power and other derivatives,” he told international media in August 2020. Indeed, despite economic disruptions during the year, the government moved ahead with various gas-based infrastructure projects. One such undertaking was the $12bn Train 7 to increase the capacity of Nigeria LNG to 30m tonnes per annum and raise the country’s total LNG output by one-third. In addition to internal funding, the company signed a $3bn hybrid corporate loan for its seventh train in May 2020, providing a new template for the financial structuring of projects in the oil and gas sector. The money comes from 26 international and Nigerian banks, three export credit agencies and two development finance institutions.

Also in May, Nigeria LNG awarded the estimated $4bn engineering, procurement and construction contract to a consortium comprising Italy’s Saipem, South Korea’s Daewoo and Japan’s Chioda. The deal is expected to offer opportunities for the further development of gas infrastructure, technologies and machineries in Nigeria. In November 2020, however, the African Energy Chamber predicted that the pandemic would delay upstream developments that are expected to supply gas to Train 7, as well as push back the timeline of other important gas projects.

Other Gas Developments

Other gas commercialisation projects include the 650,000-bpd Dangote oil refinery and petrochemicals complex, which is expected to begin operations by 2022. The integrated project is estimated to cost up to $15bn, with $10bn going towards the refinery, $2.5bn for a fertiliser factory and $2.5bn for an underwater pipeline to connect Nigeria’s Niger Delta to other West African markets. At 1100 km, the pipeline is expected to handle approximately 3bn scf of gas per day. The project as a whole could save the country around 41% of the foreign exchange used for fuel imports, Godwin Emefiele, governor of the Central Bank of Nigeria, told international press in February 2021.

Elsewhere, the first phase of the NNPC’s 614-km, $2.6bn Ajaojuta-Kaduna-Kano gas pipeline – considered to be one of the largest gas transmission projects in the country – was launched in July 2020. The infrastructure is being built under a build-operate-transfer, public-private partnership framework, and is expected to move 3.5m scf of gas per day between the south and north of Nigeria. As of December 2020 the pipeline was 15% complete and on track for its target completion date of 2023.

Located in Delta State, the $20bn Ogidigben Gas Revolution Industrial Park is expected to be completed at the end of 2022, according to Simbi Kesiye Wabote, executive secretary of the NCDMB. The refinery and petrochemicals complex will utilise the Odidi, Okan and Forcados reserves located nearby, which hold a combined 18trn scf of gas. The project is fully owned by the NNPC and is being developed by the NCDMB. It is forecast to create 25,000 direct and indirect jobs in the state.

Renewable Energy

If the current levels of production and reserves remain unchanged, the country is expected to run out of oil in 48 years and gas in 109.4 years, according to BP data. Given depleting fossil fuel resources, as well as their detrimental effects on the environment, Nigeria is turning to renewable sources to help meet its energy needs. In February 2021 Vice-president Yemi Osinbajo announced that Nigeria aims to generate 30% of its electricity supply from renewable energy by 2030. The country has high installed generation capacity, at 16,384 MW, but actual generation is much lower and insufficient for a population of over 200m. Of the total installed electricity capacity, 2062 MW is from hydro power, 10 MW is from wind and 7 MW is from solar, with the majority (11,972 MW) from gas.

To boost the share of renewables in the energy mix, in December 2020 the government launched Solar Power Naija as part of the Economic Sustainability Plan rolled out in June of that year under the country’s Covid-19 response. The programme aims to create 5m new solar connections to expand access to electricity to an additional 25m people. According to the Rural Electrification Agency, the undertaking is expected to generate around $18m in annual tax revenue and $10m in annual import substitution.

That same month the EU added €10m to its initial funding of €30m for the Climate Investor One financing facility that supports renewable energy projects in emerging markets. The grant has the potential to unlock €100m in green energy investment in Nigeria. Some of the funds are expected to go towards the second phase of KONEXA, the 30-MW solar project in Kaduna, which has received development approval and is set to begin construction in 2021. The EU funding stems from the approval of the Nigeria Renewable Energy Programme in 2020, which intends to add 150 MW of capacity from green sources.

Outlook

Nigeria is focused on developing infrastructure to get the most out of its oil and gas resources until national reserves are exhausted. To this end, the country is preparing to ramp up production both for domestic use to cut its large import bill and for export to regional markets in the medium term, with an emphasis on natural gas. Meanwhile, optimism for an improved macroeconomic environment in 2021 bodes well for investment in the energy sector, with growing opportunities in the nascent renewables segment as the country looks to expand electricity access to underserved communities.