By Wisdom Patrick Enang, PhD & Jerome Onoja Okojokwu-Idu

2021 was largely eventful for the Nigerian Oil and Gas industry with the passage of the Petroleum Industry Bill into law after two decades of being stalled in back and forth deliberations and disagreements between the different arms of government and the private sector, standing out as the major highlight. Facing a gradual recovery from the downturns imposed by the COVID-19 pandemic in the previous year, 2020, the industry was said to have shown resilience amidst a slurry of holdbacks.
According to reports from the National Bureau of Statistics (NBS), the sector recorded a 3.16 per cent year-on-year growth rate in the third quarter of the year despite a fall in average daily oil production from 1.67 million barrels per day to 1.57mbpd. Amid a 78.48 per cent contribution to the total exports in the period under review, it attracted just $69.51m of foreign capital in the same period.
The Petroleum Industry Act (PIA) generated its share of controversy as the fiscal and host community provisions made in the act raised questions from industry watchers and the public. The Department of Petroleum Resources also completed the awarding of marginal field assets to bidders as it sought to boost the country’s production levels which were impacted by slow recovery of oil fields that were shut down in compliance with the quota set by the Organisation of Petroleum Exporting Countries and its Allies (OPEC+). The sector also saw friendly policies and modest expansion in credit facilities due to the restructuring of its non-performing loans from the banking sector by the Central Bank of Nigeria (CBN).
However, the removal of subsidy on Premium Motor Spirit (petrol) and the full deregulation of the downstream sub-sector remain topics of national discourse amidst dwindling revenues of the Federal Government (FG) and increased debt servicing. The World Bank (WB) and the International Monetary Fund (IMF) warned the nation of the downsides of not following up on the removal of subsidy on petrol which it said was holding the government back on investing in capital projects that could boost the economy.
That said, the outlook for the industry

the outlook for the industry in 2022 remains positive as different capital projects by the players in the industry aim for completion within the year,

in 2022 remains positive as different capital projects by the players in the industry aim for completion within the year, that will in turn boost the sector’s recovery to pre-COVID 19 pandemic levels and aid job creation and resilient economic growth.
Big Ticket Projects likely to be sanctioned;
In a report according to GlobalData titled “Africa Oil and Gas Projects Outlook to 2025”, 30+ projects (identified below), some of which were commenced in 2021, are expected to be in its execution phases in 2022. New build projects dominate the upcoming projects landscape in Nigeria constituting around 90percent of the total projects across the value chain. The share of new build projects is especially high in the petrochemicals sector with more than 90percent.

Impact of the election preparation;

Like most developing democracies, election periods in Nigeria are typically associated with uncertainties, which generally impede business decisions and slow down economic productivity. In Nigeria for example, election cycles are typically followed by inflationary pressures occasioned by increase in money supply, which in turn forces the CBN to tighten monetary policies via the MPR (Monetary Policy Rate) and reserve requirements.
This often leads to some business leaders stalling investment decisions while awaiting the outcome of the electioneering process and policy direction from the new administration. The impact of these delayed decisions on the economy varies depending on the significance of the sector. In the oil and gas sector for example, which constitutes over 90% of the Nigeria’s foreign earnings, some of such impacts are documented in a study by Price Waterhouse Coopers titled “Avoidable Oil and Gas Revenue Losses: Breaking the Election Cycle”. In this study, it was found that between 2001 to 2017, there was a decline in the number of oil wells completed on a yearly basis, immediately after an election year, regardless of the price of crude oil in the international market. The range of decline was estimated to be between 14.0% to 59.0%.
Further analysis also showed that oil wells completion in post-election years were negatively impacted by the twin factors of policy uncertainties and heightened security challenges in the Niger-Delta region (election effect). A similar pattern is expected in the build-up to the 2023 elections, which may starve the treasury of a significant portion of its oil revenues required to fund the National budget. This is worrisome given the widening fiscal deficit of the federal budget. The implication of all these factors is that the government will likely continue to accumulate debt, which is already at an all-time high, leaving the country with meagre resources to finance its core/essential development needs; infrastructure in particular.
Additionally, the timing of the proposed subsidy removal, alongside the 2023 elections, raises concerns for political actors to implement certain anti-populist policies. As such, the burden of petroleum subsidies on government finances might persist in 2022 despite the Petroleum Industry Act (PIA), which implies that on account of political exigencies and push back by the ruling party and labour, the economy may have to bear the heavy fiscal burden of subsidy in 2022. This also signals delays in the full implementation of the PIA and reform of the downstream oil sector. However, if the Dangote refinery comes on stream in 2022, the fiscal pressure may abate, but not completely eliminated.

there was a decline in the number of oil wells completed on a yearly basis, immediately after an election year, regardless of the price of crude oil in the international market.

Covid-19 factor;
Two years into the COVID-19 pandemic it has become evident that the virus is here to stay and economies would have to adapt. With large vaccine deliveries now in place, Nigeria’s fight against COVID-19 has devolved to one against vaccine hesitancy, and it is expected that vaccine mandates for government agencies would come into force over 2022, which should increase vaccination coverage across the population.
According to analysts at Sigma pensions, Nigeria’s economic growth is expected to stabilise around 3.4 per cent in 2022, reflecting improvements across Telecoms, trade, manufacturing, and oil. The oil sector is expected to exit recession in 2022 as Nigeria’s crude production rebounds from the 1.6mbpd low base in 2021 towards a range of 1.8-1.85mbpd and as most OPEC+ curbs are removed by May 2022.

Funds for Oil projects and likely sources;
In view of the capital-intensive nature of oil and gas projects and the varying degrees of risk to which stakeholders are exposed (in part, depending on the stage of a project’s development and operations), equity investors typically require different sources of financing over the life of a project.
Key financing options employed include:
* Equity sources. IPOs, cash calls (under a joint operating agreement (JOA), shareholder loans and share subscriptions;
* Third party financing products;
* Corporate loans, acquisition financing, reserve-based lending (RBL), equity bridge loans (EBLs), project finance, capital markets, hybrid financings and hedging; and
* Other sources: operational current or future cashflow and the raising of funds through asset disposals.
Amidst the energy transition and climate change goals set by corporates, the Nigerian and foreign governments, and a tightening of monetary policy by the United States federal reserve that is projected by experts and international finance corporations to highly impact global financial markets, funding for oil and gas related projects may experience hitches. The rising oil and natural gas prices may provide solace to investors still looking to tap opportunities in hydrocarbon-supplied energy and its adjunct businesses.

Immediate dividends or challenges with PIA legislation on the industry;
In August 2021, the Petroleum Industry Act (PIA) 2021 was signed

oil wells completion in post-election years were negatively impacted by the twin factors of policy uncertainties and heightened security challenges in the Niger-Delta region

into law, bringing to a close a 20-year effort to reform Nigeria’s oil and gas sector, with the aim of creating an environment more conducive for growth of the sector and addressing legitimate grievances of communities most impacted by extractive industries.
A lot has changed in the sector domestically and globally since the reform efforts began. The number of indigenous oil and gas firms has grown, but so has the number of oil-producing countries in the region. Militancy in oil-rich communities, while remaining, has diminished. Concerns over climate change have fuelled aggressive efforts to reduce global consumption of fossil fuels—driving divestment from oil and gas by companies, institutions, and countries. The PIA represents an effort by Africa’s leading oil-producing country to respond to this changing environment.
If properly and vigorously implemented, the PIA can represent the gold standard of natural resource management, with clear and separate roles for the subsectors of the industry; the existence of a commercially-oriented and profit-driven national petroleum company; the codification of transparency, good governance, and accountability in the administration of the petroleum resources of Nigeria; the economic and social development of host communities; environmental remediation; and a business environment conducive for oil and gas operations to thrive in the country. However, these results are conditional on Nigeria’s political and oil industry leaders overcoming the following challenges in key provisions of the act.

Ambiguous and imprecise language:

The most important challenge is the challenge of interpretation and imprecisions in the law. For example, it is unclear whether host community development trust obligations are additional to existing community levies (such as the Niger Delta development levy) or will be an aggregation of those levies. Similarly, the law is silent on the definition of “frontier basin” and host community, instead deferring to the NUPRC on the definition of frontier basin and to settlors or license holders on the definition of “host community.” These definitions are not neutral to revenue; they have revenue implications. This lack of clarity creates uncertainty and even possible disputes, especially if relevant parties define them differently.

Tensions over revenue sharing:

The law has serious implications for the public finances of the federation and its constituent states and local government areas. First, the reduction in taxes and royalties will result in considerable reduction in revenues to the three tiers of government at a time they cannot afford it. Second, Nigeria’s revenue law requires that entities or enterprises owned by the federation remit their profits to a pool, the Federation Account, for sharing among the three tiers of government. Revenue from the Federation Account accounts for more than 80 percent of the revenues of many states and local governments. Therefore, the stipulation that 30 percent of NNPC Ltd.’s profits must be set aside for frontier exploration could cause a significant decrease in its contribution to the Federation Account. In the short term, revenues shared among the three tiers of government from the Federation Account will fall. Many states and local governments, especially those with very weak internal revenue-generation capacity will be unable to discharge their duties of providing essential social services to their citizens. Then again, such a change could lead to innovations at the state and local government levels to increase internal revenue-generating capacity and fiscal efficiency, such that the long-term effect of this policy could be positive.

Disagreement over Host Community Fund:

Host communities remain unhappy with the PIA’s provision that oil companies must allocate 3 percent of their annual operating expenditure in the immediately preceding calendar year to the Host Community Development Trust Fund (HCDTF); they had asked for 10 percent. Also related is a particularly sticky provision of the law is the stipulation of punishment for host communities for acts of vandalism of oil assets committed in their domain. This provision imposes collective punishment on host communities for acts of vandalism that they may not have committed and could raise constitutional and legal problems for the PIA.
Politics: Under the PIA, the president has the power to appoint members of the boards of the various institutions established by the act. Appointments to the boards of oil companies are watched keenly and could be a source of discontent among constituent parts of the country. To manage this discontent, it has become the norm (but is not the law) to have at least six positions in the board of federally owned companies and parastatals, reflecting the six geopolitical zones of the country. Unfortunately, the PIA does not create enough board positions for this condition to be met. Not increasing the number of board positions to manage out possible accusations of marginalization could be politically risky. Then again, expansion of board positions could raise the overhead of the boards and slow decision making.

if the Dangote refinery comes on stream in 2022, the fiscal pressure may abate, but not completely eliminated.

Marginal fields dynamics;

The 2021 Marginal Field Bid Rounds (“The Bid Rounds”) concluded with 57 marginal field assets awarded to 161 companies by the Department of Petroleum Resources (“DPR”) in what was the 2nd bid round since 2002/2003. The Bid Rounds is expected to generate not less than $5.7 Billion for the Federal Government of Nigeria, with the marginal fields having the potential to generate $38 Billion in revenue over the lifetime of the fields.
According to the Guidelines for the Award and Operations of Marginal Fields in Nigeria (“the Guidelines”) released by the Department of Petroleum Resources (DPR), applications for the bid rounds were field-specific, and each bid was to fail or succeed on its account. The Guidelines set down the procedure for competing parties for each field and the criteria for evaluating and selecting winning bids. More importantly, by the provisions of the Guidelines, competing parties were expected to bid for specific fields and pay the applicable fees as it pertains to a specific field.
However, despite the Guidelines and competing parties having individually submitted bids for specific fields, the DPR jointly awarded some fields to competing parties who bid independently. The implication is that these competing parties who submitted separate bids are now joint awardees and will be required to be joint venture partners to manage and operate the field. This development in the award process appears to be a deviation from the process envisaged under the Guidelines, and the amalgamation of bidders have thrown up specific issues.
For example, the Guidelines serve as DPR’s Request for Proposal (RfP) or Expression of Interest (EoI). Thus, the deviation from the Guidelines and amalgamation of competing parties for the joint award of some fields may be interpreted as a breach of DPR’s bid obligations towards the parties. Although there is limited case law in Nigeria on the nature of a RfP or an EoI, the trend in many common law jurisdictions is that an RfP is merely an invitation to treat, which is an advertisement to receive offers which may be subsequently accepted by the party who published the RfP. Notwithstanding, there have also been decisions from common law jurisdictions which have found RfPs or EoIs to be much more than invitations to treat, but as legally binding documents between the issuer of the RfP and the tenderer. By those decisions, the issuer is bound to comply and remain strictly within the scope of the RfP or the EoI. In light of this, there is the possibility that the courts may, depending on its interpretation of the Guidelines, find that they constitute much more than an invitation to treat but a legally binding document for which DPR ought not to deviate.
Additionally, parties may allege that they made offers to be solely awarded specific bids pursuant to DPR’s Guidelines. Still, through the joint awards, DPR introduced a counteroffer by introducing new terms into the bid process. Although the parties may have accepted the counteroffer, there is a possibility that parties may allege they were constrained to accept due to the inequality in bargaining power between them and the DPR. As such, aggrieved awardees may argue that the new terms introduced by the DPR constitutes a “take it or leave it” contract for which they may seek recourse from the Nigerian courts based on unfair terms or based on the inequality in bargaining power.
To further regulate the post-marginal field award phase and ensure uniformity of agreements, the DPR provided a suite of template agreements to govern the relationship between the amalgamated grantees. These agreements include (1) An Agreement to incorporate a Joint Company, (2) Shareholders’ Agreement, and (3) Special Purpose Vehicle Operating Agreement. Although these agreements are templates, they provide the basic terms which would govern the relationship between the amalgamated grantees and the operation of the marginal field. Notwithstanding, it is not uncommon for disputes to arise on issues such as default in payment or other contractual obligations, allocation of profits, duties of the operator, etc.

Insecurity and Crude Oil theft;

The Federal Government through the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), attributes the decline in Nigeria’s crude oil production to an average of 1.6 million barrels per day in 2021, to theft and insecurity, among other factors. The Commission’s Chief Executive, Mr Gbenga Komolafe, noted that crude oil export in the country began at 5,000bpd, culminating in 2.2 million bpd in the ‘90s, while the oil and gas reserves were 25 billion barrels and 166 trillion cubic feet respectively. He said in the 2020s, enhanced participation of independents and indigenous players began with the extension of exploration and production activities to Benin and Anambra basins. He said, “Consequently, there was an increase in reserves to about 37 billion barrels (oil and condensate) and over 200TCF of natural gas respectively. This makes Nigeria a big player in the global petroleum industry. “However, oil production in Nigeria has declined to an average of 1.6 million barrels per day in 2021. This decline in production could be attributed to theft, insecurity, aging facilities, and decline in exploration and production enhancement initiatives.” According to Komolafe, the NUPRC is committed to addressing these issues to increase reserves to 40 billion barrels and raise our production to three million bpd.

Komolafe

He said the regulator would initiate a public-private partnership involving the security agencies, private operators and other stakeholders to address the challenging issues of crude oil theft, sabotage and pipeline vandalism.
He said, “Collaborative efforts between operators, communities and the deployment of state-of-the-art technology to monitor pipelines in remote areas is on course. Already, as a commission, we have commenced consultation with relevant stakeholders towards the achievement of these objectives.”

Inland basin finds;
At the flag off of well drilling activities at Kolmani River Well of the Gongola Basin in 2019, President Muhammadu Buhari emphasised the need to treat oil exploration in the North and other inland basins as a national priority and part of efforts to boost oil reserves to 40 billion and daily production to three million barrels. He stressed that his administration would ensure that exploration in all frontier basins of Chad, Gongola, Anambra, Sokoto, Dahomey, Bida and Benue Trough were intensified to usher in prospects for a more prosperous Nigeria.

Muhammadu Buhari

“A key execution priority of our Economic Recovery and Growth Plan (ERGP) is ensuring national energy sufficiency and this cannot be achieved through hydrocarbon resources from the conventional basins alone. Therefore, exploration in our frontier basins is a national imperative and a core policy thrust that must be sustained”.
On this premise, the revelation by the Nigerian National Petroleum Corporation (NNPC) that between January 2021, and October 2021, N27.99 billion has been spent on frontier exploration services, may not have come as a surprise to many. This is because high hopes were raised last year when the Minister of State for Petroleum Resources, Timipre Sylva, announced that about one billion barrels of crude oil have been discovered in the Northeast, adding that there was the need for more exploration to be undertaken. Sylva’s announcement followed an earlier statement, by the NNPC in the third quarter of 2019, which stated that crude oil, gas and condensates were discovered in the Kolmani River region at a border community between Bauchi and Gombe states. That announcement was made eight months after Buhari flagged off exploration at the Kolmani River II Well, on the Upper Benue Trough, Gongola Basin, in the Northeast.

Nigeria’s economic growth is expected to stabilise around 3.4 per cent in 2022, reflecting improvements across Telecoms, trade, manufacturing, and oil.

Effects of Dangote refinery coming on stream.
According to news reports, the International Monetary Fund (IMF), in its latest report on Nigeria’s economy is projecting that Nigeria’s Dangote Refinery would boost the country’s economy when it commences production by 2022 as it would significantly improve the country’s current account balance. Beyond its ability to meet the full demand for domestic consumption of refined petroleum products-which are almost all imported at present, the refinery also has the potential to catalyze more domestic crude oil production and boost GDP growth, since crude oil for local refining is not subject to OPEC quota.

About 80% of the refined petroleum products consumed in Nigeria are imported and this implies huge foreign exchange (FX) requirements with its effect on the current account balance. Nigeria’s refineries have long operated at low levels due to many years of underinvestment and poor maintenance. To put things in perspective, on average, on a monthly basis, Nigeria consumes 1.5 billion litres of premium motor spirit (PMS). The price of gasoline ranges from 2 cents per litre in Venezuela to $2.13 in Hong Kong. But considering some of the moderate markets where Nigerian importers are most likely to shop for PMS, the price is likely to hover around 30 cents. That translates to $5 billion monthly or $167 million daily spend on PMS importation. That alone is bleeding the economy, strangling it to asphyxiation. Nigeria’s four refineries are not the hope; they have failed to produce nearly enough to meet Nigeria’s daily demand. Modular refineries are neither the solution, as their capacity is minuscule to meet Nigeria’s demand. With the Dangote Refinery promised to come on board by mid 2022 to produce more than 100 million litres of PMS daily, not only will Nigeria save the above whopping sum, but the country will have virtually the entire West African sub-region, in whose market Nigeria’s Dangote will benefit from trade creation,