Strengthening the Nigerian Oil and Gas Value Chain for a Sustained Economic Growth

Over the years, the Nigerian petroleum industry, apart from making significant contribution to the country’s revenue, has made little impact to the growth and development of the economy. Specifically, in some cases, the inability of the country to reach its full economic potentials had been blamed on the discovery of crude oil and gas in Nigeria.
However, this article highlights the opportunities to be derived from effectively creating linkage between the petroleum industry and the Nigerian economy and also ways the oil and gas value chain can be strengthened for sustained economic growth.

The Nigerian petroleum industry has over the years made significant contribution to the country‘s economy, and has remained the major revenue earner for the country, accounting for about 90 per cent of the country’s revenue. However, of recent, the industry’s impact in the economy had been waning, especially with the low crude oil prices. Specifically, the industry plunged the Nigerian economy into recession in the second quarter of 2016, while the industry’s contribution to employment generation has diminished considerably.
In the first quarter of 2019, the National Bureau of Statistics (NBS) disclosed that the oil And gas industry contributed 9.14 petroleum to Nigeria’s total real GDP, down from figures recorded in the corresponding period of 2018 but up compared to the preceding quarter, where it contributed 9.55 per cent and 7.06 per cent respectively. Also, data obtained from the Central Bank of Nigeria (CBN) revealed that in the first quarter of 2019, the oil and gas industry accounted for 61.2 per cent of Nigeria’s gross revenue, with N1.41 trillion, out of the N2.31 trillion gross federally-collected revenue recorded in the period under review.

The petroleum industry had enjoyed many years of growth from the commencement of crude oil and gas exploration in the country, in the last couple of years, the sector had suffered dwindling fortunes. Over the last couple of years, no major crude oil and gas find had been recorded in the country, while the midstream and downstream segment are plagued with obsolete infrastructure, government interference and inadequate policy. Despite the huge revenue coming from the oil and gas industry, the sector’s contribution to the growth of the Nigerian economy remained insignificant. This stemmed mainly from the fact that all the value chains of the industry in the upstream, midstream and downstream segments

of the industry were yet to be fully harnessed to make meaningful contribution to the economy. Nigeria’s economy is the second largest in Africa and dominant in the West African sub-region, with an increasing energy demand. Nigeria’s real GDP was $320 billion as at 2015 with a growth potential of $476 billion by 2025, averaging four per cent per annum.
Nigeria’s petroleum product demand is expected to grow from 13.2 million metric tonnes in 2015 to 15.1 million metric tonnes in 2020 and 17.3 million metric tonnes by 2025 while the population growth corresponding to this demand is 182 million in 2015, 207 million in 2020 and 234 million in 2025 respectively. However, for Nigeria to achieve meaningful development, it had been argued that there must be an effective linkage between all segments the oil and gas value chain and the Nigerian economy, from the exploration, extraction, production, refining, transportation, down to the distribution, storage marketing of petroleum products.

In a Policy Research Working Paper, titled, ‘Political Economy of the Petroleum Sector in Nigeria’, Alex Gboyega of the University of Ibadan and other authors, Tina Søreide, Tuan Minh Le and G. P. Shukla, noted that every institution along the Nigerian extractive industries value chain that potentially could prevent fraud  was weak. They argued that although these weaknesses allow for manipulation, it is clear that the necessary underlying conditions for what generally is perceived as best practice in petroleum governance are not in place. The energy experts disclosed that Nigeria does not develop from as much of its revenues as it could, noting that numerous studies have pointed to deep-rooted corruption and misuse of power to the exclusive benefits of some groups at the cost of society at large. They said, “Governance challenges are difficult to identify and analyze, however. They require insights into complex power alliances, which cut across formal structures, hierarchies, or sectors. Political power bolstered by petroleum revenues at the federal level has had ramifications beyond the three tiers of governance.
“The alternative explanations behind weak development tend to point toward the political setup. For example, the institutional framework for petroleum governance has not been made strong enough to prevent conflict of interest.”

They insisted that many of the development challenges in Nigeria are the results of past policy choices in the evolution of petroleum governance, pointing out that the comprehensive reform of the petroleum sector proposed by the government was an effort to move out of an adverse equilibrium. “The likelihood of success may depend critically on the following four petroleum-related mechanisms discussed: how access to oil revenues may have affected politics and core democratic functions; how the political elite has gained access to oil wealth through politics; how groups other than the political elite have claimed access to oil wealth; and how the reactions from those without access to oil revenues have been held largely ineffective.
“These mechanisms interact and appear to explain why it has been difficult to implement best practices in petroleum sector governance and make the Nigerian society benefit more fairly from oil revenues.”
“The dynamics of the Nigerian politics indicates that while appropriate strategy and adequate resources for reforms are necessary, they are insufficient for the reforms to sustain and succeed. The reforms have to be driven from within, relying on the government’s leadership or effective pressure from civil society organizations, CSO and/or the media, “they maintained. The energy experts further stated that the Extractive Industries Transparency Initiative, EITI, was an important stepforward to better governance of the sector,

noting, however, that it was inefficient without commensurate reforms across various stages of the oil and gas value chain. They said, “The Nigerian experience with the EITI indicates that internationally, to be effective, the global EITI need to diffuse from audits to remedial measures, that is, actually following up on the findings of the audits in terms of improving various aspects along the value chain.”
According to them, enhancing inter-governmental fiscal arrangement, transparency and accountability for service delivery at the state level was critical for the long-term growth and development. They argue that the Nigeria’s prospects for achieving its development agenda of becoming 1 of the 20 most industrialized nations by 2020 may appear daunting under the present circumstances in the oil and gas value chain. They maintained that the country’s development efforts are hobbled by poor infrastructure, human capacity inadequacies, corruption, weak institutions, flawed elections, and unaccountable leadership.
According to them, a lot still needed to be done to overcome Nigeria’s development challenges, especially in petroleum sector governance and in the political process. They said, “Nigeria embraced EITI, passed a law to institutionalize the initiative, and conducted physical and process audits of the oil industry. It has been difficult, however, to implement the recommendations of NEITI audits and this is not unconnected to the underlying political economy of the sector. NEITI reports reveal the weaknesses in the oil industry revenue collection machinery. “Although Nigeria’s fiscal regime compares favourably with those of other oil-producing countries, it suffers from overlaps and contradictions and inconsistencies. The main institutions involved in revenue collection — NNPC, DPR, and FIRS experience capacity inadequacies, do not coordinate their efforts, and are liable to political pressures.
“The Niger Delta conflict, criminal activities, and oil theft or bunkering are mutually reinforcing in a seemingly perpetual cycle which resists all sorts of previous intermittent military, amnesty, and rehabilitation interventions.”
In her own submission, Elisabeth Proust, former Managing Director of Total Upstream Companies in Nigeria, The transportation and distribution of produced natural gas remains an underdeveloped segment of the domestic gas value chain. According to her, the investment and operating of the midstream sector falls directly and almost solely on upstream producers, which is not the case in most mature markets. She said, “For example, when it comes to constructing and developing pipelines, the producer undertakes the entire process from the study and design phase to the construction and ultimately the operation and delivery of gas to the power sector and clients.
“This is particularly precarious for those producing from joint venture framework blocks. There, the framework dictates a 60/40 split between the Nigerian National Petroleum Corporation and operators. Most of the pipelines that are required to bring gas to the market leave the physical boundaries of the blocks, thus rendering the fiscal negotiations and determinations complex with regards to funding and compensation. ”The emphasis in the market should be on the development of private companies concentrating on the midstream sector. These companies investing in the construction and operation of pipelines, or other transport systems such as CNG or LNG vehicles, would have the opportunity under specific fiscal terms to collect tariffs from producers or to buy the gas at the outlet of the field, transport it and sell it to the customers. “All companies involved in the value chain need to understand the other parts involved in the process. There is a lack of understanding of the risk and costs associated with natural gas exploration, development and production.”
To improve the value chain, Proust declared that revisions must also be made to upstream concession frameworks, while noting that on the production-sharing concession side, the lack of fiscal gas terms creates uncertainty for producers on their future returns. She said, “On major production-sharing concessions, such as the Egina project, we hope that the producers’ association can negotiate terms for gas production. Most companies in the deep offshore are compressing and re-injecting the gas, while this gas could go to the domestic or export markets. “In the fabrication and services segment the most significant driver of cost is the lack of competition. By breaking monopolies and expanding the competitive segment of contractors and suppliers, companies are forced to become more competitive with regards to their pricing and quality of services. Assisting new Nigerian companies to challenge existing ones is of the utmost importance.” However, despite the gloomy picture painted by Alex Gboyega et al, immediate past minister of state for petroleum resources, Dr. Ibe Kachikwu said the Federal Government had taken significant steps towards developing the oil and gas value chain and creating the necessary linkage that would drive Nigeria’s economic growth and development.
Kachikwu, in a chat with newsmen, disclosed that in the upstream, the country had grown reserves by over 600 million barrels, rising from 36.18 million barrels to 37.2 million barrels, while the country had been able to grow the gas reserves by five trillion cubic feet, from 192 trillion cubic feet to 199.09 trillion cubic feet of gas in two years. He said, “We have been to discover so many new fields, like Owowo. We have been able to grow rig activity in the country. When we joined, the rig activity in the country was about two to three rigs that were operating in Nigeria at the time.
“As at 2017, we had about 21 rigs in operation, up from about 16 rigs in operation in 2016. And hopefully, with the big Floating Production Storage and Offloading, FPSO, it is beginning to look as if there are possibilities in Nigeria, we expect to see lot more real activity in Nigeria. “Crude oil production had been sustained at a fairly large level. We started at 800,000 barrels, we have grown it to about two million barrels. We should be doing more, but for the cyclical difficulties in terms of occasional pipeline disruptions, occasional closure for purpose of maintenance. We are averaging about two million barrels, and about 300,000 of that is roughly condensates. “Really, by the end of January 2019, we had grown production to about 2.2 million barrels which have been our signpost. In addition to that, there are 30 other field works that have been approved by the DPR, which have the capacity of adding about 500,000 barrels per day production.
“If you add that, we expect that, all things been equal and if we are working as we should, by the end of 2019, we should be averaging 2.5 million barrels production, which would be the first time that would be done in the country.”

Kachikwu added that the country has a couple of potential Final Investment Decisions, FID, that are in the pipeline, noting that Bonga South-West is obviously a big one for the country. He said, “We are hoping that FID would come in early first quarter next year. We have Zabazaba, still a few things to be dealt with, but if we succeed in completing all the processes that we need to that is another big FID. Those two have the potential of throwing in close to 700,000 barrels of potential production into this country.
“If we work hard enough, by the end of 2019, 2020, we ought to begin to see Nigeria’s production rise from the usual 1.8, 2.0 million barrels, up to between 2.5 million and 3 million barrels. This is the target that I had set in 2015.”

In the gas area, the former minister explained that the country had done tremendous work, noting that gas production had risen by about one billion cubic feet per day, rising from 7.16 billion cubic feet to 8.3 billion cubic feet. The effect of this, he maintained, was a 16 per cent increase in terms of gas to power supply, adding that if the issue of infrastructure could be sufficiently addressed in the country, the government would be able to power every Nigerian village. Continuing, Kachikwu said, “In the Midstream and downstream sectors, we have struggled. I would love to see a day when there would be no fuel scarcity in this country. But for that to happen, there are certain realities. The liberalization of the sector is going to be a panacea to been able to solve this. As long as we continue to subsidise products, create market-unfriendly type practices, we would continue to struggle.
“We need to find a way that would meet the needs to provide products sufficiently for the populace and at the same time to be able to free the sector to be able to grow. “Investments are lacking in this sector. We have been working on rebuilding the three refineries or four refineries that are owned by the NNPC. NNPC have struggled to find the financiers, now financiers have finally been found, but to agree on the terms have been difficult. “Hoping that by end of this year, end of first quarter next year, we would have completed the commercial aspects of this financial undertaking, which is in the excess of over $2 billion and also allow the private sector collaborate with the NNPC and repair these refineries and bring back 450,000 capacity refineries back into shape. That is one of the first solutions to solving the fuel crisis.
“We are not going to trade our way out of the fuel crisis by bringing sufficiency, by expanding reserves, by extravagant costs which cost the country a lot of money; that is not the solution. The solution is to get our refineries working.” In the aspect of refining, Kachikwu said the country’s current refining capacity was 80,000 barrels per day, adding that the country was also working with the Niger Republic to build a refinery in Katsina.The agreement with Niger Republic, he explained was still going through diplomatic process and would be private sector driven.

In addition, Kachikwu said the country was also working with Agip, to look at building a refinery in Bayelsa. He said, “Two things most happen: refineries must come to Nigeria, or become prevalent in Nigeria. We need to process a lot more of the crude oil than we process here and I have served notice to oil companies who have been complacent in enjoying the fact of producing crude oil and shipping it out.

“The issue is that until you fund and build the refineries, until you find the investors and they work, you are not going to solve the problem. I am mindful of that, I am working very hard with the NNPC on that; NNPC is driving that process; I am the policy driver, they are the mechanics of that process. “What is important is that for the first time, the President had been able to say that he would repair the refineries without government money. Nobody had been able to give attention to that. No government one penny had been spent on any refinery. Every effort we are making is to go find private investors to collaborate with us; save government money and be able to put these refineries in working order.
“This is because every TAM that we have done in the past has always come up with stories. Wrong contracting models, wrong delivery, wrong work, and we don’t want to go that way. Let the private refiners work with us, do this, and help co-manage these refineries and let us get it to work. Let us focus on being able to deliver instead of focusing on my head.” Looking ahead, Kachikwu disclosed that the country must address three critical issues in order to strengthen the Nigerian oil and gas value chain for a sustained economic growth.
He identified the issues as, “The removal of subsidy and how do we deal with it and the liberalization of the downstream sector; refineries revamp, we must complete. Increasing crude oil production to 2.5 million barrels must be a target we must push. Domestic gas and crude supply obligations, we must pursue. “Transparency in FAAC remittances, so that there is no dispute between the assembly, governors and us in terms of what we made and what we sent from NNPC, that needs to be addressed. Partnering for uninterrupted power supply, working with oil companies is key.

“Environmental cleanup; we have started in Ogoni, we need to extend to other areas. Infrastructure revamp in the sector is key, community empowerment programme is also key. There is paucity of work in this sector.”
In its own submission, PricewaterHouse Coopers (PWC) in its report titled, The Global (Political) Economy and the Future of Oil’, advised operators and stakeholders in Nigerian oil and gas industry to push full speed ahead on fossil fuels by embarking on forward integration along the oil and gas value chain; provide service offerings to self to cut cost; as well as provide service offerings to the industry. It added that efforts should be geared towards diversification of portfolio, through expansion to other industries outside energy; and forward integration along the gas to power value chain, while it also urged operators to focus more on renewable energy, especially on solar, wind and biomass. It noted that, “In view of the industry’s transformation, industry players need to pay attention to four essential strategic elements. Create a strategic identity based on your inherent capabilities and a vision for how those capabilities can best be employed in the energy sector in the coming year.

 

 

“Realign portfolios to focus on strengths and new growth areas. Invest in agility through digital innovation. Cultivate and hire the right talent.”
From the foregoing, it is evidenced that for the petroleum industry to make meaningful contribution to the Nigerian economy and to impact the lives of the citizens positively, every segment of the industry’s value chain needs to be strengthened and linked appropriately.
The necessary linkage of the oil and gas value chain and the Nigerian economy would spur micro and macroeconomic, would lead to increase value creation for the economy, tackle unemployment and insecurity, as well boost the petroleum industry’s contribution to Nigeria’s Gross Domestic Product (GDP).

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