Nigeria’s oil industry attraction undermined by risks

With highly under-explored oil and gas resources in the country presenting significant upside potential for investors, Nigeria’s oil and gas industry would have seen huge foreign direct investment in recent times but for the risks and challenges plaguing the industry.

Over the past few years, the growing operating risks such as crude oil theft and pipeline vandalism especially on the onshore, pirate attacks on Nigerian waters where oil vessels are usually targeted and the uncertainty in the industry engendered  by the long-delayed Petroleum Industry Bill (PIB), have taken a toll on the industry.

A recent report by IHS, leading global provider of diverse global market and economic information, said international oil majors were reducing their exposure to Nigeria’s onshore due to worsening security and lower profitability combined with continuing regulatory uncertainty.

Josh Holland, senior analyst and Bruce Roderick, energy analyst at IHS Energy Insight, said the intensification of oil majors’ divestment programmes in Nigeria has cast uncertainty over prospects for new investment, particularly where onshore oil is concerned.

Recent investments show appetite remains

Nigeria’s oil and gas industry recently attracted new equity capital from institutional investors and sovereign wealth fund, signaling investors’ appetite for the industry amid challenges.

 Qatari investment fund Al Mirqab Capital recently agreed to buy Heritage Oil (whose main production is in Nigeria) in a £924 million cash takeover through its wholly owned subsidiary Energy Investments Global Ltd, Heritage announced on April 30.

The acquisition of Heritage Oil will provide Al Mirqab with access to a high growth, producing asset base in Nigeria and a diverse international exploration portfolio, the United Kingdom-based company said.

In what is its first major deal in Nigeria, Temasek, the Singapore investment company, in April committed $150 million to become one of the largest shareholders in Seven Energy, an indigenous integrated oil and gas development, production and gas distribution company with interests in Nigeria.

Aside from Temasek, International Finance Corporation, the private arm of the World Bank, invested $75 million and the IFC African, Latin American and Caribbean Fund committed $30 million to Seven Energy.  The capital investment will assist Seven Energy in the development of its growing portfolio of assets in Nigeria, where the Group is focusing on the development of upstream reserves and resources and gas infrastructure to provide gas to the domestic market for power generation and industrial consumption.

What analysts are saying

 “The foreign investors see the possibility of high returns on investment if they partner with Nigerian marginal field developers and independents,” says Wumi Iledare, president of the International Association for Energy Economics (IAEE) and director, Emerald Energy Institute, University of Port Harcourt, in an email response to questions.

We need to put in place fiscal incentives that will make the industry attractive to investors, not just the IOCs, the professor of petroleum resources says, adding that “If the fiscal terms in the Petroleum Industry Bill are progressive, investment will flow because there are still reserves onshore that better technology will bring out.”

Osam Iyahen, senior vice president, oil and gas, Africa Finance Corporation (AFC), says Nigeria remains one of the few remaining prolific, yet highly under-explored oil and gas producing countries, presenting significant upside potential for investors.

 “Given the country’s forecast 7 percent per annum economic growth by 2017 and government’s focus to develop the power sector and related infrastructure to support this growth, there is expected to be strong demand for gas. Recent strategic investments by the likes of Temasek are largely anchored on the thesis of this underlined growth story,” he adds.

An additional attraction is that compared to Latin America and the Middle East, there is less threat of ‘resource nationalism’ in Nigeria, reckons Iyahen. “In other top-tier producing countries foreign companies are generally not eligible for ‘title’ to oil and gas assets, but rather are only awarded service contracts,” he cited.

 “Nigeria is like an island of oil sitting on an ocean of gas and this is attractive to investors. Oil reserves are estimated at 36.8 billion barrels and gas reserves are estimated at 182 trillion cubic feet. Nigeria is increasing gas supply to power; enhancing gas commercialisation and developing infrastructure, and investment is expected to rise in this area,” says Claire Lawrie, head of oil and gas for Africa, Ernst & Young (EY).

Industry analysts have said that the increasing shift by IOCs to the country’s offshore region, which now accounts for about 60 percent of total oil production in the country, signals their continuing appetite for the country’s oil sector despite operational and regulatory challenges.

The Nigerian National Petroleum Corporation (NNPC) recently kicked off fresh exploration campaigns in offshore, onshore and the inland basins of Chad, Anambra, Benue, Bida and Sokoto Dahomey to increase the country’s crude oil reserve and production.

In January 2014, it was reported that five firms had indicated interest to invest in exploration and exploitation of oil and gas resources in the Bida Basin in Niger State, while a Chinese firm has agreed to invest over $10 billion in oil exploration activity, according to Abubakar Baba Jibreel, Niger State commissioner of mining and mineral resources.

Nigeria, Africa’s top oil producer, has seen its crude oil reserves decline from 37 billion barrels to 35 billion barrels, according to the Department of Petroleum Resources (DPR). The country seeks to ramp up its oil reserves to 40 billion barrels by 2020, but the PIB, which is expected to overhaul the industry, is still awaiting passage in the National Assembly.