Nigeria’s Oil Industry Still In Poor State Despite Reforms

Despite passing the Petroleum Industry Act (PIA) 2021 and a host of ongoing reforms, the hiccups in the oil and gas industry are yet to abate, and have plunged oil production to record low in the past two years.  In this report, Daily Trust on Sunday ex-rays the various factors responsible for the decline in oil production, ranging from a drop in exploration activities as rig count, a major tool for oil drilling, dropped by about 36 per cent since 2019, to massive reports of crude oil theft, as well as the shutting in of drilled crude across selected oil wells over the fear that it could be stolen through the pipes.

Hydrocarbon is currently extracted from 323 developed fields in both onshore and offshore terrains, according to the Nigeria Upstream Petroleum Regulatory Commission (NUPRC). These fields, which either contain crude oil, condensates or natural gas reservoirs, are connected to 265 production processing stations, after which the stabilised oil and gas are exported via 31 export terminals.

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The onshore processing infrastructures are linked to eight crude oil and condensates and gas export terminals through pipelines that span 5,284 kilometres. Some of the pipelines are connected to the three core local refineries that are moribund and undergoing rehabilitation.

Since 2018 when the refineries shut down completely, Nigeria has depended on refineries in Antwerp Belgium, Italy to import its refined or white products, which are heavily subsidised at an initial N4trillion for the 2022 fiscal year, but has been projected to reach N6trn in subsidy cost.

The coming of PIA

After nearly two decades, the Petroleum Industry Bill (PIB) became a law in July 2021, with its immediate implementation that experts believe would have positioned Nigeria for greater gains, especially at a time when global crude oil price rose to ceiling high above $100 per barrel (bbl) band. Through the reform in about one year so far, the NUPRC, an upstream regulator, was created, the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) also emerged and the Nigerian National Petroleum Corporation (NNPC) was commercialised to become the Nigerian National Petroleum Company (NNPC) Limited.

However, in the midst of all these, the production capacity for Nigeria has constantly declined and dropped to about 900m million barrels per day (bpd) in October, according to the commission chief executive of the NUPRC, Gbenga Komolafe, an engineer.

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Oil production volume a challenge

According to the NUPRC, Nigeria produced 311.894m barrels of crude oil in the first 9 months of this year, with another 66.708m barrels of condensate, totaling 378.602m barrels so far.

The country produced 670.854m barrels of crude in 2020, which then dropped to 591.199m barrels last year. Unless interventions are made speedily, oil production volume for this year may fall short of last year’s volume in spite of having the best market price this year, reaching over $100/barrel (bbl) and dropping to about $94/bbl few days ago.

Since mid-2021, Nigeria has been unable to meet its quota of oil production given by the Organisation of Petroleum Exporting Countries (OPEC). The current quota since October is 1.8mbpd, but that has not been met, with officials blaming the theft of crude oil along pipeline routes.

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The combined factors triggered a trendy decline in oil production since 2020. According to OPEC’s latest report for October, Nigeria had produced an average of 1.578million barrels of crude oil per day (bpd) in 2020.

By 2021, the figure dropped to 1.372mbpd and slightly rose to 1.376mbpd in the first quarter of 2022. The oil production figure began a descent to 1.211mbpd in the second quarter as production dropped to an average of 1.092mbpd in Q3. A trend analysis for the third quarter shows that oil production rose to 1.131mbpd in July before wobbling to 1.057mbd in August, and went up slightly to 1.087mbpd in September.

A key worrisome implication of the drop in Nigeria’s oil production is that Angola overtook the country as the highest oil producer in Africa in the third quarter despite Nigeria having the largest crude reserve of 37.046 billion barrels. For instance, in July, Angola was 33,000bpd ahead of Nigeria, the gap fell to just 14,000bpd barrels in August, and by September, Nigeria slightly reclaimed its position of the largest oil producer by 3,000bpd ahead of Angola.

Poor investments mar exploration as rig count declines

Another hurdle for Nigeria is lack of investment so far in the upstream sector. According to reports, its crude oil drilling capacity had dropped by 36 per cent since 2019.

According to OPEC’s September 2022 Monthly Oil Market Report, oil rig count for Nigeria dropped to 10 in August 2022 from 16 that were present in the country in 2019.

The rig is a tool for the extraction and processing of crude oil both at the offshore and onshore exploration sites. It is capital intensive, with most of them owned by foreign oil and gas service industries, according to a record of the rig count position obtained from the NUPRC.

According to the analysis of the rig count depletion, from 16 rigs, the figure dropped to 11 in 20220, which was the COVID-19 pandemic year. However, by December 2021, the rigs have further depleted to seven.

So far, this year, as at August, there were 10 rigs. Eight operated in the first quarter 2022, rising to 10 in Q2 and 11 by July before dropping to 10 in August.

In comparative terms, Nigeria’s rig count is far below those of its peers and even Algeria, which is the third largest oil producer in Africa in terms of oil production volume per day. While Algeria has 33 rigs, Saudi Arabia has 68 rigs, United Arab Emirates (UAE) has 50 and Iraq has 54 to mention a few.

The United States has 602 oil rig counts, rising from 428 units one year ago, according to a report by Baker Hughes North American Rotary. The increase in its oil rig shows increased oil exploration activities in the country.

Crude oil theft, shut-in oil contributing to woes

Authorities in the oil and gas industry have said Nigeria loses over 200,000 barrels of crude oil per day (bpd), cutting production capacity to just 1.1million bpd from a 1.8m bpd quota assigned to Nigeria by the OPEC as at September.

The Group Chief Executive Officer of the NNPC, Mele Kolo Kyari, who described the situation as sabotage, assured that the situation was being addressed by the security agencies towards reviving oil production volume.

To mark the first year anniversary recently, the chief executive officer of the NUPRC, Komolafe, said it was deploying strategies to ensure that operators raised crude oil production to 2m bpd from the current 1.1m bpd by curbing oil theft and allowing oil to flow from some wells that were shut down earlier.

He said, “By our estimate, the current volume we are losing to oil theft oscillates between 80,000 and 100,000 barrels daily.”

Komolafe said the production dropped with the downtime of the Forcados line, a major crude export line, but that with its re-streaming soon by the NNPC and partners, about 400,000 barrels could come on stream, raising production capacity to 1.5m bpd near the OPEC quota.

He also said that due to the crude oil theft, 1.2m bpd of crude was shut-in at oil wells, but there is an ongoing engagement with operators to identify which wells could be opened, and at least 50 per cent of them could be re-opened.

“Our projection is that with this we could have over 2million bpd of crude oil production, which will surpass the OPEC quota,” Komolafe noted.

Plans to raise oil production above 2mbpd

Although there is yet to be new investment into the exploration business, it was also learnt that pacts have been signed to attract investment, with other steps mentioned by the NUPRC to increase production output to over 2mbpd.

The NNPC Ltd has, in the last three months, resolved some oil production disputes recently. Kyari said the NNPC commenced formal engagements with Addax and NUPRC on January 25, 2022, followed by a series of meetings to ensure a swift close-out of the exit discussions and formalities. These discussions eventually paved the way for the preparation and signing of a Transfer, Settlement and Exit Agreement (TSEA) by NNOC and Addax Petroleum Nigeria Ltd for its four oil wells last week.

The protracted dispute on Oil Mining Licence (OMLs) 123/124, 126/137 wells operated by Addax stalled production and investment. China’s Sinopec Group owns Addax with the four OML, which it operates in a Production Sharing Contract (PSC) with the NNPC Limited. The wells are said to have a 22,000bpd capacity.

The first Production Sharing Contract (PSC) for the blocks was initially signed in 1973 between the NNPC and Ashland and terminated after 25 years. Subsequently, the NNPC signed another PSC with Addax in 1998 on the blocks and operated through Addax Petroleum for another 24 years.

The NUPRC, in 2021, said the assets should be returned to the NNPC, and that caused the dispute.

On July 19, 2022, the NNPC was formally commercialised with the unveiling of logos, projections and expectations. Among these expectations is the resolution of oil well disputes between its partners, and an expansion of petroleum retail outlets to over 1,500 units from about 500 units.

Barely a month, precisely in August, the NNPC Ltd and partners resolved a $9bn dispute and signed pacts for six oilfields, while also launching a crude oil monitoring system.

The lingering disputes had attracted $9bn contingency liability, but that has been resolved and the partners signed new oil production pacts for the renewed OMLs for six oil fields, comprising OMLs 125, 128, 130, 132, 133, and 138, for 20 years.

There are also concerted efforts at tackling crude oil theft through the NNPC newly launched crude oil monitoring system and platform.

Following up on this has been a massive ongoing onslaught against oil theft, especially in the Niger Delta creeks through a partnership with security agencies and a contract with Tantita Security Services Ltd belonging to ex-agitator Government Tompolo. Already, illegal pipelines have been discovered, as well as vessels and crew involved in the heinous activities.

What Nigeria must do – Experts

Commenting on the way forward, the chief executive officer/chief economist at EUA Intelligence, Dr Emeka Ucheaga, noted that Nigeria would have to raise oil production to 25mbpd if it would be successful like its oil-producing peers.

In his contribution, a professor of energy economics, Omowumi Iledare, said Nigeria had to find a way to attract investment.

“The only way to attract investment is to guarantee a return on investments comparable to other places and opportunities. This is where governance is very important.

“When a country is not governed well, nobody will bring billions of dollars for investment in the power sector. Investment (in the oil and gas sector) can take eight to 15 years before I begin to enjoy the benefits of my investments,” Professor Iledare stated.

(Daily Trust)