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OVERVIEW OF THE OIL AND GAS INDUSTRY

THE NIGERIAN OIL & GAS INDUSTRY

INDUSTRY OVERVIEW

Nigeria, with a population of over 140 million people, is the largest oil producer in
Africa and the sixth largest producer in OPEC with an average of 2.6 million barrels
per day (bpd) (2006E). Nigeria's economy is heavily dependent on the oil sector,
which account for nearly 80% of government revenues and over 90% of total
foreign exchange earnings. Estimates of the total crude oil reserves vary, but are
generally accepted to be about 36 billion barrels, although new offshore discoveries
are likely to push this figure to about 40 billion barrels.

Most of Nigeria’s crude oil production, comprising 10 major crude streams (including
condensate), is light sweet crude, API grades 21-45, with a low sulphur content.
Nigeria's marker crudes on the International oil market are Bonny Light and
Forcados. All of the crude oil in Nigeria comes from numerous, small, producing
fields, located in the swamps of the Niger Delta, and product is exported through 7
terminals, and a number of floating production vessels. There are about 606 fields,
most with less than 100 million bpd of extractable reserves. Numerous other fields
are known throughout the Niger Delta, and some of the marginal fields have
become the focus of a longstanding debate over their possible reallocation to small
private local companies. The Oil Industry remains the backbone and driver of
development across other sectors of the economy, especially infrastructure in other
regions of the country apart from the Niger Delta. In realizing the increasing
capacity of the sector, the sector has witnessed a number of government initiated
reforms including the privatization and unbundling of the Nigeria National Petroleum
Corporation into several companies.
Recent key points on the Nigeria Oil and Gas Industry include the following:

OIL

Proven Oil reserves of 35.2 billion barrels and plans to expand to 40 billion

barrels by 2010

�Joint ventures account for 95% of Nigeria's crude oil production

�NNPC estimates that $7 billion per year will be necessary to fund exploration
and development in hopes of reaching its production targets.

�Crude oil producers will be required to refine at least 50 percent of their


production in the country

�Issuance of 13 licences for the construction of additional private refineries.

�Increasing commitment to the Nigerian Content program with the plan to


achieve 70% local content by 2010.

GAS

�Natural gas reserves of 185 trillion cubic feet (01/06)


�Plans to raise earnings from natural gas exports to 50 percent of oil revenues
by 2010

�Nigerian gas flaring accounts for 20% of the world total which could be ended
by 2008 by collecting associated natural gas and processing it into Liquefied
Natural Gas (LNG).

�NNPC estimates that $15 billion in private sector investments is necessary to


meet its natural gas development goals by 2010

�The $7 billion Nigeria-Algeria (NIGAL) project is planned to be finished by


2009. 4,000 km pipeline from Nigeria to Algeria's export terminals on the
Mediterranean.
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OVERVIEW OF THE OIL AND GAS INDUSTRY CONTD…

UPSTREAM

The industry is dominated by 6 major joint venture operations managed by a


number of well known multinationals, Shell, Mobil, Chevron, Agip, Elf, and Texaco.
The production concessions are managed through joint venture companies, in which
the Nigerian Government, through the Nigerian National Petroleum Company
(NNPC), holds about 60% shareholding. The foreign joint venture partners manage
the operations, under a joint equity financing structure regulated by a Joint
Operating Agreement. All operating costs are financed jointly, by a system of
monthly cash-calls. A Memorandum of Understanding (M.O.U.) defines the
commercial agreement between the partners and the government.

A small production sharing operation, previously managed by Ashland, has now


been taken over by Total. Apart from the major joint venture operations, a number
of private Nigerian firms have been awarded concessions, and most have been
involved in the exploration of their blocks over the past 2-3 years. Three of the firms
have commenced production-Amni International, Dubri Oil Limited, and
Consolidated Oil. The government plans to press ahead with more local investment
in the oil sector, and have issued directives guiding the development of ‘marginal
fields’ comprising small, abandoned fields, which have remained undeveloped by
their joint venture partners. Offshore companies have been invited to participate in
the development of these fields.

The last few years have been a difficult period for Nigerian Upstream oil sector-
community restiveness throughout the Niger Delta, increasing violent kidnap of oil
workers, massive squalor and environmental degradation with monumental impact
on the livelihood of the population. Despite all of these, given the important role
that this sector plays in the economy of Nigeria, the business of oil continues.

DOWNSTREAM

The refining, petrochemical, and transportation sectors of the oil industry in Nigeria
are controlled by government and indigenous operators and are an area in which
government has made considerable investment over the years. The downstream
sector is beset by a non-commercial pricing environment and lack of resources to
maintain and manage the infrastructure properly.

The focus of the government's policy on the downstream sector can be summarized
as follows:

• To maintain self-sufficiency in refining

• A need to ensure regular and uninterrupted domestic supply of all petroleum


products at reasonable prices

• To establish infrastructure for the production of refined products for export.

The oil marketers in the downstream sector in Nigeria are divided into two
segments: the majors and the independent Nigerian marketers. Currently, the
independent marketers number over 500, with a market share of less than 30%.

The downstream sector has been a major problem for the country over the past
three to four years, as the NNPC has found it impossible to maintain the country's
four refineries, and to provide adequate supply of petrol, diesel, and kerosene
nationwide. The NNPC recently completed the 3rd phase of their national pipeline
distribution system; however large segments of the distribution system are in
urgent need of maintenance.
OVERVIEW OF THE OIL AND GAS INDUSTRY CONTD…
The country has been relying on massive importation of Petroleum products in order
to augment the domestic production and hence meets local consumption
requirements. According to the Department of Petroleum Resources’ figures
released for January to June 2006, a total of 1.55 million metric tonnes of Premium
Motor Spirit (PMS) otherwise known as Petrol was imported into the country,
Automotive Gas Oil (AGO) also known as Diesel showed 323,266 metric tonnes
while Dual Purpose Kerosene importation for the period was 165,818 metric tonnes.

Despite the above, there were still reported cases of shortages of the products in
some parts of the country even up till date. A country whose local consumption rate
is put at about 30 million litres per day, eradicating shortages therefore requires the
players in the industry to do more in ensuring availability of the products
nationwide.

NATURAL GAS

Estimates of Nigeria’s proven natural gas reserves are approximately 185 trillion
cubic feet. Nigeria has the tenth largest reserves in the world, approximately 30%
of African gas reserves. Much of this is associated gas, as many Nigerian oil fields
are saturated, and have primary gas caps. There is presently no dedicated
exploration for gas. About 75% of the associated gas is currently flared off, as no
domestic gas infrastructure or market exists, while fiscal terms remain unattractive.
Growing pressure from environmentalists, has now led to increasing utilisation of
the associated gas, and Shell has committed to ending all flaring of associated gas
from their fields by the year 2008. This has been embodied in the National Gas
Policy.

A number of major gas projects are under way, and more are being planned. The
largest and most significant of these projects is the Liquefied Natural Gas Project
(LNG). The LNG project, with a development budget of approximately $4 billion, is a
joint venture with 4 shareholders- NNPC (49%), Shell Gas (25.6%), CLEAG-(an ELF
subsidiary)(15%), and Agip (10.4%) with Shell providing the technical and project
management capabilities.

There are plans for the construction of a Trans West African pipeline to supply
natural gas to Benin Republic, Togo, and Ghana. The gas is intended to be used to
generate electricity in the three countries, and would require the construction of
about 600 kilometres of pipeline. The World Bank has shown interest in providing
project finance, and both Shell and Chevron have shown an interest in the project.

To drive significant investment opportunities in the sector, the Nigerian Government


has introduced a number of incentives in an attempt to encourage new foreign and
domestic private sector participation in the oil and gas industries:

1. Licensing of private players

2. Tax Holidays: A five year tax exemption will be granted for all new plants,
from start of production.

3. Equity Structure: Foreign private investors can now own 100% of the Shares in
any venture incorporated in Nigeria.
4. Guaranteed Export Earnings: Earnings from the export of any local production
will be permitted to be retained in approved export accounts in any country
nominated by the investor.

Source: NNPC Website, Research Department of ICML and other independent sources.