Oil: Uneasy bedfellows
On the surface, Nigeria's oil and gas exploration and development programme is well on course; however a strong undercurrent of distrust between the government and its multinational partners could yet derail progress. Jato Thompson reports.
Last October Gen. Sani Abacha, announced that Nigeria had hit the 25bn barrels oil reserve targeted for 1998. Production capacity accordingly shot up from 2.0m barrels per day (bpd) to 2.5m. The multinational oil prospecting companies have continued to make impressive strides in their exploration and production (E & P) activities, especially in the deep-water areas.
Recent intensification of drilling at the Ngolo Oil Field by Shell Nigeria Exploration and Production Company (SNEPGO) and on Anwa 1 and 2 off-shore (Akwa Ibom State) by Elf Petroleum, seems to bring Nigeria's 2010 40bn barrel reserve target within reasonable reach. An oil output of over 500,000 b/d is expected from the hitherto unexplored offshore basin.
There have also been clear signs of success in gas development and utilisation. Projects include Chevron's $550m Escravos Gas Project (EGP), the $3.8bn Nigerian Liquefied Natural Gas Project (NLNG), the $400m Obite Gas Project of Elf Petroleum, the $900m Natural Gas Liquids (NGL) by Mobil Producing, and the $1.0bn (N84bn) integrated gas development programme of Shell's Petroleum Development Company of Nigeria.
These accomplishments, among others, have gone some way to achieving the nation's objectives in optimum exploitation of its abundant hydrocarbon resources. However, this success hides a growing rift between the Federal government and its joint-venture (JV) partners.
Over the past three years, this relationship has been uneasy at best, characterised by a lack of trust, arbitrary cuts in operating budgets, and continued defaults in cash call obligations.
In August 1996, Petroleum Resources Minister, Chief Dan Etete, laid into multinational oil prospecting and service companies and accused them of a whole host of sins. These included: (1) evasion of taxes on a massive scale. Chief Jimoh Ibrahim, executive consultant to the Federal government on monitoring the withholding taxes in the petroleum sector, claimed last year that six companies owed a cumulative total of N22.75bn; (2) lack of accountability and transparency in joint ventures; (3) abuse of the expatriate quota; (4) discrimination against Nigerians in key job opportunities and transfer of technological know-how; (5) lack of regard for the environmental health of host communities; and (6) continued failure to exploit about 183 oil fields estimated to hold at least 800m barrels of crude oil.
Budgetary allocations for JV operations, apparently influenced by government apprehension, have been far below projections made by JV partners. For 1996, as in 1995, the government approved $2.05bn (N174.25bn) for the Nigerian National Petroleum Corporation (NNPC) to fund its 57% equity holding in the seven oil prospecting joint ventures. The amount represented 30% of the $3.0bn (N255bn) requested by the partners. In addition, the government continued its pattern of defaults in cash-call payments, especially between 1995 and 1996. This has had far-reaching consequences for exploration and production programmes.
It is on record that in 1997, JV operators who had been promised an upward review in the NNPC's allocation, overspent on their own budgets. The expected adjustment did not materialise, and the operators ended up with huge deficits. In 1996 alone, over N40bn was incurred as excess expenditure by the companies. For this year, despite a marginal increase in government allocation from $2.05bn in 1997 to $2.50bn, monthly disbursements to the joint ventures, during the first quarter, remained at the 1997 rate of $170.83m.
Given these circumstances, oil companies have had to devise radical survival strategies. Measures adopted so far, include: (1) reduction in current exploration and appraisal programmes; (2) deferment or outright cancellation of some scheduled exploration activities; and (3) rationalisation of personnel requirements and community development programmes.
Petroleum industry operatives have pointed out that recent successes in oil exploration and gas development have come about as a result of past investments and funding arrangements separate from the JV schemes. The increase in the oil reserve level (to 25bn barrels), for instance, is attributed to discoveries made between 1995 and early 1997 in the deep off-shore areas, and to operations carried out under the Production Sharing Contract (PSC). The PSC is an arrangement whereby "the operator finances all stages of the operations and is guaranteed a pre-determined share of production in the case of commercial discoveries in the form of cost oil and profit oil," according to Winston Dublin-Green, director of the Department of Petroleum Resources (DPR).
There is still a long way to go to the target 40bn barrels of reserve by 2010 and, indeed, the maximisation of economic gains from the petroleum sector. Oil industry experts believe that government has a number of options, each of which promises an effective approach to project funding: (1) project financing option in which companies are free to raise loans to finance certain projects on behalf of the government and to use proceeds of these to repay such loans; (2) exchanging government equity for cash; and (3) funding programmes which are designed to cover a number of years,
In addition to the promised review of the Memorandum of Understanding (MOU), which governs how oil income is allocated amongst the partners, the companies are demanding an increase in the national fiscal margin up from the six-year-old level of $2.30 per barrel of crude oil produced.
The downstream, (refining, distribution and marketing), picture is equally grim. The Port Harcourt Refining Company (PHRC), with a total capacity of 210,000 bpd, has been due for turn-around maintenance (TAM) since 1996. This is also true for the Warn Refining and Petrochemical Company (WRPC) which has an installed capacity of 125,000 bpd.
The Kaduna Refining and Petrochemical company (KRPC), with a capacity of 110,000 bpd, was due for TAM in 1994, but a contract was awarded to Total Oil International for its rehabilitation and maintenance only two months ago.
From all this it is clear that both the upstream and the downstream sectors have been faring poorly. A more focused programme for the management of the industry is needed if Nigerians are to reap the economic benefits of their country's natural endowments.
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