Overview of the Nigerian Oil and gas Industry
The Nigerian oil and gas industry has been vibrant since the discovery of crude oil in 1956 by the Shell Group. However, the sector was largely dominated by multinational corporations until the early 1990s when Nigerian companies began to make a foray into the industry. Local participation was boosted with the implementation of the Nigerian Content Directives issued by the Nigerian National Petroleum Corporation (NNPC) about a decade ago, and eventually, by the promulgation of the Nigerian Oil and Gas Industry Content Development (NOGIC) Act (The Act) in 2010. The Act seeks to promote the use of Nigerian companies/resources in the award of oil licences, contracts and projects.
In terms of structure, the industry is broadly divided into:
- Upstream sector,
- Downstream sector, and
- Services sector.
The mid stream operations are usually included in the downstream sector. However, a distinction is now being made between the two sectors. Mid stream covers the processing, storage, marketing and transportation of crude oil, gas, gas-to Liquids and liquefied natural gas. 1.1 Upstream sector This sector is characterized by exploration and production of crude oil and gas (petroleum operations). The income of companies engaged in these activities is subject to tax under the Petroleum Profits Tax Act, 2004 (PPTA), as amended. The upstream oil sector is the single most important sector in the economy, accounting for over 90% of the country’s exports and about 80% of the Federal Government (FG’s) revenue. Crude Oil is currently produced from three different basins: the onshore Anambra, the offshore Benin/Dahomey (deepwater and ultra-deepwater) and the Niger Delta (shallow and deep offshore basins). The Niger Delta and Benin basins are known to be the richest basins and hold the vast majority of reserves, and the source of a large portion of current production. During the late 1990s, exploration focus turned to high risk ventures in the frontier basins of deep water offshore, with encouraging success. These ventures are becoming increasingly attractive, with developments in deepwater exploration and production technology. Nigeria’s crude oil generally has a gravity between 21o API and 45o API. Its main export crudes are Bonny Light (37o ) and Forcados (31o ). About 65% of Nigeria’s oil is above 35o API with a very low sulphur content. The country’s proven oil reserves is estimated at about 37.2bn bbl as at the end of 2010, according to the report by the US Energy Information Administration (EIA). Exploration activities have slowed down recently due to the uncertainties surrounding the passage of the proposed Petroleum Industry Bill into law. The PIB is an omnibus legislation, which will introduce significant changes to oil and gas operations in the country.
With respect to gas, a recent BP Statistical Energy Survey1 put the proved natural gas reserves at 5.29 trillion cubic metres, 2.82% of the world’s estimated reserve. Estimates of Nigeria’s undiscovered gas reserves range from 300 – 600 TCF. Nigeria has therefore been described largely as a gas province with some oil. The gas quality is high – particularly rich in liquids and low in sulphur. Due to the lack of gas infrastructure, 75% of associated gas is flared and only about 12% is re-injected.
This is the standard agreement between the national oil company i.e the Nigerian National Petroleum Corporation (NNPC) and a multinational oil company (MOC). Under this arrangement, both NNPC and the MOC contribute to funding oil operations in the proportion of their JV equity holdings, and generally receive crude oil produced in the same ratio.
Companies engaged in this form of arrangement are assessed to tax under the PPTA at the rate of 65.75% of chargeable profits for the first five years of operation (when the company is yet to fully recover its capitalized pre-production cost), and 85% thereafter. The tax payable is modified by the provisions of the Memorandum of Understanding (MOU) between the parties. The MOU seeks to guarantee certain profit margins to the MOC, when crude oil market price falls below certain thresholds. The Parties have since suspended the application of the MOU provisions since crude oil price now exceeds the reference price of $30 per barrel. Major operators in the JVs with the NNPC are Shell, ExxonMobil, ChevronTexaco, TotalFinaElf and Agip. It is however important to note that the JV model is currently being phased out in the oil and gas industry, due mainly to the inability of the NNPC to fund its share of JV costs.