Nigeria’s promising geology

Author: | Published: 1 Sep 2012
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Nigeria's current reform agenda and its Vision 20:2020 blueprint is partly geared towards making more of its natural resources, especially in terms of staking its claim as a gas producer of the future. According to BP, it has an abundance of both gas and oil reserves.

The African continent has 8% of the world's proven oil reserves while Nigeria alone has 28% of the oil reserves of the African continent, surpassed only by Libya. On the production side however, Nigeria produces 28% of Africa's oil, comfortably eclipsing every other country in Africa.

But from 2010 to 2011 Nigeria only managed to boost its oil production by 0.2%, compared to the 9.3% average increase in production across the Middle East, for instance. In fact, Nigeria has barely managed to increase its production over the last ten years and according to the National Bureau of Statistics the oil and gas sector has also shrunk as a proportion of GDP, with a real term 2.32% reduction in oil GDP growth the first quarter of 2012 despite high prices and demand from growing economies such as China.

Crude oil is at the most expensive it has been in the last 40 years, at over $110 a barrel, with the last closest peak as far back as 1980 when prices hit $100 a barrel.

In terms of refineries, Africa lags behind with the lowest capacity of any continent, including Central America (without Mexico), and only manages a throughput that accounts for 1% of the world's production.

Nigeria is even richer when it comes to natural gas. The country has the largest proven gas reserves in Africa accounting for 2.5% of the world's total. Africa as a continent holds 7% of the world's total. This ranks Nigeria as having the ninth largest gas reserves in the world, but the striking thing is that in terms of production in 2011 it lay in 23rd place, behind both Algeria and Egypt despite their much smaller reserves.

Going by prices from Japan LNG cif (cost, plus insurance, plus freight), Average German Import Price and UK BNP, in 2011 gas prices were also creeping up on the back of consistently rising prices since 2009. Rising demand coupled with rising prices should stand Nigeria in good stead.


It is not surprising then that investors around the world see a lot of potential in the Nigerian natural resources sector. Local lawyers are also quick to point out that it is not just a question of oil and gas and that in 2011 they have experienced an uptick in interest in the mining sector from countries including Australia, China, India, Brazil and Korea.

According to Lawrence Fubara Anga of Aelex, there has been interest in gold, lead, tin, bitumen, semi-precious stones and other minerals.

Kamal Shah, head of the Africa practice of Stephenson Harwood, believes LNG is going to be big. "Countries like China and India are trying to secure supplies for the future and they know that gas is on the rise and that Nigeria is cheaper than the Middle East. The Bonny light crude from Nigeria is also very sweet and easy on machines and equipment and a lot more user friendly than other oils."

"Nigeria has huge gas reserves and they are expecting to sell a lot to the Middle East, India and China, which is going to be a big importer of LNG to fuel its power stations and fuel its infrastructure development programme," adds Shah.

Other global law firms also note an increasing diversification of the investor base. "We get three or four requests and week from our global offices with regards to Nigeria," say Clifford Chance partners Kem Ihenacho and Edmund Boyo. Furthermore there has been an increasing demand for gas and gas infrastructure from Nigeria itself.

Activity in the industry in 2011 and the first quarter of 2012 however has been significantly restricted by the uncertainty in the legislative regime.

Oil reserves and production
Country Reserves Bn barrels (end 2011) Country Production 1,000 bbl/day-2011
Venezuela 296.5 Saudi Arabia 11,161
Saudi Arabia 264.4 Russia 10,280
Canada 175.2 USA 7,841
Iran 151.2 Iran 4,321
Iraq 143.1 China 4,090
Kuwait 101.5 Canada 3,522
UAE 97.8 UAE 3,322
Russia 88.2 Mexico 2,938
Libya 47.1 Kuwait 2,865
Nigeria 37.2 Iraq 2,798
USA 30.9 Venezuela 2,720
Kazakhstan 30 Nigeria 2,457
Qatar 24.7 Brazil 2,193
Brazil 15.1 Norway 2,039
China 14.7 Kazakhstan 1,841
Angola 13.5 Angola 1,746
Algeria 12.2 Algeria 1,729
Mexico 11.4 Qatar 1,723
Azerbaijan 7 UK 1,100
Ecuador 6.2 Indonesia 942
Africa Total 132.4 Africa Total 8,804
Top 20 Total 1567.9 Top 20 Total 71,628
World Total 1652.6 World Total 83,576
Source: BP Statistical Review of World Energy June 2012

Natural Gas proven reserves and production
Country Reserves Trillion cubic metres (end 2011) Country Production Billion cubic metres-2011
Russia 44.6 USA 651.3
Iran 33.1 Russia 607
Qatar 25 Canada 160.5
Turkmenistan 24.3 Iran 151.8
USA 8.5 Qatar 146.8
Saudi Arabia 8.2 China 102.5
UAE 6.1 Norway 101.4
Venezuela 5.5 Saudi Arabia 99.2
Nigeria 5.1 Algeria 78
Algeria 4.5 Indonesia 75.6
Australia 3.8 Netherlands 64.3
Iraq 3.6 Malaysia 61.8
China 3.1 Egypt 61.3
Indonesia 3 Turkmenistan 59.5
Malaysia 2.4 Uzbekistan 57
Egypt 2.2 Mexico 52.5
Norway 2.1 UAE 51.7
Canada 2 India 46.1
Kazakhstan 1.9 UK 45.2
Kuwait 1.8 Australia 45
Uzbekistan 1.6 Trinidad & To. 40.7
Libya 1.5 Nigeria 39.9
Africa Total 14.5 Africa Total 204
Top 20 Total 99.4 Top 20 Total 2806
World Total 208.4 World Total 3276
Source: BP Statistical Review of World Energy June 2012

Petroleum Industry Bill (PIB) and Local Content

The PIB has been a long time coming. It is generally accepted that the delay in the passing of the bill has had a very damaging effect on development and investment in the sector. Meanwhile, the Local Content Bill of 2010 seems to have been "fairly successful", in the words of one local partner, in encouraging domestic players and boosting local expertise.

Much of the activity in 2011-2012 has been on the level of local players, such as Oando, Afren, Septa Energy, Shebah Exploration and Production Company and many others, making acquisitions of oil mining leases (OMLs) and marginal oil fields that international oil companies have been divesting from (see Box). Local companies are incentivised by the Act.

The Act also applies to other aspects of transactions such as financing. In the current project for the construction of the Brass LNG plant – Nigeria's third LNG plant so far – the project managers, say lawyers at Banwo & Ighodalo, will be expecting to look for financing later in 2012. That financing will be provided by local banks, in part due to local content rules, and most likely also from international banks, due to the size and longevity of the financing required.

Lawyers agree that the Local Content Act is not watertight but the general consensus is quite positive.

The slow passage of the PIB on the other hand has created enough uncertainty about the legislative regime and future fiscal regime to derail large investments for the time being. Nina Bowyer of Herbert Smith says the firm has continued to be very busy despite the PIB. "People say billions of dollars of investment has been lost in the last few years but investment has continued to flow," she says.

A draft of the PIB is currently being revised by parliament and expectations vary as to when it might be enacted, with optimists looking at 2012 and the rest looking into 2013. Some sources that have seen the most recent draft say it leaves room for improvement. "We expected more but at least it is there and that gives certainty," says one. "Some things are a bit vague, like royalties and rentals [..and] it is still not very clear who will do what, with the NPDC [National Petroleum Development Corporation], which is a commercial arm and will be listed, and the NNPC [Nigerian National Petroleum Corporation], which still seems to have commercial functions."

Consensus on the PIB is that once it is passed it will create certainty (even it is falls short of some expectations) and open the way for investment. Local lawyers are also expectant that investment may come in once the PIB has been brought into law.

For the moment, with a GDP per capita of $1,452 in 2011, according to the World Bank, Nigeria remains one of the poorest wealthiest countries.

Exemplary cases
  1. In December 2010 First Hydrocarbon Nigeria (FHN) acquired a 45% stake in oil mining lease (ONL) 26 from Shell Petroleum Development Company of Nigeria (SPDC), Total E&P Nigeria and Nigeria Agip Oil. FHN is 45% owned by Afren. The acquisition financing of $230 million was provided by Stanbic IBTC, Standard Bank and First City Monument Bank (FCMB). The lenders were advised by Aluko & Oyebode.
  2. In 2012 a consortium consisting of Niger Delta Petroleum Resources and the Swiss Petrolin Group were working on the acquisition of a 45% stake in OML 34 from Shell (SPDC), Nigeria E&P Total and Nigeria Agip Oil. Herbert Smith and Banwo & Ighodalo was advising the acquiring consortium.
  3. In December 2011, Beta Energy, a subsidiary of Afren, secured a $200 million reserve based loan facility from VTB Capital and BNP Paribas, guaranteed by Afren and other subsidiaries. The loan was for the financing of the acquisition of certain oil assets. The lenders were advised by Aluko & Oyebode.
  4. Septa Energy had also established an alliance with the Nigerian Petroleum Development Corporation (NPDC) to develop certain OML assets in the Delta region. Financing was secured in August 2011.

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