The future of oil, gas and power

For the past three decades, Nigeria has been the hub for hydrocarbon exploration, production and services in the West African Gulf of Guinea region, as oil has become a major source of revenue and foreign exchange for the country's economy. With an estimated sustainable production of 2.7 million barrels of crude oil daily and proved reserves of 37 billion barrels, Nigeria is rated the tenth largest producer of crude oil globally and sixth largest exporter among Organization of Petroleum Exporting Countries members. The country's possession of natural gas (distinguished from associated gas) reserves estimated at 187 trillion cubic feet (TCF), makes her the world's seventh largest gas reservoir. Further reports estimate undiscovered gas reserves of between 300 and 600 TCF with daily gas production of about 4 billion cubic feet (BCF). Despite this impressive profile, the oil and gas industry has not generated the type of multiplier effects necessary to facilitate Nigeria's sustainable development and economic growth. Against this backdrop are the inherent challenges of instability, politicking, corruption, and the dearth of a solid legal and fiscal regime.

In a bid to turn around its fortunes and align with international best practice, current reforms include the Nigerian Oil and Gas Industry Local Content Act, which was passed in 2010 to allow for the use of indigenous human and material resources, and the Petroleum Industry Bill (PIB), which though is yet to be passed into law, contains innovative provisions for the Nigerian oil and gas sector.

Quite apart from core exploration and production activities onshore, offshore, and also in the Joint Development Zone between Nigeria and São Tomé e Principe, there has been a recent shift in focus to the gas industry as the country's money spinner of the future. At present, about 75% of gas produced as a consequence of oil production activities is flared, which not only results in pollution but a colossal loss in revenue. However, with efforts at reducing this environmental menace, the signing of the Gas Master Plan, and the commitment by the Nigerian government to Gas-to-Power Projects, the nation's gas agenda appears robust and aimed at the growth of power demand.

Of all the myriad challenges that confront the energy sector in Nigeria, none is as profound as corruption. While Nigeria has earned billions of dollars from oil and gas exploration and production activities, poverty still reigns supreme while the country's sustainable development and economic growth remains at best an aspiration. With an almost complete dependence on oil revenue, alternative economic opportunities such as agriculture, solid minerals and manufacturing have remained untapped. Among the endless catalogue of challenges which undermine the development of the energy and natural resources sector are:

Nigeria operates a Joint Operating Agreement (JOA) and Production Sharing Contract (PSC) model with the international oil companies (IOCs) and hence owns equity stakes in joint ventures with these companies through the Nigerian National Petroleum Corporation (NNPC) and its subsidiaries. This has been a burden on Nigeria's ability to undertake the funding obligations required for petroleum projects, particularly as other sectors of the economy require funds too. Hence the joint operating partner carries the financial burden of exploration and production through alternative funding arrangements.

Petroleum operators in Nigeria are statutorily required to observe the highest level of international environmental safety standards. However, the combined failings of regulatory agencies such as the Department of Petroleum Resources (DPR), the National Environmental Standards and Regulatory Enforcement Agency and lack of enforcement and punitive mechanisms have resulted in shoddy enforcement of legislation. This has led to unimaginable environmental and social damage especially in the Niger Delta Region of Nigeria – gas flaring, oil spills and leakages, among others. IOCs flagrantly disregard domestic laws and international best practices without sanctions. This has heightened the social unrest and instability in the area, as well as direct bunkering or theft of crude oil from pipelines, flow stations, and export facilities. Attempts are being made by the government at solving this problem by beefing up security in the region as well as setting up amnesty programmes.

Nigeria is unfortunately plagued with government inefficiency and corruption in virtually all sectors of the economy, most significant of which is the oil and gas sector. This is quite glaring in the non-existence of accounting methods and principles, moribund refineries, non-transparent bids and contract-awarding rounds, indiscipline and gross embezzlement of public funds by public officials. Some of the direct fallout of these challenges includes the recent removal of fuel subsidy and the subsequent probe of public officials within government agencies. Decaying infrastructure compounds the problems: refineries, transportation systems, as well as communication, security and law enforcement systems are all significant challenges to the sector.

In light of recent public awareness and interest in government activities fueled by revolutions around the world, it is hoped that the reforms currently on-going in the Nigerian oil and gas sector are the first step in the right direction. Overhauling the industry through the establishment of distinct regulatory agencies, reduction of government control of the sector through the introduction of commercially-competitive measures, as well as the introduction of competitive pricing mechanisms all create positive expectations.

The Petroleum Act, which is the principal petroleum legislation in Nigeria, has remained largely static since its enactment in 1969. Other relevant legislation (and amendments) in this regard is scattered over several Government Gazettes and has become obsolete and deficient in meeting the demands of twenty-first century petroleum operations in a developing country.

These short-falls, among others, prompted the establishment of the Oil and Gas Reform Implementation Committee (OGIC) in 2007 with the mandate to make recommendations for restructuring Nigeria's oil and gas sector. This birthed the Petroleum Industry Bill (PIB) which is yet to be passed into law in Nigeria.

The PIB is an attempt to revamp Nigeria's petroleum revenue systems with new fiscal regimes designed to energise the petroleum sector and create linkages with the other sectors of the economy, while remedying the stale legal regime and subsequently promoting transparency and accountability. In summary, the PIB contains fiscal instruments and terms that would enhance government access to gross benefits and sustained revenues from the petroleum sector. Through the Bill, the government recognizes the need to ensure that the fiscal regime aimed at improving government access to revenue does not weaken investors' ability to maximize shareholders' value.

Upon its passage into law, the PIB will result in the repeal of 16 petroleum industry acts to create a single piece of legislation for the entire industry. It would create new regulatory agencies and transform existing institutions into efficient and profit-oriented enterprises. Among its appeal is the likelihood of having the NNPC function as a purely commercial venture similar to state owned national oil companies in other jurisdictions (Brazil's Petrobas or Norway's Statoil). Its present functions shall be transferred to other newly created entities proposed under the PIB such as the Nigerian Petroleum Assets Management Company Limited and the National Oil Company among others.

The PIB will substitute current petroleum profit tax with the national hydrocarbon tax, increase royalty rates on the basis of acreage size, make a separate provision for gas operations distinct from oil, and make onshore and offshore operations distinct with reference to taxation. Similarly, operators in the oil industry will be required to pay 70%, up from the 42% currently payable to the Federal Government. As drastic as that increase may seem, it is still lower than the tax regime applicable in other jurisdictions such as Angola, where operators are subject to 78% in tax to the government. In Saudi Arabia and Libya the figure is 85%. The PIB further makes provision for the implementation of the Nigerian Oil and Gas Industry Content Development Act (the Local Content Act) enacted in 2010.

In an attempt to focus and develop the skills of its citizens towards enhanced participation, as well as break the monopoly of the sector by foreign nationals, the 2010 Local Content Act defines Nigerian local content policy as:

The Act specifically advocates the full engagement of indigenous companies in all spheres of the industry, giving preference to Nigerian indigenous companies while encouraging in-country capacity building via optimum use of Nigerian goods and services, as well as human and material capacity development and improved income per capita.

Consequently, only companies incorporated under the Companies and Allied Matters Act of Nigeria (CAMA) 1990, with no less than 51% equity shares owned by Nigerians, are qualified to participate under the priority consideration provision of the Act. Multi-nationals, whose subsidiaries are registered in Nigeria under CAMA, but whose majority equity shares are owned by holding companies operating outside Nigeria, do not qualify as Nigerian indigenous companies under the Act. The Act also reviews the principle of bid evaluation based on the lowest bidder in favour of Nigerian indigenous companies.

Other key provisions of the Act include:

• Establishment of the Nigerian Content Development and Monitoring Board (the Board) to monitor and ensure compliance with the provisions of the Act.

• Requirement for all industry players to submit a Nigerian Content Plan to the Board in bidding for any license, permit or interest and before carrying out any project in the industry.

• An employment and training programme requirement for every project, giving first consideration to Nigerians for employment and training. However, where Nigerians cannot be employed for lack of training and/or requisite skills, the operator must make efforts within a reasonable time to provide the requisite training for the benefit of Nigerian nationals.

• Contracts with a total budget exceeding US$100 million are to contain a labour clause mandating the use of a minimum percentage of Nigerian labour in specific cadres while all junior and intermediate positions are expected to be filled by Nigerians.

• Establishment of the Nigerian Content Fund through the contribution of 1% of the value of every contract awarded to operators and contractors, for the purpose of financing the implementation of Nigerian content development.

• Professional services including legal, financial and insurance services within the industry must be provided solely by Nigerian firms.

• An e-market place, to be established by the Board, is to serve as a virtual platform for buyers and sellers of goods and services in the sector, allowing speedy and transparent transactions.

• The development of a Joint Qualification System under the Act to serve as a databank of available capacities and capabilities in the industry in Nigeria.

While the PIB and the Act give clear indications of a promising future and set Nigeria on the path towards achieving sustainable growth and development in the oil and gas sector, immense investment opportunities abound in other sectors of the economy. The manufacturing industry (marine vessels, oil pipelines and other ancillary materials) for instance is projected to grow massively as a consequence of these innovations.

Foreign direct investment into Nigerian indigenous companies without necessarily becoming shareholders would be a good invest­ment strategy to take advantage of the local content initiative. Furthermore, partnering with strategic Nigerian firms, as well as leveraging on education and training programmes, presents an advantageous opportunity for foreigners playing within the industry rules.

Current initiatives in the country tend to suggest a gradual shift in focus from core oil exploration and production to the gas and power sectors. These two areas could provide a number of opportunities.

With its huge gas endowment, a combination of proved, probable and possible reserves of 300–600 TCF7, Nigeria's natural gas sector presents an investment haven even as gas is yet to be explored. Its discovery is the result of oil exploration projects in associated form, comingled with crude oil. Following several years of low gas use, the sector is confronted with a huge potential for growth from its current 5BCF per day to over 20BCF per day by 2015, giving Nigeria the world's most aggressive gas growth forecast. To achieve this feat and maximize the revenue from gas, the Nigerian government initiated the Gas Master Plan (GMP) under three subs, namely: the Domestic Gas Supply Obligation; The Gas Pricing Framework and the Gas Infrastructure Blueprint. The sector, which hitherto had been constrained by the absence of pricing, fiscal terms, institutional and infrastructural arrangements, legal and regulatory framework and financing, is in line for a surge and repositioning following the development of the the GMP.

The Natural Gas Policy (NGP) is aimed at promoting Public–Private Partnerships between the government and private sector investors. This will result in the orderly and rapid commercialization of the country's natural gas resources for the development and diversification of the domestic economy. A combination of the the GMP and NGP will provide the framework for Nigeria to maximise value from its gas resources through leveraging the multiplier effect of gas in the domestic economy and optimising the country's share in the high value export market.

The breadth of opportunities surrounding the development of the gas industry stretches from manufacturing pipelines, shipping, storage and transportation to the development and production of the final products and their retail.

Nigeria's electricity sector has experienced several challenges over the years and remains underdeveloped. Nigeria currently has existing capacity to generate about 6000 megawatts (MW) of electricity, of which about 3600 MW is actually generated for a population of about 158,259,000. This compares very poorly with South Africa's 44,074 MW for a population of 49,320,150, and Ghana's 2,111 MW for a population of 23,837,261. Per capita, this equals 22.8 W of electricity for each Nigerian, which is pitiable compared with 535.8 W for a Brazilian; 1093 W for a South African and 88.6 W for a Ghanaian. Today, the state of the sector is a barrier to economic development in the country, thus a priority area for intervention under the Federal Government of Nigeria's reform agenda.

Industry experts have emphasised the importance of gas because of its clean burning nature, as a source of fuel for the Nigerian power sector. The Federal Government of Nigeria has now adopted a holistic approach towards restructuring the power sector beginning with the Gas Master Plan and the different Gas-to-Power projects designed to facilitate the supply of gas to government owned power plants for electricity generation. In addition, the reforms have seen the unbundling of the Power Holding Company of Nigeria (PHCN) into eight generating companies, of which only six are operational8, one transmission company and eleven distribution companies. This arrangement is expected to encourage private sector investment, particularly in generation and distribution. The Nigerian Electricity Regulatory Commission has been established as the sector's regulator and the Nigerian Bulk Electricity Company as the bulk purchaser from independent power producers, entrusted with the provision of the government's credit enhancements. In addition, there is a rolling guarantee supported by a counter guarantee issued by the Federal Government, a World Bank Partial Risk Guarantee backed by a Federal Government indemnity, as well as a government treasury bond to aid developments within the sector.

The Electric Power Sector Reform Act, which was enacted in 2005, provides an enabling regulatory framework for private sector participation. The government intends to use the country's vast natural gas resources as a fuel source. In this regard, additional support and incentives are given to private investors that are willing to explore and produce the country's natural gas. The government targets capacity increases in each section of the electricity value chain, with 40,000 MW set for the year 2020, investments worth US$3.5 billion per annum for the next ten years in power generating capacity, and with corresponding investments in fuel to power infrastructure, power transmission and distribution networks.

As the government does not intend to fund these projects, this opens huge investment opportunities (in gas and power) to private sector investors around the globe.

Foreign participation in the Nigerian petroleum industry dates back to the twentieth century. Since the 1970s, Nigeria has gradually transformed into a petroleum-based economy, without the multiplier effects necessary for Nigeria's economic growth and sustainable development. The series of on-going reforms in the industry, especially the Local Content Act and the PIB are aimed at correcting this aberration by restructuring the industry to promote transparency and accountability while enhancing and sustaining indigenous expertise as well as government access to gross revenue from the industry. However, contrary to the insinuations by some industry players, the fiscal incentives of the PIB would not operate to disenfranchise investors as this would defeat the whole idea of revamping the industry. Furthermore, the local content policy would lower production and running cost of companies by using national labour and raw materials while fostering business relationships through the collaboration of both international and indigenous players in the industry.

Without doubt, the shift in focus to the gas and power sector, as well as the increasing awareness of the importance of renewable sources of energy in Nigeria, are definite pointers to a very positive outlook of investing in the Nigerian energy and natural resources industry.

Kingsley Sawyerr
		Aina Blankson 5/7 Ademola Street S.W. Ikoyi, Lagos Nigeria T: +234 1 898 0882-3 / 271 0566 F: +234 1 271 0566 E: k.sawyerr@ainablankson.com W: www.ainablankson.com Kingsley's practice is centered on Oil & Gas and Energy, as well as structuring corporate and commercial related transactions. He has been involved in advising, negotiating and rendering opinions on several projects and agreements regarding government investments. He has made laudable strides in the successful negotiation and execution of various Public-Private Partnership agreements between various state governments and private sector investors on diverse projects in the power, transport and infrastructure, aviation and housing sectors, among others. He obtained his law degree from the University of Ibadan (LLB) and masters from the University of Dundee (LLM Petroleum & Energy), and is a member of the London Court of International Arbitration (LCIA) and the Energy Institute (EI) in London.

Chisom Udechukwu
		Aina Blankson 5/7 Ademola Street S.W. Ikoyi, Lagos Nigeria T: +234 1 898 0882-3 / 271 0566 F: +234 1 271 0566 E: c.udechukwu@ainablankson.com W: www.ainablankson.com Chisom, currently engaged in the Corporate and Commercial Group, as well as the Power and Energy Group of the firm, holds a bachelors degree in law and a masters in Oil and Gas Law from the University of Aberdeen, Scotland. She is an assiduous, highly ambitious and astute lawyer endowed with a brilliant mind and unique flexibility. Career interests include Energy and Power, International Tax Law and Alternative Dispute Resolution (ADR). Chisom is experienced in Corporate Restructuring, Project Finance & Company Secretarial transactions. She is a team-player, often instrumental to the development of resourceful and effectual strategies aimed at the success of transactions in which she is involved. Chisom is a member of the Nigerian Bar Association and the Association of Professional Negotiators and Mediators (Nigeria), as well as a student member of the Institute of Chartered Company Secretaries & Administrators (Nigeria).

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