Nigeria: Buhari’s oil industry reforms

On his fourth attempt, Muhammadu Buhari was elected President of Nigeria earlier this year.  Needing his attention was a litany of problems, not least of which was the economy.  With the prolonged drop in oil prices, Nigeria – which relies on crude exports for 70% of government revenues – has had to contend with a big hole in its budget.

Nigeria needs to stop haemorrhaging what money it has if it is to repair the economy and fulfil its potential.  As President Buhari has said: “Given the previous levels of waste and corruption, if we spend what we have more wisely and effectively, we can achieve a great deal more.

The oil industry is a good place to start.  Three areas appear to be the current focus: NNPC, the national oil company; illegal crude theft; and the fiscal terms under which the industry operates.

President Buhari’s appetite to reform NNPC is clear.  He set the tone by firing the NNPC board and appointing an outsider as its head.  Splitting NNPC into two separate entities – a regulator and an investment vehicle – is another welcome move that should improve transparency and governance.  A partial sale of NNPC’s interests is trickier to achieve, but could raise over US$30 billion.

Crude theft is a chronic and endemic problem in Nigeria.  It remains a major source of lost revenue for the government and the oil companies.  Since 2008, more than US$100 billion has disappeared through illegal bunkering and outages from damaged pipeline.  Indeed, a resurgence of violence in the Niger Delta could still follow Buhari’s decision, soon after being sworn in, to revoke surveillance contracts from local militias, while those profiting from illegal crude theft will not go quietly.

That leaves the government with revising fiscal terms as its other target to boost its revenues from the industry.  NNPC has stated it “…is set to revisit the fiscal terms of the existing PSCs entered into by the Corporation with some International Oil and Gas Companies with a view to seeking favourable benefits to Nigeria based on prevailing realities in the industry.

 

Value remaining in the producing 1993 PSCs

The IOCs won’t accept any changes without a fight. Lengthy legal arguments, against a backdrop of low oil prices and Nigeria’s high cost reputation, are likely to result in difficult negotiations lasting years. As we’ve seen with shallow water licence negotiations, NNPC can extract concessions from the IOCs. It can offer the 1993 PSCs to other investors when they expire in around a decade. But both sides have so much at stake that we believe an agreement will ultimately be reached.

Longer term, Nigeria’s continued success as an oil and gas producer depends on its ability to replenish produced reserves. Exploration activity in the past decade has been worryingly low and success rates very disappointing. Even when discoveries have been made, bureaucracy leads to cost escalation and many projects struggle to break even in a US$60 oil price world.

Volumes produced and discovered 2005-2014

 

President Buhari’s aim of doing more with what Nigeria has is laudable, and he is targeting the right areas to achieve this.  Getting results is another matter altogether.


Africa Oil Week 2015
Wood Mackenzie will be exhibiting at Africa Oil Week 2015, at the Cape Town International Convention Centre in South Africa, from Monday 26th – Friday 30th October, find out more here

Wood Mackenzie’s Sub Sahara Africa upstream analysis is now available to purchase On Demand from our website, you may also like:
Nigeria Upstream summary
Reforming Nigeria’s oil industry: Buhari’s crude theft problem
New leadership in Nigeria: what does it mean for investors?
Nigeria deepwater PSC re-negotiation: how much is at stake?

Martin joined Wood Mackenzie in 2008 as an analyst in the Europe Upstream team. After managing the UK and Southern Europe team, he joined the Sub-Sahara Africa research team in 2010 and leads Wood Mackenzie’s research on the upstream industry in the region, as well as the fiscal, LNG and unconventional sectors in Sub-Sahara Africa. Prior to joining Wood Mackenzie, Martin spent five years with Shell in the UK North Sea and Russia as a Petroleum Engineer.

2 Comments
  1. Tola Awoniyi 2 years ago

    Thanks for this piece!
    For me, I think the Nigerian government and those of other oil producing nations need to focus on ensuring that the terms in our fiscal regimes does not only focus on ensuring that the government get its slice of the economic rent but also making sure that investors are incentivized to spend more on exploration activities. For a PSC, these incentives will be in different forms and I think looking critically at the ‘cost recovery mechanics’ can be a good way to start. Now that the risk and uncertainty in the market has deepened, a lot of work needs to be done on the PIB.

    • Author
      Martin Kelly 2 years ago

      Thanks for your comments Tola. Fiscal terms are a tricky balance for governments to get right, as there are many factors that influence the structure of the terms: global things like oil price, all the way to domestic politics and local content aspirations. Wood Mackenzie will shortly be releasing some further information on African fiscal terms next week, when a number of the team will be at Africa Oil Week in Cape Town.

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