While oil giants on joint-venture contracts press for alternative sources of cash to expand Nigeria’s output, natural gas finally flares with promise.

Oil is still king of the economy, but natural gas is fast becoming a major player.

The budget drawn up for 1999 by General Abubakar’s transition government was not encoded in subtleties. The bare truth that over 90% of government revenue depends on oil income from the Niger River delta and offshore joint-venture operations took center-stage in the ‘budget of realism’. If the previous government budget had worked with a figure of $17 per barrel for fiscal policy in 1998, that price had slipped to $12 by October and was down to $11 in the first quarter of 1999. This precipitous fall in world oil prices led OPEC to reduce Nigeria’s quota downward of 2.042 million barrels per day. Nigeria had to draw down $1.8 billion from foreign reserves to compensate for the turn of events and as a consequence nearly $2 billion will be lost this year. But tax incentives, implementation of production-sharing contracts, and the allocation of new offshore acreage for exploration is pumping new life back into the sector. And advance contracts for natural gas are helping to clean up the act.

For now, the code word that has broken through the morass of difficulties is ‘alternative funding’. The word has the luster of a permanent solution to the problem of unpaid cash calls from the federal government and is regarded as the most realistic option throughout the sector. “Most of the oil companies here consider these alternative funding mechanisms as a panacea for the survival of the industry. If operators were allowed to source external funding of projects, Nigeria’s oil reserves would increase,” says Simone Gregori, managing director of Texaco Overseas Nigeria Petroleum Company (Topcon). Topcon’s own plan to begin production later this year at the offshore fields of Madu and Anyala are illustrative of the situation. The company’s producing fields at North Apoi, Funiwa, and Pennington have yielded over 450 million barrels of oil since they went onstream in the 1970’s. But newer joint-ventures are still waiting for government approval. “After the Abubakar government came to power, the issue of how to resolve the funding problems was discussed. We hope to get approval for external financing to fund the government’s share in these projects and we are optimistic that they will come onstream,” says Gregori.

To increase Nigeria’s oil output, the new civilian government is rethinking the conditions for joint-venture contracts with partners like Shell, Texaco, Chevron, Mobil, Total and Agip. As prosaic and bureaucratic as it may sound, financing arrangements alone could expand output by 200,000 barrels per day. When demand brings oil prices back up, Nigeria will be in a more robust condition to respond - and to profit. Although no single formula has yet coalesced, one option is reducing the percentage of government equity in the operations and letting the multinationals cover exploration and development costs. “I have always suggested a very simple way to get out of the government funding problems. You fund your own operations, try to keep production flat, find a partner who has the money to fund and take the financing cost out of production,” says George Kirkland of Chevron Nigeria Ltd. The privatization of state-owned subsidiaries belonging to Nigerian National Petroleum Corporation (NNPC) or the sale of oil equity through the local stock exchange to allow Nigerians to profit from the country’s wealth are two other options. Government equity in joint ventures, currently 60%, could be divested. But a review of contractual conditions is rife with controversy and people are wary of going too far to shelve short-term problems. An advocate of deregulation, Godwin Aret Adams, the Abubakar government’s special advisor on petroleum resources, warns about the need for caution: “We have to take into account the sensitivity of Nigerians who feel we should hold onto something like 51%.”

Dalhatu Bayero

"Our activities are now shifting to the development of the deep offshore due to the substancial discoveries that have been made."

If the country overwhelmingly depends on oil for its foreign exchange, Nigerian wallets rely on the fortunes of NNPC statistics. The state-owned oil and gas conglomerate is ranked among the best businesses in the developing world and accounts for nine-tenths of export earnings ($15 billion in 1997). It is what made Nigeria an African industrial powerhouse after independence in 1960. With the inspired vision of Dalhatu Bayero, the managing director, its many branches are spearheading the expansion of terminals, modernization of refineries and new exploration offshore. “Our plan is that in the next 10 years we will go from 2.2 million barrels per day to about 4 million,” says Bayero. Alluding to Topcon’s wildcat find of several hundred million barrels of recoverable oil on Block 216 last January, Bayero says NNPC will refocus on its offshore thrust: “Our activities are now shifting to the development of the deep offshore due to the substantial discoveries that have been made. With new technology we can access these oilfields and are hoping to increase reserves to 40 billion barrels, up from the current 25 billion.”

Fostering the development of local communities has become a priority for the oil giants

Reforms in the upstream sector are increasingly welcomed by NNPC’s pro-deregulation management. The move toward reduced government equity in its joint venture agreements has prompted Bayero to speak of establishing a less restrictive 40% government stake in operations as a standard instead of the current 60%.

African Petroleum Plc (AP), a wholly Nigerian-owned company, has submitted applications for several joint ventures with NNPC and is working with Chevron to develop marginal oilfields. An offspring of British Petroleum Nigeria Ltd., AP is an example of a socially-conscious, environmentally safe and indigenous corporate citizen. “Our goal is to become the best oil company and to be responsible in whatever we do. We take a lot of initiatives and move a bit faster than the other companies,” says AP’s Managing Director Umar Abba Gana. AP’s statistics show that it supplies 16% of Nigeria’s petroleum products. Creative ingenuity has given it more than a foothold in the market for everything from lubricating oils (the popular Visco 2000) to insecticides and jet fuel. The high demand for bitumen in road construction projects convinced the company to build two bitumen plants in Lagos and Port Harcourt that have a capacity of 9,000 metric tons. Despite fierce competition from giants like Mobil and Shell, AP’s efforts at branching out into related products have yielded dividends. “We’ve been able to maintain our market share and the same quality and standards as other companies that are not wholly Nigerian-owned,” says Abba Gana.

What started as a one-man used parts venture is now selling its technical expertise and accessories to Nigeria’s petroleum industry. Ciscon, the company headed by Shawley Coker in Port Harcourt, is 100% Nigerian-owned and its vision is to become a major player in the services sector by improving equipment and training engineering cadres. “We started buying some used equipment, refurbishing it and shipping to Nigeria,” says Coker. Ciscon now provides a whole range of completion accessories from landing nipples, oilfield pumps and hydraulic wrenches to chemical injection valves. Coker and his staff surveyed the fields and figured out what pieces make the oil industry’s clockwork tick. They initially focused in the drilling aspects and later became involved in geophysical surveying to stay competitive. Ciscon’s machine shops and maintenance services now rank among the most solicited. “We work for Shell, Mobil and Elf to name a few. Since the indigenous companies like Consolidated Oil have come in now, we work for them as well,” says Coker.

Forescasting growth in the sector, Ciscon is currently looking at potential foreign partners to expand its oilfield services. “There is a lot to gain for both sides from an association. There is still a lot to be done in Nigeria,” he adds.

Giant foreign operators like Chevron Nigeria Ltd. (CNL) are outfitting themselves increasingly with an indigenous staff. CNL’s George Kirkland, who has seen production grow from 300,000 barrels per day to a capacity of 500,000 since arriving in Nigeria seven years ago, boasts of the country’s potential in people resources. “Our workforce is 92% Nigerian. We have approximately 1,800 employees and that makes a big impact,” says Kirkland. CNL is leading the way in the development of feasibility studies to exploit the country’s huge natural gas potential. “Nigeria’s greatest resource outside its people is gas. There is gas everywhere. We cannot drill a well and not get gas,” says Kirkland. The construction of an offshore pipeline that would directly serve power-hungry Ghana, Togo and Benin is profiling itself as a long-term regional solution and has become a priority for Obasanjo’s administration. “Gas is cheap, very cheap,” says Kirkland. “It should be supplying power all over the world.”

Of the oil multinationals operating in Nigeria, Shell Petroleum Development Company (SPDC) is the largest. Its presence dates back to the 1930’s and today accounts for 40% of Nigeria’s total oil exports through its joint venture with NNPC. Its network of 1,000 producing wells, 6,000 km of pipelines, eight gas plants, 87 flow stations, and export terminals cover a staggering 31,000 square km of land. ”SPDC is investing $8.5 billion in an integrated series of oil and gas projects to raise oil production by 600,000 barrels per day and increase to 8% its share of the world’s liquefied natural gas markets,” says SPDC’s Chairman and Managing Director Ronald van den Berg. The five-year project includes investment into offshore block concessions E, H and K, and into the OPL 219 venture, which will initiate Nigeria’s deep-water development in the Bonga field. The project is viewed by industry analysts as sub-Saharan Africa’s most ambitious investment to date. “Shell is optimistic that its project will generate net income for Nigeria of an estimated $20 billion over a 25-year period,” says van den Berg.

Ronald van den Berg

“Shell wants a guarantee that a realistic percentage of petroleum revenue actually comes back here.”

Simone Gregori

“If operators were allowed to source external funding of projects, Nigeria’s oil reserves would increase.”

Despite the industry’s current slump, SPDC’s Forcados and Bonny terminals underwent upgrades last year worth $800 million as part of a comprehensive plan to meet new environmental regulations. The company now drills horizontally from existing rigs to minimize land use and cut down on waste by-products. The main environmental issue in the delta, however, is the flaring of associated gas from the oil wells. SPDC has committed itself to stop routine flaring at its sites by 2008 and is channeling it to the liquefied natural gas plant at Bonny which begins operations later this year. Shell is also bankrolling the $4.5 million Niger Delta Environmental Survey meant to assess the oil industry’s impact in the region.

Finding Nigerian Oil... in Texas

Using virtual 3-D technology, Texaco hits on major oil reservoirs off the coast of Nigeria.

Texaco applies 3-D visualization technology worldwide in search of new reservoirs of oil and natural gas

Sitting before a panoramic computer screen in a research building in suburban Houston, Texas, geoscientists at Texaco pore over data in search of a valuable treasure thousands of feet below the ocean's surface 70 miles off the coast of Nigeria. Texaco's modern day explorers use 3-D visualization technology developed by the company to 'look' into complex geological structures to find hidden oil. Analyzing images with spectacular precision and detail enables the team to do in hours and days what previously took weeks and months. Earlier this year Texaco announced the result of this quest&mdashtwo major oil discoveries in deep waters offshore of the Niger Delta region. Both the "Agbami-1" and "Nnwa-1" wells, to be developed respectively with partners Famfa Oil Ltd. and Statoil, are among the largest discoveries made by Texaco in close to 30 years, and signal a new chapter in the company's long history in Nigeria. John J. O'Connor, Texaco's president of Worldwide Exploration and Production, says the discoveries are the result of a focused exploration program: "Nigeria is a central part of Texaco's business strategy. We hope to build upon the long-standing relationships we have there and to work with our partners to develop the country's vast energy resources in a responsible and environmentally-sensitive way." Texaco's presence in Nigeria dates back to 1913 when the company's refined products were first marketed there. Through its subsidiary, Texaco Nigeria plc, the company currently owns and operates more than 200 retail outlets in the country. In 1961 a separate subsidiary, Texaco Overseas Nigeria Petroleum Company Unlimited (Nigeria) or TOPCON, began a successful search for oil in shallow waters close to the Central Niger Delta. Today TOPCON produces nearly 60,000 barrels of crude oil per day from six offshore oil fields. Texaco's plans for growth in Nigeria are matched only by the company's on-going commitment to the people that live in the communities closest to its operations there. "We have a long history of harmony with these communities," says Simone Gregori, TOPCON's Managing Director. "Working together, we have developed a wide-ranging community relations program that has seen financial and practical help provided for road- and bridge-building projects, cottage hospital construction, and water-well developments," he says. Vocational training programs for local youths, the donation of school supplies, support for local self-help business associations, and scholarship awards also play a large part in TOPCON's giving philosophy. Commitment, technological excellence and a long-term approach to business partnerships have made Texaco a world leader in the oil and gas industry. And that is why Texaco is recognized as a preferred partner by nations seeking to develop their energy resources.