Nigeria is the eighth largest exporter of crude oil, with over 36 Bbo proven reserves, according to the Oil and Gas Journal. Oil brings billions of dollars in export revenues annually into the country. Yet the Nigerian people remain some of the poorest in the world. More than 70 in every 1,000 babies die before their first birthday, average life expectancy is less than 46 and only 33% of the population have access to adequate sanitation. The amount spent annually on health services is $23 per head, contrasting vividly with over $6,000 per person a year spent in the US. Equally amazing in a country that exports 2.5 million barrels of oil a day, is the fact that only about 40% of Nigeria's total population - 10% in rural areas - has access to electricity.
After more than 50 years in the country, can the oil industry help Nigeria - or is it too late?
Dollars flooded in
Hydrocarbon exploitation in Nigeria began at the end of the 19th century, using surface oil seeps to the east of Lagos. Shell drilled the first exploration well in 1951 and, together with BP, made the initial commercial discovery, 50 miles west of Port Harcourt in the Niger Delta, in 1956. The earliest offshore discovery came in 1963.
In 1960, when Nigeria gained independence from Britain, production was 17,000 bopd, rising rapidly to 1 MM bopd by 1970. Major and independent companies came flocking to the country when it joined OPEC in 1971 and nationalised the oil industry through the creation of the forerunner of the present Nigerian National Petroleum Corporation (NNPC). Any company wishing to explore for oil entered into a joint venture with the NNPC, so that the state effectively owned about 60% of all multinational oil projects onshore, whilst the oil company paid most of the exploration and development costs. Over the years hundreds of billions of dollars have flowed into Nigeria from oil revenues, contributing over 90% of the country's total economy, but a combination of inefficiency and endemic corruption means that a massive 70% of oil revenue effectively ‘disappears'.
As a result, most Nigerians live on less than one dollar a day and the country, which used to be a net exporter of agricultural products, imports more food than it produces. Even more staggering is the fact that Nigeria actually buys in refined fuel, because its refineries break down so frequently that there is always a paucity of supply.
Rise in insurgency threatens security
One of the major disincentives to exploration in Nigeria in recent years has been security. Armed robbery and street crime are rife, and the police force is unable to deal with the problems. Never considered one of the safest of countries, the transition to a form of democracy in 2003 did not result in an increase in stability, with instead a rise in insurgency groups, particularly in the Niger Delta.
"Rise in insurgency threatens production"
One of the main militant groups, MEND (Movement for the Emancipation of the Niger Delta), targets foreign multinational companies involved in the oil industry, blaming them for the poverty and exploitation of local people and associated pollution, which has turned many of the once fish-rich creeks into stagnant pools. This group have the stated aim of destroying the capacity of the Nigerian government to export oil. They have had some degree of success, through bombing pipelines and attacking installations, and it is estimated that at the moment as much as a quarter of Nigeria's production is kept off the market by militant violence.
Nigerian hopes lie in deepwater
This violence, coupled with poor returns after government take from onshore and shallow water contracts, has enticed many major oil companies into the deeper waters off the Niger Delta, where the government take is lower. Estimates of ultimate recoverable oil reserves in the deepwater are as high as 20 Bbo, and the potential for large and giant discoveries is high. Chevron's massive Agbami Field, for example, which went on stream in July this year, covers 182 km2 and contains recoverable reserves of approximately 900 MMbo.
The first field to go on production in water depths over 1,000m (3,300 ft) was Shell's Bonga Field, in 2005, which was discovered in the mid 1990's, illustrating a major issue with Nigerian deepwater fields; the time lapse between discovery and first production. The field, operated by Shell on behalf of NNPC with Esso, Agip and Elf is reported to contain reserves of 6Bboe, with the company aiming to produce more than 2MMbo and 150 MMcfg per day.
Exploration has been moving into even deeper waters, with recent wells in depths in excess of 2,700m (9,000ft). However, the hope that moving offshore will remove oil operations from the sphere of the rebels was shattered in June this year, when MEND attacked and closed down the Bonga complex, 120km offshore. As well as indicating that Nigeria's oil platforms are within range of attack, it effectively shut down 10% of the country's oil production for several weeks in a single attack. MEND called a unilateral ceasefire a few days later, but whether this will be effective has yet to be seen.
Local participation important
Just a few western oil majors produce around 95% of the oil, but the Nigerians are keen to see many more indigenous companies involved in the oil industry. A 2003 licensing round offering a number of abandoned and marginal fields in the onshore Niger Delta proved popular with indigenous organisations in partnership with smaller companies like Afren (see separate article). Most of the fields involved in this have recoverable reserves of less than 20 MMbo, too small for the majors, but profitable to small scale operators.
"Gas reserves in excess of 150 Tcf"
A lot of effort is also being put into using local people in the industry. Most companies, whether national or international, believe that it is important to involve locals at all levels, both in the community and through employment. Chevron's Agbami deepwater project, for example, notched up 300,000 man-hours by Nigerians during the building of the FPSO. It is crucial to provide employment not only in manual labour, but also in professional occupations, to ensure that the trained and entrepreneurial elite stay in the country.
Huge untapped gas reserve
Although Nigeria contains large volumes of oil and has over 300 producing oil fields, it is also a major gas province, with proven reserves estimated to be in excess of 150 Tcfg (25 Bboe). Most of this is associated with oil, and as a result gas was usually flared in the past, or reinjected to enhance oil recovery. After 2008 flaring will be illegal, and this valuable resource will start to be harnessed.
At present, Nigeria has the capacity to process over 200 MMboe of LNG and gas liquids annually through the 6 LNG trains at Bonny Island on the south coast, about 60 km south of Port Harcourt, as well as through other terminals and floating processing plants. International investment is sought for gas projects ranging from new gas-to-liquids plants to proposed pipelines across the Sahara and along the West African coast, as well as domestic market projects and local power stations.
As a result, interest in previous gas discoveries, shut-in due to the lack of a market, has increased considerably in recent years. These fields are mostly centred on the Niger Delta, but some are in the Anambra Basin to the north, opening up a less well known area to exploration. The Nigerian Government has launched a number of initiatives to encourage the development of these resources.
Pressure for peace
As can be seen, the challenges facing the hydrocarbon industry in Nigeria are plentiful - but so are the rewards. Growth will depend largely on deepwater success, but crucial to this is also the effective exploitation of the vast gas resource. A restructuring of the industry to be more operationally efficient is needed, in order to attract foreign investments. Government attitudes towards contracts and the time taken to approve field development programmes are also important factors.
"Growth depends on deepwater success"
However, the over-riding question is whether the security situation can be improved to control disruptions to exploration and production, particularly in the Delta region. That this is a huge problem, which can mainly be laid at the feet of the Government and ruling classes, is not in dispute, but the oil industry needs to be prepared to accept some of the blame. Assistance by oil companies to communities affected by the industry has been huge in monetary terms, running into billions of dollars, but it has proved difficult to channel it in the most valuable direction. Recent projects working closely at ground roots level with local people should show better returns. Industry efforts to improve the heavily polluted environment have increased in recent years, although continued attacks on pipelines do not help these endeavours.
Can the oil industry, as well as the international community, put pressure on Nigeria to bring some peace to the country, through fairer wealth distribution and an increase in social justice? Every effort must be made by all concerned, as the problems in the Niger Delta, through their effect on the price of oil, are assuming global dimensions. The industry must play a major role in bringing stability to this troubled country.