Nigeria’s oil and gas industry fails to cash in on global energy hunger

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Nigeria’s oil and gas industry, the source of much of the country’s foreign receipts and more than half of government revenues, is in bad shape. Although figures released by Nigeria’s national statistics bureau show $45.6bn in revenue last year, a 46 per cent rise on 2021 levels, those numbers hide an uncomfortable truth: oil production in Nigeria has been falling steadily over the past few years.

In April, the country produced less than 1mn barrels of oil daily, far below its 1.8mn bpd Opec quota. So, even though oil prices spiked in 2022, due to Russia’s invasion of Ukraine, the longer-term story of Nigeria’s energy industry has been one of lost opportunity. Hence, former finance minister Zainab Ahmed says the overall impact of high prices has been “nil or negative”.

Oil production in the country has been blighted by large-scale theft and vandalism, as well as decades of under-investment in infrastructure. As such, state oil company NNPC cannot meet its output targets. Mele Kyari, head of NNPC, has alleged that as much as 600,000 barrels of oil are stolen daily by government and security officials, and even members of the clergy. The security situation is so dire that Nigerian authorities have contracted Government Ekpemupolo — better known as TomPolo, a former Niger Delta militant leader — to protect pipelines.

Fuel subsidies, introduced in the 1970s to provide cheap petrol for Nigerians, have also robbed NNPC of vital resources to invest. Last year, it paid out $10bn worth of subsidies to distributors.

Official figures suggest that Nigerians now consume about 68mn litres of petrol daily, compared with about 49mn in 2015. Yet there has not been a commensurate increase in population or economic activity. Some believe that the numbers have been fiddled and that oil distributors sell subsidised oil in neighbouring countries at a huge profit. Bola Tinubu, the new president, cut subsidies on his first day in office.

Experts say the combined effects of all these negatives are behind the recent rush of international oil companies to exit Nigeria’s onshore sector. China’s Addax handed its four oil blocks to NNPC last November. Meanwhile, ExxonMobil’s planned $1.28bn divestment from four oilfields remains in limbo. Last August, local producer Seplat thought it had secured approval to receive the assets from Exxon, after president at the time Muhammadu Buhari, who doubled as petroleum minister, granted the go-ahead. A few days later, however, Buhari rescinded his support for the deal.

Noelle Okwedy, an energy analyst at Lagos-based data company Stears, says the operating environment in Nigeria is no longer conducive to efficient oil production. “Vandalism and theft have severely constrained production, causing production shutdowns for months on end,” she notes, pointing to disruption at leading export terminals. Shell, for example, declared force majeure for just over a year from March 2022 on exports of high-quality Bonny Light crude as a result of attacks on pipelines.

Fractious government agencies and consequent regulatory uncertainty have also damped investor confidence, Okwedy adds. “There’s no clarity on who regulates what,” she says.

The gas sector is not faring much better. Analysts say a price cap on the domestic market has limited investment. The export market is stronger, though, especially since the Russia/Ukraine war has left the EU shopping for gas around the world. Matthew Baldwin, deputy director-general of the European Commission’s energy department, says Nigeria supplies 14 per cent of the EU’s gas imports and that 60 per cent of Nigeria’s liquefied gas is shipped to Europe. Both sides agree there is scope to do more.

Yet Nigeria’s main gas company, NLNG, faces multiple challenges. A nationwide flood that killed more than 600 people and displaced 1.3mn last October led it to declare force majeure on its operations after its gas suppliers were affected. The group, which is jointly owned by energy majors Total, Eni and Shell, as well as by NNPC — which holds just under half the shares — also faces the same security problems that bedevil the oil industry. Some gas wells have lost as much as 80 per cent of their capacity to theft and vandalism.

Clementine Wallop, senior adviser to political risk consultancy Horizon Engage, believes Nigeria should push for the completion of long-term infrastructure projects to help it take advantage of Europe’s hunger for gas. Investors are quietly hoping that the new government can deliver the funding. In his run for the presidency, Tinubu presented himself as a pro-business candidate capable of luring investment back to a country sorely in need of it.

His choice of oil minister and head of NNPC will be critical to investor confidence, says Okwedy. “There’s a lot of diplomacy involved and we did not see a lot of this from Buhari,” she says. “Instead, the measures he took as minister of petroleum scared investors away.”

But even optimistic investors acknowledge that a shrewd appointment would be only a start. Getting a grip on theft and vandalism will ultimately determine how Nigeria’s oil and gas industry fares in the coming years.