The Power To Be

When looking at the energy sector in Nigeria, one is struck by its Janus-faced nature. On the one face is Nigeria as the world’s sixth-largest oil exporter, boasting the second largest proven reserves on the African continent after Libya. However, the other face of Janus displays a country in need of reform of both the domestic oil and gas industry, and most especially in terms of its electricity generation and distribution abilities. The latter face has long weighed down Nigeria’s overall economic performance. Any improvements in these main areas of the energy market are ensured to provide a massive boost to GDP performance going forward, though handling such changes will be no mean feat. Since the restoration of democracy under the “Fourth Republic” in 1999, successive governments have sought to implement policies to enhance Nigeria’s export abilities and resolve the overall internal energy deficit. However, further policy development will be needed to ensure that the oil and gas revenues generated by exports are channeled more effectively into the real economy to boost local content, encourage a diversified market, and generate the jobs Nigeria needs to sustain its rapidly growing population.

OIL & GAS

According to the latest BP Statistical Review of World Energy 2014, Nigeria plays host to 37.1 billion barrels of proven oil reserves, well above those in all of the rest of Africa excluding Libya (48.5 billion barrels). Production over 2013 equated to 2.32 million barrels a day (bbl/d), down some 4.2% on the 2012 figure in YoY terms. In natural gas terms, proven reserves for Nigeria weigh in at 5.1 trillion cubic meters (tcm), representing a 2.7% share of the global total. Over 2013, Nigeria produced 36.1 billion cubic meters (bcm) of gas, down sharply by 16.4% on FY2012, much due to unanticipated production stoppages. In financial terms, the IMF calculated that Nigeria exported some $89.4 billion in oil and gas products over 2013, while importing another $20.5 billion in oil and gas products to overcome the country’s refining shortfall. In terms of exports by continent for 4Q2013, Europe remains Nigeria’s largest customer, taking in 43% of exports, followed by Asia and the Far East on 26%, Africa and South America on 12% each, North America on 4%, and Oceania on 3%, according to the Nigerian National Petroleum Corporation (NNPC). By 2Q2014, the North American share had shrunk to just 2% of the total, and it appears that the shale oil revolution has begun to curb what was once one of Nigeria’s largest export markets. Nigeria’s light crude output, especially its Bonny Light, is known to be favored by refiners due to its low sulfur content, which causes less wear and tear on sensitive refining equipment.

Natural gas is being increasingly looked at as a resource that will improve Nigeria’s export outlook. According to BP research, at the end of 2013 Nigeria was estimated to have reserves of 5.1 tcm, or 2.7% of global reserves. Nigerian production was estimated at 8.4 bcm for 2013, down some 9.8% on the year, according to OPEC’s 2014 Annual Statistical Bulletin.

PARTICIPANTS

The country’s national oil company, NNPC, lies at the center of the industry, being involved with its own independent projects as well as joint ventures, service contracts, and other forms of involvement with both local and foreign private industry players. While major IOCs continue to provide the bulk of production, a series of divestments by major operators is ongoing, with both national and international independent producers looking to take up the slack. The IOCs still operating in Nigeria include Shell, Chevron, ENI-Agip, Total, Addax Petroleum, Conoco Phillips, and ExxonMobil. Ecobank Research noted that by the end of 2013, some 300,000 bbl/d in producing assets from the Niger Delta region especially will have been sold off by the majors. At present, around 10% of Nigeria’s oil output is in the hands of locally owned firms. In terms of production share, NNPC has the largest stake at 33% on end-2013 figures, much of this was done in conjunction with the IOCs, ExxonMobil was next largest at 14%, and was followed by Shell (12%), Chevron (11%), and Total (6%), while the Others category accounted for the remaining 24% of output, according to Ecobank Research. In terms of production by structure, production sharing companies were the largest, representing 38% of output, and these were followed by joint-venture companies (37%), alternative funding joint ventures (AF-JVs) on 18%, independent/sole risk producers were at 5%, marginal fields represented 2%, while service contract agreements were negligible for 2013. It is in the marginal fields that many see the potential for Nigerian firms to show their mettle and move up the value chain.

Despite ambitious targets of up to 60% of oil output being operated by indigenous Nigeria companies over the coming decade or so, the current potential of the local market will see the presence of the major IOCs remain unthreatened. For many in the industry, the concept of Nigerianization is more of a complement rather than a challenge to the presence of IOCs in the country. As the current President of the Nigerian Association of Indigenous Petroleum Explorers and Producers (NAIPEC) and Managing Director & CEO Amni International Petroleum Development Company, Tunde J. Afolabi , saw it in an interview with TBY, “I do not foresee a situation where there is a clash between the IOCs and indigenous companies. The IOCs are leaving more difficult terrain, onshore production, and operating where they have better control and more experience in deep-water production.”

REFINING & LOSS RATES

Over 2013, NNPC reported that domestic refineries processed some 35.23 million barrels, up on the 33.63 million barrels processed in 2012, though well down on the 39.41 million barrels taken on in 2011. Considering that there were a number of refining stoppages, the end of year figure actually represents relatively sound performance, though affecting the overall capacity utilization rate (CUR) of the facilities. Nigeria has three main refineries, Warri (125,000 barrels per calendar day [b/cd]), Kaduna (110,000 b/cd), and Port Harcourt (60,000 b/cd) and its extension (150,000 b/cd). Warri reported the best CUR at 35.99% according to NNPC, followed by Kaduna at 29.33%, whilst Port Harcourt was last at 9.18% for the year. The low CUR of the plants hints at one of the Nigerian energy sector’s other weakness—electricity. In June 2014, Port Harcourt’s operator signed up GEL Utility to provide a 25-MW generator to help the plant overcome the electricity shortages that have hampered its output. In 2013 alone, NNPC estimates that Nigeria was forced to import some 4.39 million metric tons of refined products to satisfy domestic demand.

Pipeline losses, mostly caused by unauthorized access to the network, continue to weigh down the country’s oil industry, though in 2013 losses were calculated at some 2.31 million barrels, down on the 3.82 million barrels reported for 2012. However, the number of vandalization attempts on pipelines rose to 3,505 in 2013 from 2,230 in 2012, while ruptures were assessed at 65 and 26 for the same respective periods, revealing why the rate of exports declined over the year. Such stoppages have long bedeviled the oil and gas industry in Nigeria, though action is being taken at both a state and private sector level to both improve security and engage with local communities in development programs to discourage pipeline vandalism.

ELECTRICITY

With only 55% of Nigerians having access to electricity, and many in industry crying out for a more regular supply, the government has stepped up its efforts to increase generating capacity. Initial plans include increasing generating capacity by 40,000 MW by 2020, and this will be achieved through both public-private partnerships (PPPs), privatization, and FDI. Hopefully, once this new capacity is installed, up to 75% of Nigerians will be hooked up to the grid, with rural areas of the country being targeted for renewables installations, such as solar, under the state’s “Light Up Rural Nigeria” plan.

Electricity represented some 0.9% of GDP in 2013 according to the National Bureau of Statistics (NSB). Of the 6,000 MW of installed capacity in the country, it has been estimated that only around 3,600 MW was actually usable due to equipment failures and poor distribution mechanisms. Once dominated by state-owned generator and distributor Power Holding Company of Nigeria (PHCN), the government decided to privatize its assets in September 2013 into generation, transmission, and distribution arms that would be regulated by the Nigerian Electricity Regulatory Commission (NHRC). As a result, six generating assets were split off from the now defunct PHCN, while a further 10 distribution areas were created as well. The transmission side of the equation was handed over to the Transmission Company of Nigeria, whose management contract was won by Canada’s Manitoba Hydro International so as to help deliver the new state company’s capabilities. In order to encourage independent power producers (IPPs) to move into generation gap, the government has created the Nigerian Bulk Electricity Trading (NBET) company so as to ensure payments to IPPs are guaranteed. For distributors, it is hoped that the private sector can act in a far more efficient manner than the old PHCN in addressing transmission loss and theft rates. The CEO of Abuja Electricity Distribution Company, told TBY, “Over 50% of our customers are not metered, and that has significant impact upon the sector. For every kilowatt hour (kWh) of electricity that we paid for, we have to buy more than 2 kWh, so the losses are high, which no business can sustain.” Work on installing meters across its distribution area is now being carried out by the company to turn this situation around.

The generation side is still heavily dominated by natural gas as a source fuel, with Minister of Power Chinedu Ositadinma Nebo describing the state of the sector to TBY as, “70% of all power stations are gas-fired, while the remaining 30% comes from hydro-power. If you were to realize production exclusively using gas, then you can’t call yourself a secure country.” In order to encourage such development, the government has issued a number of licenses to IPPs looking to build coal-fired facilities, while those hoping to develop on the renewables side in terms of solar, wind, or biomass are not being forgotten.