“Nigeria is not an oil-rich country. We are an oil-producing country” -Sanusi Lamido Sanusi.
Oil was discovered in Nigeria in 1956 in Oloibiri, Bayelsa State. Production began in the late 1950s. In the following decade, oil exploration was open to foreign companies and by then, the oil industry grew constantly to become a global giant. In 1977, the Nigerian National Petroleum Company (NNPC) was founded. The state-owned corporation aimed to regulate and participate in the country’s oil business. Currently, Nigeria is Africa’s main oil producer. It is the 9th largest oil producer globally in terms of value with 18 operating pipelines and an average daily production of over 2 million barrels in 2019.
Needless to say, Nigeria is one of Africa’s leading oil exporters with the largest natural gas reserves. The country is also known to have one of the largest economies on the continent and 22nd globally. Apart from oil, Nigeria is also known to export other commodities such as cocoa and rubber. Nonetheless, exports of oil remain to be Nigeria’s main source of export value. Other natural resources present in the country include natural gas, tin, iron, ore, coal, limestone, niobium, lead, zinc and arable land.
The economic growth in Nigeria can also be attributed to strong performance in the agricultural, trade telecommunications, manufacturing and film industries. However, even though agriculture employs close to 70% of the labor force, oil remains a key economic component. In 2019, over 80% of Nigeria’s export value was generated by mineral fuels, oils, and distillation products. This accounted for approximately 47 Billion USD. Nigeria’s main trade partners are Brazil, China, India, Japan, the US and the European Union.
Since the early 1970s, Nigeria has been a member of the Organization of the Petroleum Exporting Countries (OPEC). The organization’s members are mainly from the Middle East and Africa with Venezuela being the only South American member and founder. The purpose of OPEC is to unify and coordinate the oil market. According to OPEC, the oil and gas sector in Nigeria accounts for about 10% of gross domestic product, and petroleum exports revenue represents around 86% of total exports revenue. The long-term economic performance seemed to be broadly positive for a while as it was driven by rising oil and gas production. However, the onset of the COVID-19 pandemic led to lower demand and consequently the oil production in Nigeria dropped.
An article published by Simona Varella on Statista (https://www.statista.com/topics/6914/oil-industry-in-nigeria/) states that between January and March 2020, the average daily oil production in Nigeria was 1.81 million barrels. In 2020, production decreased due to the impact of the coronavirus (COVID-19) and the subsequent lower demand. According to estimations from April 2020, Nigeria’s daily oil production would have reached 2.1 million barrels per day in a scenario without COVID-19. However, the low demand for oil during the first half of 2020 led to a sharp fall in prices. The biggest drop in gasoline prices was recorded in April 2020, when the average price decreased by ten per cent compared to the previous month. Nevertheless, in July 2020 gasoline prices increased again, reaching roughly 144 Naira per liter, which is about 0.37 USD. Diesel prices in Nigeria dropped by over two per cent in May 2020. This was the most significant monthly drop in 2020. As of July 2020, the price of diesel in Nigeria was 224.43 Naira, roughly 0.58 USD per liter. Between October and December 2020, the oil industry contributed 5.9% of the total real GDP. This was a decrease by roughly 3% points compared to the previous quarter.
Most of the largest oil companies operating in Nigeria are from the United States and Europe. In 2019, the multinational oil and gas producer ExxonMobil produced 191,000 barrels of liquids per day in Nigeria. Similarly, the daily crude oil and natural gas liquids production in Nigeria was done by another American oil giant, Chevron, and amounted to 173,000 barrels. Approximately 9% of the total net liquids production of crude oil and natural gas of this company comes from Nigeria. During the same year, the British-Dutch multinational Royal Dutch Shell produced almost 57 million barrels in Nigeria. The oil industry value generated by foreign companies represents an important source of income for the Nigerian government. In 2019, the Norwegian company Equinor paid 427 million USD to the Nigerian government for extractive activities, of which the largest amount was derived from taxes. However, despite the oil industry being the main source of income in Nigeria, the wealth generated by oil reaches only a small share of the population.
A newsletter published by KPMG in 2020 (https://assets.kpmg/content/dam/kpmg/ng/pdf/tax/nigerian-oil-and-gas-update-quarterly-newsletter-edition2020-q2-q3.pdf ) highlights some of the challenges brought about by the economic crisis caused by the pandemic and ways in which Nigeria’s oil industry is trying to recover from the economic crisis.
Some of the challenges faced include a decrease in local and global demand for oil due to the lockdown and curfew measures put in place by various nations in the world. The decrease in demand consequently led to a decrease in global and local production. Oilfield servicing companies have also been hit given that oil exploration companies were forced to dial back on production hence reducing exploration and drilling services significantly. However, with the continued easing of lockdown restrictions, resumption of international flight operations in many parts of the world and a relatively steady crude oil price, it would seem that demand for oilfield services is on the rise.
Foreign direct investment within the Nigerian oil and gas industry has been experiencing a gentle decline particularly in 2020. Despite the apparent opportunities within the oil and gas sector and therefore the incontrovertible fact that the Nigerian economy depends on this sector, there seems to be hesitation by foreign investors to direct their investments into this sector. Although the decline in 2020 could easily be attributed to the global economic crisis due to the COVID-19, industry stakeholders continue to blame the lack of competitive regulatory and fiscal reforms to be the cause for declining foreign investments. However, the passage of the Petroleum Industry Bill,(http://www.petroleumindustrybill.com/wp-content/uploads/2020/09/Petroleum-Industry-Bill-2020.pdf ) currently with the National Assembly, is believed to be a turning point for the outlook of foreign investment in the industry.
The Department of Petroleum Resources (DPR) unveiled its strategic plan and policy for the survival and success of the industry post-pandemic period. The policy focuses on four key areas. Firstly, cost control and management with the realignment of cost of production per barrel as well as corporate, business and financial stewardship. Portfolio rationalization and asset optimization using project screening and maturation and contract renegotiation. Strategic repositioning and business optimization and finally strategic partnerships with contracting models, service provider open access and shared risks and returns.
The DPR post-pandemic survival models involve prioritizing gas, improving policy and regulations, the business environment and drive for investment in the industry. The Nigerian oil and gas industry is considered to be the ‘wheels’ of Nigeria’s economy hence the success of this plan will give the industry the boost it requires to overcome the issues experienced during the pandemic.
Content writer at Cue Africa. Email: email@example.com LinkedIn: Selina Liyengwa.