Exploration for Oil at a 10-Year Low in Nigeria

Oil exploration in Nigeria has fallen to its lowest level in a decade as the country's major producers, including Royal Dutch Shell and Total, have been withholding investment pending the imminent passage of the disputed Petroleum Industry Bill (PIB). Recent official figures from the Petroleum Ministry reported by Bloomberg indicate that just one exploration well was drilled in Nigeria in the past two years—the lowest figure since 1999, with the number of exploration wells peaking at 34 wells in 2002. Belema Osibodu, spokeswoman for the Department of Petroleum Resources, blamed declining exploration efforts on a lack of funds available for exploration as IOCs have temporarily halted new projects while waiting for the PIB to be passed.

The PIB will bring sweeping reform to the Nigerian energy industry. The bill will significantly raise government take by introducing a hydrocarbon tax, amongst others, that could render particularly deepwater projects economically unviable. This is in fact the crux of the IOCs' opposition to the PIB, as oil companies fear that the PIB will increase their tax liabilities and alter the economics of existing and new projects. This is a particular concern to large IOCs since most of their new production is scheduled to come from deepwater areas, in part a result of the rising insecurity onshore that has already seen Shell sell some of its onshore blocks. Shell, the major IOC operating in Nigeria, warned last year that almost USD40 billion of planned investments are at stake if the PIB is approved in its current form. It appears that there are several versions of the PIB in front of the Senate, and despite constant promises from government officials that the bill will be passed "soon", the delay has been causing IOCs to withhold some USD120 billion in oil and gas investment (see Nigeria: 3 February 2011: Petroleum Industry Bill Will Be Legislated Before May, Says Nigerian President). The Nigerian National Petroleum Corporation (NNPC) has noted that every month that the PIB's passing is delayed, Nigeria is losing additional revenue of USD287 million in accruals from the NNPC's joint ventures with ExxonMobil, Shell, Chevron and Eni (see Nigeria: 4 January 2011: Further Uncertainty over Nigeria's Petroleum Industry Bill As Presidential Election Nears).

In addition to the impact of the PIB on deferred investment, armed attacks on oil installations have cut more than 28% of the country's oil output between 2006 and 2009, according to Bloomberg data. Militant groups, in particular the Movement for the Emancipation of the Niger Delta (MEND) often sabotage oil pipelines, and this has also been deterring new investment. The table above indicates the number of wells drilled, the square kilometres covered by seismic data acquisition, as well as the number of incidences of pipeline vandalisation and rupture over a period of 10 years (2000–09). When the number of incidences of pipeline vandalisation and rupture spiked from 2006 onwards, the number of exploration wells decreased, while the areas covered by seismic data acquisition halved twice after first increasing the previous year.

Impact on Production

Several outstanding oil and gas projects have since been deferred until 2014 or postponed indefinitely on account of the uncertainty over the prevailing fiscal terms. Projects affected by the non-passage of the PIB include Shell's Bonga SW, Bonga NW, Total's Egina, ExxonMobil's Bosi, and Chevron's Nsiko developments. Shell's Bonga SW development was delayed indefinitely in 2009 in order to secure stakeholders' agreement on the scope and commercial terms of the project, according to a Chevron statement. In reality, the debilitating fiscal terms of the PIB have been causing a rethink of the project, and a final investment decision (FID) has been imminent since 2010. Field development planning and subsurface evaluations were completed in 2008 and front-end engineering and design (FEED) are expected to begin once commercial terms are resolved. Total's Egina project has also been delayed because of tough local content provisions. Invitations to tender for the large floating production storage and offloading (FPSO) vessels were released last year in July, six months behind schedule, to several South Korean, European, and Chinese bidders. Nigeria's local content law, signed into law last year in April, stipulates that a significant amount of the fabrication of the vessels' topsides must be carried out in the country. Nigerian shipyards, however, are not able to construct an FPSO's 34,000-tonne deck owing to a lack of capacity and capabilities. In order to meet these local content requirements, the bidders now need to upgrade Nigerian facilities, which will increase the cost by around USD200 million. First oil production was originally scheduled for end-2012 but has now been pushed back to 2015.

Outlook and Implications