Overview (May 2007) - International Law Office

Background
Oil Sector
Gas Sector
Cross-sectional Projects

Background

Soon after coming to power in 1999 the federal government announced the implementation of various policies aimed at:

• promoting competition, efficiency and transparency in the oil and gas sectors;
  
  
• encouraging private sector participation and investment; and
  
  
• generally developing the oil and gas sectors and positioning Nigeria as a hub for global energy market needs.

The proposed initiatives included:

• increasing crude oil reserves to a level of 40 billion barrels and raising production capacity to 4 million barrels of crude oil per day by 2010;
  
  
• increasing local content participation in the industry to 45% by 2007 and 70% by 2010;
  
  
• developing and commercializing the nation's gas resources with a view to matching revenues from oil by 2010;
  
  
• eradicating gas flaring by 2008;
  
  
• privatizing government-owned refineries and petrochemical plants; and
  
  
• restructuring the legal and regulatory framework of the sector.

Oil Sector

Recent statistics suggest that crude oil and condensate production have increased to approximately 2.4 million barrels per day. This has been achieved primarily through a series of auctions of oil acreage. Between 2000 and 2006 the government auctioned oil blocks in two bidding rounds carried out in 2003 and 2004. These oil blocks were located in the joint development zone within the Gulf of Guinea offshore Nigeria and the Republic of Sao Tome and Principe. By virtue of a treaty signed in 2001, the two countries share control of the joint development zone - Nigeria has 60% equity participation and Sao Tome has 40%.

In 2005 the government auctioned over 70 oil blocks located in the onshore and deep offshore regions of the Niger Delta and inland basins. The most striking features of this bid round were (i) the requirement for oil majors to include indigenous companies within their bidding consortia (a requirement designed to encourage indigenous capacity building in the oil and gas industry), and (ii) the reservation of some oil blocks for oil companies willing to invest and develop downstream projects, such as refineries and independent power plants.

In pursuit of its objective of raising crude oil reserves to 40 billion barrels by 2010, the government has continued the auction process. On April 3 2007 the government announced its intention to auction a further 45 oil blocs located in the Niger Delta, deep offshore, onshore, continental shelf and the inland basins. The auction process is ongoing; it is anticipated that the criteria for an award of oil acreage will be similar to those of the 2005 bidding round, with preference being given to oil companies willing to invest in strategic downstream projects (eg, refineries, petrochemical plants, independent power projects and gas gathering and gas development infrastructures) and proposed bidders participating with local partners.

In order to ensure full compliance with the government's policy of increasing local content participation in the industry to 45% by 2007 and 70% by 2010, the Nigerian Content Development Bill 2006 was submitted to the National Assembly for consideration. It is anticipated that the bill, together with the government's marginal field programme, will encourage, promote and entrench local/indigenous participation in the oil and gas sector. The government has recently announced that the present level of local content in the oil and gas industry is 33% and urged multinational oil companies in the country to accelerate the participation of indigenous companies within the sector.

Gas Sector

The gas sector has also evolved over the past few years. A review of the laws and policies governing the legal, regulatory, commercial and fiscal regulation of the gas sector was undertaken between 2003 and 2004. The exercise resulted in the preparation of a draft national gas policy, the Downstream Gas Bill and the Natural Gas Fiscal Reform Act.

The draft national gas policy details the steps proposed by the government to promote a public-private sector partnership for the commercialization of Nigeria's natural gas resources and the elimination of gas flaring by 2008. The policy is intended to develop and diversify the domestic economy and recover the maximum possible revenue from gas utilization. The government, in joint venture with multinational oil companies, has embarked on several gas commercialization schemes as part of its gas development and utilization programme. These include:

• Nigeria's brass liquefied natural gas (LNG) project;
  
  
• the Olokola LNG project (the partnership between the Nigerian National Petroleum Corporation and Mobil Producing Nigeria to establish LNG and independent power plants); and
  
  
• various regional gas projects, including:
  
  
  • the West African gas pipeline project (to supply natural gas from Nigeria to Benin, Togo and Ghana for power generation and other domestic and industrial uses);
    
    
  • the Trans-Sahara gas pipeline project; and
    
    
  • the Nigeria-Equatorial Guinea gas pipeline.

It is expected that the gas utilization projects will result in the commercialization of about 14.75 billion standard cubic feet per day of gas by 2011, the majority of which will be for LNG projects.

The Downstream Gas Bill seeks to establish a Gas Regulatory Commission, whose duties will include the development and regulation of the downstream gas sector and the implementation of sector policies prescribed by the minister of energy. Downstream activities (eg, ownership of transportation pipelines, operation of transportation networks, gas supply and gas distribution) will be licensed. A set of principles will regulate third-party access to, and the prices charged for, gas supply, as well as the revenues earned by licensees. These principles aim to promote competition and private investment in the downstream gas sector.

Reforms to the existing fiscal regime for upstream and downstream gas projects have also been proposed. The highlight of the proposed reforms contained in the draft Natural Gas Fiscal Reform Act is the introduction of a new tax formula for gas operations based on a sliding scale.

Cross-sectional Projects

The government has increased its efforts to create other cross-sectional projects. For example, the Nigerian National Petroleum Corporation has developed an ethanol project with a view to creating a domestic ethanol fuel industry. It is expected that ethanol will reduce domestic use of petrol, freeing up more crude oil for export and positioning Nigeria for the development of 'green' fuels.

As part of the deregulation of the downstream oil sector, the government has commenced the divestment of its equity holdings in a number of oil companies. It is undertaking to reform the Nigerian National Petroleum Corporation in order to encourage best practice and reposition the corporation with a view to improving its performance standards and business results.

For further information on this topic please contact Afoke Mokedi at Udo-Udoma & Belo-Osagie by telephone (+234 1 264 5931) or by fax (+234 1 263 4541) or by email (afoke.mokedi@uubo.org). The Udo-Udoma & Belo-Osagie website can be accessed at www.uubo.org.