Investment Opportunities in the Nigerian Oil and Gas Sector

AUTHOR: BALOGUN DAMILOLA AYODEJI

Student (LL.B), Faculty of Law, University of Lagos

Introduction

Due to Shell – BP’s first commercial discovery in 1956 at Oloibiri in Bayelsa State, producing about 5,100 barrels of oil per day in 1958, Nigerian’s Oil and Gas sector has remained one of the biggest in Africa. Research has shown that Nigeria has vast oil and gas potential. It has the second largest oil reserve and the largest natural gas in Africa with estimated reserves of about 35-36 billion barrels of Oil & 4-5 trillion cubic metres of natural gas. The country currently generates about 1.9 million barrels per day with potentials to increase to about 5 million barrels per day. This article is divided into five sections; the first section deals with the history and discovery of oil and gas, Nigeria’s influence in oil and gas sector. The second section deals with a state’s absolute control of oil and gas. The third section focuses on the obstacles of this sector and the effective ways of overcoming them so as to increase investment opportunities. The penultimate section addresses the opportunities for investments in the oil and gas sector proper, with the last section concluding the work.

Absolute Control of Oil and Gas Sector by the State

It is trite that the Federal Government of Nigeria (herein referred to as the State) solely owns and controls oil and gas mineral resources. Section 44(3) of the Constitution of the Federal Republic of Nigeria, 1999 (as amended) which is in pari materia with Section 1 of the Nigerian Petroleum Act, vests ownership of minerals, mineral oil and natural gas in the hands of the state. It is by virtue of this absolute right that the state grants right in the oil and gas sector.

By virtue of the Petroleum Act, the Minister only can grant rights to explore, prospect and mine in the Nigerian Oil and gas industry. Pursuant to the grant of this right, there are several arrangements in the industry which the federal government exercises this right to grant. They include the following:

Sole Risk Arrangement

This right is granted on a sole risk basis and concession may be awarded either by way of open competitive bid, a selective competitive bid or based on discretionary allocation. Based on the sole risk principle, holder of right are solely responsible for all risks associated with petroleum activities e.g paying requisite taxes, cost of petroleum operation. The NNPC holds the license of grant on behalf of the Federal Government of Nigeria. It is worthy to state also that by virtue of Back-in-Regulation the Federal Government of Nigeria has the right to participate and acquire any interest resulting from the licence subject to the terms and conditions to be negotiated by the Minister and holder of licence. For example in 1971/1972 the FGN acquired 35%-37% undivided interest in Societe Anonyme Francaise Des Recherches et d’Expolitation de Petrole { SAFRAP} Nigerian limited operations and asset.

Joint Venture Arrangement

Here Oil companies enter into a joint venture arrangement with NNPC and each party is expected to share interest in the relevant concession. Parties are expected also to share cost of operations according to their respective participating interest. They also execute a Joint Operating Agreement which would govern their commercial and administrative relationship.

Production Sharing Contract (PSC)

It is trite that under this arrangement, NNPC holds concession on behalf of the FGN and contracts with one or more private exploration and production companies to carry out all petroleum operations within the concession. However, the contractors are solely responsible for the costs and risk associated with petroleum operation in return for a right in share of production. Above all, the product is shared between the contractor and NNPC in accordance with their agreement.

Hybrid Carry Arrangement

This arrangement is similar to Joint Venture Arrangement except that oil companies carry NNPC’s share of cost and are later reimbursed from income generated from the project. The attraction here is that NNPC doesn’t have any proprietary interest in any capital asset during the period that its interest is carried.

Risk Service Contract (RSC)

Here, contractor provides the extra risk capital for exploration and production activities. Contractor’s expenses are only recovered where a commercial discovery is made. Payments can however, be in cash or crude depending on terms of the contract. Difference between Production Sharing Contract and Risk Service Contract should be made, in that in the former, the contractor is granted an economic interest in crude which subsists throughout the life of the relevant concession.

Obstacles Hampering the Oil and Gas Sector and Solution

It is only when these obstacles are cleared or abated that is when the investment opportunities become apparent.

Due to the state’s absolute control of the oil and gas sector, there are myriads of legislation governing this sector. For example the Mineral Oil Act of 1914 and its subsequent amendments in 1948, 1956 and 1958 up until the Petroleum Act of 1969 shows that the state has too many legislation and has made this sector less effective. It’s worthy to note that for the betterment of this sector, all legislation should be documented in a simple statute. This was the aim of the Petroleum Industry Bill of 2012 but the bill wasn’t passed due to several criticisms.

Another obstacle in this section is pipeline vandalism. This act simply denotes the willful or deliberate damaging of petroleum pipeline with the sole aim of stealing crude oil or other associated petroleum products. Research has it that in the past 40 years, over 6,000 spills have been recorded in Nigeria. This no doubt has led to huge economic losses from pipeline and plant shut-down and also makes life unfavourable to citizens of these Littoral states. This point was reiterated by the African court in the famous case of SERAC v. Nigeria {2001 AHRLR 60(ACHPR 2001)}where the court held that the extraction of oil led to the violation of right to good health of the Oogoni people. An apt solution to this tragic act is that the Federal Government of Nigeria should give proper attention to the littoral states and also empower the youths in those states by providing enough amenities.

It is trite that corruption is a major problem being faced by the Nigerian Oil and Gas sector. Due to huge capital expenditure and high technological expertise in this sector, there are very high chances that corruption will settle in. Situations where pipeline instruments and drilling machines are purchased and a substandard quality is just a problem that has its roots in corruption. Due to the recent sacking of about eight Directors-General of NNPC by the current Minister of Petroleum in the person of Dr. Ibe Kachukwu, it would be seem that this obstacle is gradually being overcome.

Investment Opportunities in the Oil and Gas Sector

It is no doubt that investing in oil and gas sector is very much profitable and requires a lot of capital. The Oil and Gas sector is divided into Upstream, Midstream and Downstream sector.

The Upstream deals with mining, exploration, production and exportation of crude oil. This aspect requires technical engineering and consultancy services.

Midstream: The venture here includes refinery.

Downstream: This concentrate on refining of crude oil into usable products through distillation, conversion to get petroleum product and petroleum gas.

By virtue of this divided sector, it is lucid that the opportunities in this sector include the following:

• Refineries

As stated earlier, this is the major aspect of the midstream and it is actually very profitable. Recently, NNPC has called upon potential investors to invest in building a modules refinery with 10,000 barrels per day. This is aimed at abating dependence on importation. This refinery, as stated by the Director-General, also produces a range of refined products including diesel, kerosene and marine diesel. This will help to stem the tide of militancy and illegal refineries in the Niger Delta Region.

• Exploration

Here, potential and influential companies can buy or lease/and invest money in drilling. If oil is struck the investment can pay off twenty time over. This form of investment is best suited for those with very high tolerance of investment risk.

• Mutual Funds

Shares can be bought in a number of oil and gas comspany. This help to gain substantial exposure to the community without taking direct risk in commodity spot prices.

• Building of Petrol station, selling of petroleum produce.
• Investing in Natural gas

This is done by purchasing a natural gas asset, then drilling begins after which it is ready for sale.

Conclusion

Having traced the historical evolution of the Oil and Gas sector, and discussed the obstacles hindering this sector. It is rather obvious investing in this sector will be profitable and help to boost the economic sector. Nigeria will stand out in Africa and the rate of poverty would be abated. Finally, dependence on importation will be reduced drastically.

Balogun Damilola is a 300 Level Student of the Faculty of Law, University of Lagos. He is a member of the Maritime Forum and a member of Taslim Elias Students Chamber, University of Lagos. His field of interests are Energy law, Commercial law and Entertainment Law. Damilola is passionate about the Oil and Gas Sector.