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Challenges before Buhari’s administration in petroleum industry


Buhari-osNIGERIA is the largest oil producer in Africa and is among the world’s top five exporters of LNG. Despite the relatively large volume of crude oil reserves, the country’s oil production is hampered by instability and supply disruptions, while the natural gas sector is restricted by the lack of infrastructure to monetize natural gas that is currently flared (burned off).

The incoming government may have to content with numerous challenges, which are bedeviling the oil and gas sector.

Some of the challenges include non-passage of the Petroleum Industry Bill (PIB); gas flaring; crude oil theft and pipeline vandalism; divestment of International Oil Companies (IOCs): local content and human capital deficit.

Besides, the incoming administration has to content with maintaining the level of government investment in oil and gas while meeting pressing social needs; funding required to achieve gas flare out is significant and grows with increased oil production.

Others are ageing oil production facilities built in the early and mid-seventies requiring modernization; building indigenous technology capability in complex deep water environments; indigenous participation and the pace of human capacity development (Institutional development and organisational strengthening) and crude oil and petroleum product theft.

The Petroleum Industry Bill (PIB)
The idea of the PIB began in 2007 following the recommendations of a Presidential Committee set up to carry out oil and gas sector reforms in the country. The reforms were expected to form the nucleus of Nigeria’s aspiration to become one of the most industrialised nations in the world by the year 2020.

The promising yet problematic PIB was first introduced to the National Assembly in 2009. Since then it has suffered a number of setbacks. The delays have been on account of diverse interests scrutinising its provisions.

Amongst these are the interests of legislators from the country’s North pitted against those of their Southern counterparts.

At a point in time, the outgoing administration promised to pass the bill before the end its regime, but was not able to do so.

The latest draft of the PIB was submitted to the National Assembly by the Ministry of Petroleum Resources in July 2012. The delay in passing the PIB has resulted in fewer investments in new projects, and there has not been a licensing round since 2007, mainly because of regulatory uncertainty. The regulatory uncertainty has also slowed the development of natural gas projects as the PIB is expected to introduce new fiscal terms to govern the natural gas sector.

Gas flaring
Despite longstanding laws against gas flaring, the burning of natural gas during oil extraction in Nigeria, and shifting deadlines to end the practice, the activity continues, with serious health consequences for people living nearby.

In the Niger Delta, where most of the flaring takes places, residents living near gas flares complain of respiratory problems, skin rashes and eye irritations, as well as damage to agriculture due to acid rain.

According to reports, Nigeria lost about $170.166 million, around N27.227 billion to gas flaring in one month, as oil and gas companies flared 39.07 billion Standard Cubic Feet (SCF) of gas in one month in 2014.

The Nigerian National Petroleum Corporation, in its recent report on activities in the oil and gas sector, revealed that the oil and gas companies produced a total of 226.255 billion SCF of gas, utilised 187.85 billion SCF and flared 39.070 billion SCF.

The Nigerian government has been working to end gas flaring for several years, but the deadline to implement the policies and fine oil companies has been repeatedly postponed.

Security, oil theft and pipeline vandalism
Security issues, sabotage and crude oil theft continue to present significant challenges in the industry, and adversely impacting on onshore oil and gas production as well as the challenge to deliver same to market.

According to the International Energy Administration (IEA), the instability in the Niger Delta has resulted in significant amounts of shut-in production at onshore and shallow offshore fields, forcing companies to frequently declare force majeure on oil shipments.

Security concerns have led some oil services firms to pull out of the country and oil workers’ unions to threaten strikes over security issues. The instability in the Niger Delta has also resulted in significant amounts of shut-in production at onshore and shallow offshore fields, forcing companies to frequently declare force majeure on oil shipments.

IOC Divestments in Nigeria
It is estimated that by the end of 2015, the International Oil Companies (IOCs) operating in Nigeria will have sold at least 250,00 barrels per day worth of equity in onshore and shallow water producing assets in the oil producing Niger Delta region.

According to Deloitte, it is an open secret that IOCs have been hesitating to make long term capital and technical investment in searching for or developing new offshore fields.

The attractiveness of the divestment option was first explored by BG when it withdrew from the Olokonla LNG export development project and disposed its rights in 3 oil prospecting licenses (OPLs) – 284, 286 and 332.
Royal Dutch Shell initiated its divestment programme in 2010 and was able to complete the sale of about 8 blocks by the end of 2012.

Just last week, Shell, Agip and Total completed their divestment programme from some of their major assets in Nigeria.
Though, the Minister of Petroleum Resources, Diezani Alison-Madueke, said the divestment should serve to enhance the profile of indigenous participation in the Nigeria oil and gas industry in the same manner and effect as the marginal oil field programme, industry watchers believed that this should be a source of concern to the incoming government.

Low refining capacity of refineries
Nigeria has a crude oil distillation capacity of 445,000 bpd. Despite having a refinery nameplate capacity that exceeds domestic demand, the country must import petroleum because refinery utilization rates are low.
Nigeria consumed 305,000 bpd of petroleum in 2014. The country has four oil refineries (Port Harcourt I and II, Warri, and Kaduna) with a combined crude oil distillation capacity of 445,000 bpd.

The refineries chronically operate below full capacity because of operational failures, fires, and sabotage mainly on the crude pipelines feeding the refineries.

The combined refinery utilization rate was 22 per cent in 2013. As a result, the country must import petroleum, although its refinery nameplate capacity exceeds domestic demand. Nigeria imported 164,000 bpd of petroleum products in 2013.

For several years, the Nigerian government has planned the construction of new refineries, but the lack of financing and government policies on fuel subsidies have caused delays.

Nigerian refineries managed to record an average capacity utilization 4.19 per cent, 19.24 per cent and zero per cent for KRPC, PHRC 1 and PHRC 11 and WRPC respectively in December last year. According to the NNPC report released at the weekend, 1,044 thousand barrels of dry crude oil, condensate and slop was received by the three refineries, KRPC, PHRC 1 and PHRC 11 and WRPC. “With an opening stock of 2,933 thousand barrels, total crude oil available for processing was 3,977 barrels out of which 1,396 thousand barrels was processed.

Total national domestic refining produced 165.54 thousand mt of finished and intermediate products. PPMC, which lifts products from the refineries evacuated 126.66 thousand mt of products”, it added. It said that altogether 10.63 mt of products was used by the three refineries as fuel and loss, consumption as fuel was 5.81 per cent while loss and flare accounted for 8.59 per cent of production.

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