This article is extracted from PESGB Monthly Newsletter, July 2006 and republished with permission.

Nigeria 2006: Politics and Oil Are Inextricably Mixed, But Prospectivity Is Still King

Nigeria in 2006 presents a chaotic yet compelling picture. Political maturity is taking a long time to arrive. This is understandable, in that the restoration of civilian rule and democracy in 1999 under President Olesegun Obasanjo was just 7 years ago, following the kleptocratic dictatorship under General Sani Abacha. But Nigeria is still one of the big hitters in terms of global oil supply, at the present, and will continue to be into the future. Oil-hungry nations without exception pay close attention to the availability of Nigerian low-sulphur crude. In addition, Nigeria is becoming central to the global LNG trade.

Presidential elections are due again in 2007 and – as is common in Africa – Heads of State like to prolong their stay in office (the current African doyen is Omar Bongo Ondimba of Gabon, in the seat since 1967). But moves through the National Assembly to change the 1999 Nigerian constitution to allow the President to stand for a third term have just been rejected decisively in the Senate. The tenure is now confirmed as 2 x 4 years with 100% relinquishment. The contenders for the Presidency in 2007 include such figures as Vice President Atiku Abubakar, but he does not have the backing of Obasanjo and is facing a widespread public perception against his probity. General Babangida may stand, and there is talk also of General Mohammed Buhari putting his hat in. Two ex-military rulers would like another turn. Party politics is secondary to power politics.

Fig. 1: Seismic operations in Nigeria (courtesy Shell). E and P operations (of all
operators) are subject to disruption from indigenes.

Overlain on this confused political picture is the worsening security situation. There is an undercurrent of ongoing “illegal oil bunkering” – an euphemism for crude oil theft for export. But in general terms, E and P operations in the Niger Delta have become downright dangerous, with the avowed intentions of ethnic guerilla groups such as MEND (Movement for the Emancipation of the Niger Delta) to disrupt operations. MEND or similar shadowy groups have captured and bartered hostages, destroyed pipelines, attacked drilling installations and threatened the huge NLNG plant. Onshore production of over 400,000 bo/d has been shut in this year. The ethnic groups involved are (mainly) the impoverished Ijaw and Itsekiri.

Although there have been many such disruptions of operations in the Delta dating back 5 years or so, the violence is becoming ever more serious, and it is affecting shallow water operations. In the past an invasion of a drilling barge could be “bought off” with minor payments, or promises of casual employment. Or the militants would simply get bored. This is no longer the case, as young men in speedboats toting AK-47s seize foreign workers for barter. This has affected near-shore operations – notably at Shell’s EA field. Those who oppose the gunmen – the local police or military – have got short shrift. The government’s response to the hostage taking has so far has been appeasement, which has emboldened the militants. Political moves – such as the increase in the “Derivation” formula for applying oil revenues for Niger Delta development are a step in the right direction. MEND and others do not have an obvious political agenda, so dialogue is problematic at best. But for some citizens of the Delta, these guerillas are heroes.

One possible scenario is that the tone will harden after the Presidential elections in 2007, and militarization of the Delta will ensue. However, the Nigerian army (with no ethnic relation to the tribes in the Delta) has little taste for, nor experience of, the swamps. No hearts and minds campaign is possible here. Additional protection for the many offshore installations is coming from the US navy, which is patrolling off the coast – as revealed at a military symposium “Seapower for Africa” held in Lagos at the end of May.

But Nigeria, the giant of Sub-Saharan African oil, represents for domestic and foreign investors a major opportunity. Despite the evident logistical and security problems in the oil operations, there is no shortage of suitors arriving at the Presidency at Aso Rock in Abuja to discuss participation in “oil blocs”. With remaining proven and probable resources around 35 Bb and 200 Tcf gas with significant yet-to-find, and low finding costs, there is ample scope. The government knows quite well what natural resources it is sitting on, and will exploit them to maximum gain. The gain is a mixture: Diversification of investors (an encouragement for Asian companies); infrastructure building (notably in the Delta, in an attempt to evolve out of the current insecurity); and political advantage (to win the next election).

Fig. 2: Bonga FPSO (courtesy Shell). Peak production will be around 225,000 bo/d;
similar FPSO operations have been established at Erha (ExxonMobil); and will be at
Agbami and Bosi (Chevron), Akpo and Usan (Total). Others are under consideration.

The 2005 Bid Round has more-or-less been settled. Commendable efforts were made to install a transparent bid process. But preposterous bids were accepted from local companies which did not have the wherewithal to pay the promised bonuses, nor to conduct the work programmes – at least without additional partners. Few of these bidders were bona fide exploration companies. At least half of the offers were of this nature, and of the 77 blocks on offer, the majority were not let. But the key winners were Korean National Oil Co (KNOC), Petrobras and BG. UK company Centrica also secured operatorship of two blocks. Equator Exploration secured important equity in OPL 321 and 323. Local (bona fide) oil company Conoil was also successful (OPL 257).

The 2006 Bid Round is designated a “Mini Bid Round” and only companies which gave commitments to build infrastructure were pre-qualified to participate. Thus the Mini Round did not follow the procedures (recommended by the Norwegian government advisor INTSOK) for a “Regular Bid Round”. One suspects that there will be a lot of later behind-the-scenes horse trading, and in all likelihood those excluded from initial participation may form groups with the successful bidders. The acreage on offer is quite interesting, notably relinquished portions of various of the 1993 deep water PSCs. These relinquished tracts are adjacent to the giant successes of the late 1990s. For example, the OPL 212 relinquishment is adjacent to Shell’s Bonga (OML 118) ; OPL 209 adjacent to ExxonMobil’s Erha (OML 133) ; OPL 216 adjacent to Chevron’s Agbami (OML 127); OPL 246 adjacent to Total’s Akpo (OML 130). It is known that previous operators earlier made major efforts to retain (or renegotiate) the residual exploration acreage, due of course to its prospectivity. For OPL 246, South Atlantic Petroleum, owned by political heavyweight (and ex-Defense Minister) Lt Gen Theophilus Danjuma has taken steps in the Courts, saying that the acreage has been revoked for political reasons related to Danjuma’s non-support for the “Third Term Agenda” for President Obasanjo. The General’s wife, Mrs Daisy Danjuma, is a Senator. OPL 246 was withdrawn from the Round as the affair is sub-judice. The government’s legal counsel said in court that, should SAPETRO win the case, this would “endanger Nigeria’s oil policy.”

Fig. 3: A Niger Delta Deep water hot spot: Latest exploration successes in deep water:
Bonga North 2X/2XST; Uge 1 /1ST. Also showing latest awards of OPL 286 (ex OPL 213)
and OPL 285 (ex OPL 212 ). Water depth contours are 500m, 1000m, and 2000m.

Eleven companies pre-qualified for the 2006 auction have, in the last few months, committed to invest $2 billion in infrastructural projects, although how this commitment is to be tied to the Production Sharing Contracts is not clear. Projects are promised in refining, power generation, and even agriculture.

Bids from all these companies were opened on 19 May. Sixteen blocks received offers. CNOOC received four blocks. An earlier state visit by Chinese President Hu Jintao to Nigeria saw a preliminary protocol signed for the Chinese state oil companies to get “first option” on these - OPLs 721 and 732 in the Chad Basin; OPL 471; OML 65 (onshore Delta). Altogether, a quixotic mix. It will be interesting to see how the Chinese companies will operate in the Delta, notably in OML 65, not a long way from the hot-spot of Warri. Predictably, MEND has already issued threats against the incoming Chinese.

Indian state company ONGC-Videsh, unsuccessful in the 2005 battle against KNOC for OPL 321 and 323; lodged a successful bid with Mittal Steel as ONGC-Mittal. It paid $65million for OPL 279 (ex-OPL 209), and OPL 285 (ex-OPL 212). These are the prize blocks. The consortium has promised to build a 180,000 bo/d refinery, an east-west railway and 2000 MW of power generation.

British Gas/Sahara consortium received OPL 286-DO (ex OPL 213) and paid a signature bonus of $55 million.

Local companies (probably backed by major politicians), also feature on the list. INC Natural Resources (which claimed already to have certain rights at least a month before the auction), received OPL 252 and OPL 292 (ex-OPL 217). Transcorp, a newly formed Nigerian conglomerate with government financing, submitted an anomalous bid, by failing to present the requisite financial bid bonds, but was accepted for three blocks (including ex-OPL 220).

Clear Waters Refining (underwritten by the Rivers State government) bid with Sahara, and obtained OPL 289.

Nig Del United Oil Company, established by the government to entice militants away from violence and into the oil business, received an onshore block, OPL 233.

Some details are yet to emerge. But, despite the political uncertainties for 2006-2007, and the daily bulletins on security problems emanating from Port Harcourt and Warri, one can say that “in the era of global supply anxiety, oil prospectivity is still king”. The most recent deep-water exploration results show that successes similar to those in the Lower Congo Basin in Angola and Congo can be obtained. For example, Shell Nigeria’s Bonga North 2X and 2XST has created the possibility of a new pole of production in OML 118, and volumes may be sufficient to establish a separate FPSO operation there. In OPL 214, ExxonMobil has made the first really important discovery from a Year 2000 deep-water exploration block: Uge 1 /1ST discovered 100m of net oil sand and looks to be potentially commercial.

Moreover, the deep-water potential – which will be chased for years to come – is located a long way from the aggrieved communities.

And, when the 2006 Mini Bid Round is completed, the exploration base will be expanded yet again to include state companies from Korea, India, and China, to add to 2005 incomers (BG, Centrica, Equator). In parallel, there will be evolution in the local company participation.

Selected further reading

For a listing of 375 tribes in Nigeria and some tribal maps covering the Delta, see www.onlinenigeria.com. For a map of the States of Nigeria, and population density, see wikipedia.

The Economy of Conflict in the Oil Rich Niger Delta Region of Nigeria, Augustine Ikelegbe, Nordic Journal of African Studies 14 (2) 2005, 208-234