Nigeria is the largest oil producer in Africa and the eleventh largest in the world, averaging 2.5 million barrels per day (bbl/d) in 2004. In August 2004, Nigeria’s finance minister announced plans to produce 2.6 million bbl/d of oil in 2005. The Nigerian government plans to increase oil production to 3 million bb/d in 2006 and 4 million bbl/d in 2010. Such aspirations have led to disputes with the Organization of Petroleum Exporting Countries (OPEC), as the country frequently exceeds its production quotas. On 16 March 2005 OPEC set Nigeria’s production quota at 2,265,000 bpd compared to 2,224,000 bpd, the quota set in September 2004.
In January 2005 Nigeria earned a total of US$2.6 billion, an equivalent of N345.8 billion from the sale of crude oil alone, at an average of US$46.86 per barrel and with an estimated daily sale of 1.79 million barrels The majority of Nigeria’s crude exports are destined for markets in the United States and Western Europe, with Asia and Latin America becoming increasingly important as well.
Oil was discovered in Nigeria in 1956 at Oloibiri in the Niger Delta after half a century of exploration. The discovery was made by Shell-BP, at the time the sole concessionaire. Nigeria joined the ranks of oil producers in 1958 when its first oil field came on stream producing 5,100 bpd. After 1960, exploration rights in onshore and offshore areas adjoining the Niger Delta were extended to other foreign companies. In 1965 the EA field was discovered by Shell in shallow water southeast of Warri.
In 1970, the end of the Biafran war coincided with the rise in the world oil price, and Nigeria was able to reap instant riches from its oil production. Nigeria joined the Organisation of Petroleum Exporting Countries (OPEC) in 1971 and established the Nigerian National Petroleum Company (NNPC) in 1977, a state owned and controlled company which is a major player in both the upstream and downstream sectors.
Despite its major problems of civil unrest, political instability, border disputes, corruption and poor governance, international oil companies have always seen Nigeria as an attractive area for upstream investment. Exploration has taken place in five major sedimentary basins, namely, the Niger Delta, the Anambra Basin, the Benue Trough, the Chad Basin and the Benin Basin. The most prospective basin is the Niger Delta which includes the continental shelf and which makes up most of the proven and possible reserves. All oil production to date has occurred in this basin.
In February 2005 Nigerian lawmakers announced that they would launch a three day public hearing in the capital Abuja, to discuss how to amend the laws governing the oil industry in order to create more local jobs and boost government revenues. The House of Representatives committee on petroleum resources will review the 1969 Petroleum Act. In March 2005 the government appointed Britain’s Hart Group to conduct a five year audit of the activities in the oil and gas sector, in an effort to give effect to government’s commitment to the principles of Extractive Industry Transparency Initiative (EITI). The idea of NEITI is to have full disclosure of oil and gas sector which is why NEITI appoints advisers to select competent companies to carry the audit of the sector.
Since 1990, Nigeria has opened up the deeper areas for exploration. In 1990, the Government offered a number of new concessions in water depths of up to 3,000m. BP/Statoil, Shell, Mobil, Elf, Agip and Exxon were among the major oil companies that won concessions. Estimates of recoverable oil reserves in Nigerian deepwater areas range from eight to nearly 20 billion barrels. Exploration and appraisal began in 1995 and several discoveries have been made in Nigeria’s deepwater although high production costs associated with deep water have meant that production has been delayed.
Shell’s Bonga field (225,000 bbl/d capacity) is expected online in mid-2005. ExxonMobil’s Erha, East Area Oil, Bosi, and Eti/Asasa fields with capacities of 150,000 bbl/d, 110,000 bbl/d, 50,000 bbl/d, and 25,000 bbl/d, respectively, are scheduled to come online between 2006 and 2007. ChevronTexaco’s Agbami field (250,000 bbl/d capacity), Total’s Usan and Akpo fields (205,000 bbl/d combined capacity), and Shell’s Bonga Southwest (145,000 bbl/d capacity) are in various stages of development as well.
ExxonMobil is currently producing around 570,000 bbl/d in Nigeria and plans to invest $11 billion in the country’s oil sector between 2003 and 2011, increasing production to 1.2 million bbl/d. The majority of the increase will occur at the 150,000-bbl/d Erha development, expected to come online in 2006. In addition, ExxonMobil’s 400 million barrel Yoho field began initial production of 90,000 bbl/d in February 2003. The $1.2 billion field is located in the shallow waters of Block OML-104. Although Yoho’s full-field output of 150,000 bbl/d was expected in late 2004, the timetable for completion has been pushed back to mid-2005.
ChevronTexaco, Total, Agip, and ConocoPhillips are also involved in the Nigerian oil sector. Output at Total’s Amenam field reached 120,000 bbl/d in January 2005. The Amenam field contains reserves of 500 million barrels of oil.
In January 2005 Dow Jones reported that the Nigerian government revoked development rights for 24 undeveloped oil blocks and will offer them again in the country’s next major oil licensing round.The blocks had been awarded to oil majors including Royal Dutch/Shell Group (RD SC), ChevronTexaco Corp. (CVX), as well as small oil companies. The previous owners of the blocks had held them for at least 10 years, beyond which the government can revoke development rights.
In October 2004 Total’s subsidiary Nigerian operating subsidiary, Elf Petroleum Nigeria Ltd. made a significant discovery in the area west of the Usan field in the deepwater Oil Prospecting License (OPL) 222, offshore south-eastern Nigeria. Nexen has a 20% interest in OPL-222. Oil was sampled at Usan 5 in several levels confirming the presence of additional quantities of oil as well as further potential in previously untested reservoirs. In January 2005 Elf Petroleum Nigeria Ltd. (EPNL), has encountered hydrocarbons in OPL 222, During the well test, Usan 6 was flowed at a rate of 5,800 barrels of oil per day under restricted flow conditions.
In September 2004 Shell Exploration and Production (EP) Africa announced that it aims to invest $9-billion in Nigeria’s oil and gas over the next five years. The money will go to the development of oil exploration and production in deep offshore leases, expand the Nigerian liquefied natural gas project, and cover joint operations with the Nigerian National Petroleum Corporation.
In January 2005 Syntroleum Corporation announced that it had finalized agreements with Lundin Petroleum, Challenger Minerals, Providence Resources, Howard Energy Co., Palace Exploration and Yinka Folawiyo Petroleum Co. Ltd to begin the appraisal of the Aje discovery offshore Nigeria located in Oil Mining Lease 113. The Nigerian government approved the agreemtn in April 2005. The OML 113 license covers approximately 454,000 acres located off western Nigeria near the border with Benin.
Yinka Folawiyo Petroleum Company (YFP) is the licencee and the operator of OML 113 which was granted for a 20 year term in June 1998. Aje is situated 24 kilometres offshore in water depths ranging from 99 to over 1,500 meter. Aje was discovered with the drilling of the Aje- 1 well in 1996 which encountered a thin oil rim in the gas-charged Turonian sandstone testing at a combined flow rate of 42 mmcfd and 2,262 bopd from three zones. Due to mechanical problems with the well the Aje-1 well only reached the Turonian sandstone.
The Aje-2 appraisal well drilled in 1997, penetrated the deeper Cenomanian sandstone at a depth of 2,400 metres. The Cenomanian oil zone was tested by Aje -2 from a structurally low position at a rate of 3,866 bopd of 39 degree API oil from an 8 metre thick interval. The Cenomanian section encountered by Aje-2 has net reservoir thickness of 50 metres of sandstone. Following the approval of the transaction it is planned to drill the first appraisal well Aje-3 in the second or third quarter of 2005. The Aje-3 well has the potential to confirm significant volumes of oil and gas reserves.
In February 2005 Esso Exploration and Production Nigeria-Sao Tome “One” Limited, has signed a Production Sharing Contract (PSC) with the Nigeria – Sao Tome and Principe Joint Development Authority (JDA) and consortium co-venturers ChevronTexaco and Dangote Energy Equity Resources, to explore for commercial hydrocarbons in Block 1 of the offshore Joint Development Zone (JDZ).
In March 2005 Spinnaker Exploration Company entered into a Farmout Agreement covering a 12.5% interest in OPL Block 256 offshore Nigeria from Ocean Energy Nigeria Limited. OPL Block 256 was acquired by Devon and Nigerian Petroleum Development Company Limited (NPDC) in a mini-bid round in 2002. Block 256 is located approximately 200 kilometers off of the coast of Nigeria in water depths ranging from 1,500 to 2,800 meters.
In March 2005 Mart Resources signed a formal agreement with Network Exploration to participate with Network in the development of the Qua Ibo Oil Field in Nigeria. The Qua Ibo Oil Field is located onshore in Nigeria’s Niger Delta region and was awarded to Network under the Nigerian Government’s marginal field allocation program. Fields allocated under this program contain significant proven reserves determined by previous drilling, but remain undeveloped.
In April 2005 a subsidiary of Pioneer Natural Resources joined Oranto Petroleum and Orandi Petroleum in an existing production sharing contract on Block 320 in deepwater Nigeria gaining exploration rights from the Nigerian National Petroleum Corporation. The 442,000 acre (1,790 square km) block is located about 90 miles (150 km) southeast of Lagos in water depths ranging between 6,900 to 8,900 feet (2,100 to 2,700 m).
In April 2005 Equator and Peak Petroleum Industries Nigeria Limited signed an agreement to undertake the potential development of two oil and gas discoveries and drill a significant exploration prospect in Oil Mining Lease (OML) 122, offshore Nigeria. The estimated costs of the 2005 activities on OML 122 to Equator are US$25 million including seismic license fees, G&A; costs and the drilling of two wells.
In May 2005 the Nigerian National Petroleum Corporation (NNPC) authorized Total, as operator, to begin developing the offshore Akpo field on the Oil Mining License (OML) 130, Nigeria. Total holds a 24% interest in the OML 130, alongside NNPC, Petrobras and Sapetro.
Licensing History
Shell-BP was the sole concessionaire in Nigeria in 1956 when it made the first oil discovery in Oloibiri in the Niger Delta. This oil field came on stream in 1958. Following this, exploration rights to offshore and onshore areas adjoining the Niger Delta were made available to foreign companies. Nigeria achieved independence from Britain in 1960. After 1960 exploration rights were extended to other foreign companies.
In 1977, Nigeria established the Nigerian National Petroleum Company (NNPC) in 1977. The NNPC became the dominant player in the downstream sector and acquired a 57% stake in the upstream sector through joint venture agreements with all major international players.
In 1990, the Government offered for bidding a number of new concessions in the deep outer shelf of the Delta area. Water depths of some blocks extend to about 3,000m. In 1993, deep offshore blocks in water depths between 200 and 3,000m were awarded to local and international oil companies including BP/Statoil, Shell, Mobil, Elf, Agip and Exxon.. The exploration and development campaign began in 1995. To date, a number of sizeable discoveries as well as modest ones have been made. Some of the major commercial finds include Bonga (OPL 212), Agbami (OPL 216) and Erha (OPL 209) and by Elf in OPL 246. In the Niger Delta shallow continental shelf and onshore blocks, new discoveries have also continued to be recorded.
In 1998, the military government created 25 new deepwater oil concessions. The blocks designated OPL 317-325, OPL 251-265 are located in waters with depths between 6,600 ft and 16,500ft. In 1999 Obasanjo announced the cancellation of 16 of the concessions granted during this licensing round. A majority of the awards (11 of which were in deepwater areas) were granted to local firms which were believed to have ties to active and former senior military officials. This was followed by the cancellation in February 2000 of 31 prospecting leases awarded to local firms because they failed to develop them. Local firms currently produce less than 5% of Nigeria’s total oil production, a figure significantly lower than the targeted minimum of 10% by the year 2000.
Legal / Fiscal – Joint Venture Arrangements
Production from Joint Ventures accounts for approximately 95 percent of the country’s crude oil production. The largest JV, operated by Shell Petroleum Development Company of Nigeria Ltd. (SPDC) and majority owned by NNPC, produces nearly half of Nigeria’s crude oil, with average daily production of approximately 1.1 million bbl/d.
A joint venture arrangement is defined as where one or more foreign oil companies enter into agreement with NNPC for joint development of jointly held oil mining licences and facilities. Each partner in the joint venture contributes to the costs and shares the benefits or losses of the operation, in accordance with its proportionate equity interest in the venture. One company is designated as the operator and is responsible for the day-to-day running of the venture. All budgets, work programmes and any contracts awarded must, however, be agreed by all parties.
Joint ventures are the agreements in place for shallow water and onshore exploration and for downstream ventures. Joint ventures have been subject to problems of the NNPC not contributing its share of the costs. This has resulted in exploration and production having to be cut back due to the underfunding.
Legal / Fiscal – Production Sharing Contracts
Because of the difficulties faced by the NNPC to fund joint venture operations and the need to increase Nigeria’s oil reserves, the federal government introduced the Production Sharing Contract. In these cases the NNPC engages a competent contractor to carry out petroleum operations on NNPC’s wholly owned acreage. The contractor undertakes the initial exploration risks and recovers his costs if and when oil is discovered in commercial quantities. If no oil is found, the company receives no compensation.
Under the PSC, the contractor has the full right to only cost oil (ie oil to recoup production cost) and equity oil (oil to guarantee return on investment). He can also dispose of the tax oil (oil to defray tax and royalty obligations) on NNPC’s behalf. The balance of the oil, if any, is shared between the parties (profit oil).
Almost all deepwater exploration is subject to this type of contract.
Participating Organisations
Challenger Minerals Inc
Chevron – Texaco
Through its local subsidiary, Texaco Nigeria and Chevron Nigeria Ltd, ChevronTexaco are a major oil producer through its interests in joint vetnures with other local and foreign companies in Nigeria.
ConocoPhillips
Through its subsidiary, Phillips Oil (Nigeria), the company produces oil from several established fields in Nigeria.
Consolidated Oil Limited
Consolidated Oil produce 7000 bpd from the Bella Field, OML 103.
Eni
Eni is a producer and explorer through its subsidiary, the Nigerian Agip Oil Company Ltd (NAOC).
ExxonMobil Corporation
Through its subsidiaries in Nigeria, ExxonMobil has a 40% interest in several producing fields in Nigeria.
Howard Energy Co., Inc.
Lundin Petroleum AB
Nigerian National Petroleum Corporation
The NNPC is Nigeria’s state operated gas, oil and petroleum controlling entity, with several production sharing agreements from oilfields throughout the country.
Providence Resources plc
Shell International Ltd
Through its interests in the SPDC, Shell is one of Nigeria’s largest oil producers and explorers.
Sovereign Oil & Gas
Syntroleum Corporation
TOTAL
Through subsidiary Elf Oil Nigeria, TotalFinaElf has a 40% interest in several producing wells as well as interests in several concessions in Nigeria.
Yinka Folawiyo Petroleum Company Limited
