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Author Topic: The Investment Opportunities in Nigeria’s Oil and Gas Sector  (Read 1201 times)

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A Speech Delivered By Diezani Allison-Madueke (Mrs.) Honourable Minister,

Ministry of Petroleum Resources, Nigeria At Nigeria – South Africa Business Forum during Mr. Presiden's visit to South Africa, from 6th – 7th May, 2013


It gives me great pleasure to attend the Nigeria – South Africa Business Forum and to address this distinguished forum on “The Investment Opportunities in Nigeria’s Oil and Gas Sector”. The ties between Nigeria and South Africa are historic ones, both nations being resource rich in their own ways and leading economies in Sub-Saharan Africa (SSA).

Nigeria is the second largest economy in Africa (after South Africa) with a GDP on purchasing power parity of $418 Billion and ranked 31st largest economy in the world. In the last decade, the Nigerian economy has grown at an average rate in excess of 6.5% and with a population estimated at 160 million is the largest market in Africa.

Based on the foregoing, the Nigerian economy has been rated as one of the fastest growing in the world and to coin the phrase by Goldman Sachs, it is firmly in the group referred to as “The Next Eleven”.

It is therefore of particular importance, that both Nigeria and South Africa as the two biggest economies collaborate in unlocking the full potential of Africa’s development. Naturally, the prominence of Nigeria’s oil and gas resources (10th and 12th largest in oil and gas reserves respectively) means that this sector offers world scale opportunities for investment.

It is in this context that I shall be discussing investment opportunities in Nigeria’s oil and gas sector.

I am honoured to be invited to speak at this very important “IHS CERA’s annual Executive Conference’’ and to make some remarks on the “Drivers of Change: Geopolitics, Economics and the Energy Future.”

Natural resources, politics and economics have always been inextricably linked. The significance of oil throughout the 20th and 21st centuries is clear to see from our recent past. Wars have been fought over oil; economies have been driven into recession over oil prices. The author of “The Prize: The Epic Quest for Oil, Money and Power” – Mr. Daniel Yergin, has been one of the most important raconteurs of this inter-relationship and therefore I feel honored to be here at this forum to reflect on the opportunities and challenges this poses to our energy future.

Although resource exporting and importing nations have talked about co-operation to stabilize oil prices, the intense political and economic struggle has not abated and is not likely to abate soon. In discussing this topic, I will like to focus on these factors that influence and impact the oil and gas industry worldwide namely politics, economics, security and the environment.

Politics: Oil and gas are natural resources that are controlled by the State in most countries and therefore have political dimensions. Because resource ownership is vested in the state, the state provides the legislative, regulatory frame work and fiscal terms for which investors participate in the oil and gas industry. In Nigeria with the advent of the 4th Republic, this is done through a bi-cameral legislature.

The international dimension of the politics of oil is reflected in the pressure that resource rich countries are subjected to by resource deficient countries in order to guarantee security of energy supply, moderation of price increases and competition for resource capture.

Political events such as the Arab Spring, Iran nuclear crisis and the Syrian civil war all contribute to geopolitical tensions and reflect the uncertainties in which the oil and gas industry operates under.

Economics: GDP growth is impacted directly by oil and gas prices and therefore there is a link between energy consumption and the strength or weakness of the global economy.  Global oil demand as at 1st half of 2011, stood at 87.8mpbd while supply was 87.15mpbd but these figures are higher than 86.8mpbd and 86.4mpbd for 2010. However, they are lower than earlier projections because of slowing global economic recovery especially in developed countries. As economic growth slows in emerging economies of China and India, prospects for increased global oil demand are also dimming. When oil prices are low, demand especially in the transportation sector grows rapidly and at high prices demand destruction takes place.

Due to the link between prices and demand, investment decisions are made based on long term view of prices. Most oil companies manage the volatility of oil price and governments must do likewise if they are natural resource dependent like Nigeria.

In low price environments, incentives are used by governments to attract investors, for example, the Memorandum of Understanding introduced in Nigeria in 1986. However, there has been a general upward shift in energy prices since 2004 and therefore governments tend to claw-back on incentives given.

Security: The third factor is security. Resource nationalism often creates a demand by some sub-national groups for resource control and more equitable distribution of natural resource proceeds. Due to the high natural resource economic rent, there is often a contest by the ruling elite resulting in agitation which can sometimes breed violence. The recent Niger–Delta militancy is a typical example of this phenomenon which has been tackled by the implementation of the amnesty program.

In many areas of the world, border disputes are often aggravated by the presence of natural resources. For example the Spratly islands in the South China Sea where various nations are laying claims to what is thought to contain significant natural resources. Nearer home the recently resolved Nigeria – Equatorial Guinea border disputes and the Nigeria – Cameroun (Bakassi) disputes are examples of how the control of natural resources can create security challenges among neighbors. Similarly, external interests often follow natural resource opportunities.

Environment: Oil and gas operations need to be properly carried out to minimize environmental footprints especially in sensitive coastal areas because hydrocarbons can be pollutants if improperly handled. The environmental impacts of improper handling of oil and gas activities are evident in illegal bunkering, artisan refining activities and land or water pollution.

There are numerous sites in Nigeria where environmental degradation is quite acute. The recent UNDP report on Ogoni land for example has shown the devastation caused by such activities. The consequential environmental degradation from pipeline vandalism also requires significant investment in the future to remediate. The government of Nigeria is tackling such activities through enforcement and the Hydrocarbon Pollution Restoration Program (HYPREP)

The Energy Future

I shall now focus on a series of important events that are likely to shape the oil and gas industry going forward.

Impact of Tight Oil, Shale Oil and Gas

The most important event in the horizon of the oil and gas industry is actually the direction the US shale oil and gas will take in the medium to long term. In the US, tight oil, shale oil and gas resources are proving to be much larger than previously thought. Oil supply has a large price upside and break-even price of most tight oil are in the range of $40 - $60 per barrel. This production cost is economic in view of current $100/bbl oil prices.

Between 2007 and 2011, US shale gas share of total gas supply increased from 8% to 32%; consequently pipeline & LNG import share of total gas supply declined from 16% and 3% in 2007 to 12% & 1% respectively. As a result of shale gas production, it is projected that U.S. will become a net exporter of natural gas in the year 2020.

Implication of Shale Gas Production on Nigeria

Tight oil and pre salt resources are proving to be the largest among the new exploration concepts and the major contribution to future resources are domiciled in North America and Brazil. This new paradigm may lead to supply outstripping demand and a resultant oil price drop.

The US has been cutting back on imports of light sweet crude and the rate of total imports has decreased by 10% in the last two years. US dependence on oil imports is expected to continue declining over the next 10 years reaching a share of about 43% of total oil consumption by 2020 from 67% in 2005.

The impact of US shale oil can be seen in declining imports from countries such as Nigeria. This new realignment in the oil markets has not escaped the attention of the government of Nigeria. We are committed to finding new markets and processing most of our crude domestically to meet our growing demand for refined products.

Renewable Energy

The exhaustive nature of fossil fuel and the consideration for the preservation of the environment are key factors for the development of renewable energy. A steady increase in hydropower and the rapid expansion of wind and solar power has cemented the position of renewables as an indispensable part of the global energy mix.

According to IEA, by 2035, renewables will account for almost one-third of total electricity output. The rapid increase in renewable energy is underpinned by falling technology costs, rising fossil-fuel prices and carbon pricing. 

In SSA, the long term benefits of having renewable energy integrated into available energy options are known, however, the governments on the continent have not turned to innovative ways to improve uptake of renewable energy.

Considering that Nigeria’s reserves of 37 Billion barrels could deplete in about 40yrs at the current production rate, efforts have been made by Government to emplace appropriate policy frameworks with respect to renewables. So far implementation for biofuel has been limited, however hydro renewables are a key part of our strategy for electricity generation in the medium to long term.

New Discoveries in Sub-Saharan Africa (SSA)

Africa's petroleum sector offers a tremendous diversity of world-class opportunities and would increasingly play an important role in the overall energy mix.  Independent explorers are leading the industry's exploration campaign and opening key new plays across the continent.

Huge gas finds in East African deepwater, together with the continuing strength of some West African oil plays, saw 61% of volumes and nine out of the ten largest discoveries added in SSA in 2012.  Exploration success especially in Mozambique (which alone accounted for one-third of the new volumes during the year) and Tanzania has been huge and in the next five years, analysts have predicted that the export capacity potential for gas supply from East Africa would have risen steeply. This would impact positively on global energy markets.
Source: Wood Mackenzie

Aftermath of Japan Nuclear Crisis

The crisis at Japan's nuclear plants has caused a re-assessment of nuclear power plants and projects worldwide and could cause an uptick in demand for other sources of energy including coal, oil and natural gas.

Before the earthquake and tsunami that hit northern Japan in March 2011, nuclear energy had been making a comeback. Concerns about global warming had led a range of environmentalists to set aside their concerns and join in pushing for the revival of an industry whose growth had stalled after the Three Mile Island accident in 1979 and the Chernobyl disaster in 1986. Countries such as Germany have given indicative dates when their nuclear plants will be shut.

For gas exporting countries like Nigeria, this represents an opportunity to grow market share in not only the Pacific Basin where there are competing LNG projects, but also in South America and Europe. Despite the developments in US shale gas industry, it is my considered view that the extent of the impact of shale gas in other jurisdictions may be tempered by the following factors:

•       High production costs
•       Energy intensive production techniques
•       Uncertainty regarding estimates of technically recoverable resources
•       Lower recovery rates compared to conventional oils
•       Continued development dependent upon price signals of hydrocarbons and technical and environmental factors.

Concluding Remarks

In conclusion, politics and economics will continue to dominate the oil and gas industry. It is true now as is likely to be in the future because in most jurisdictions, oil rights are granted by state actors and because of the huge economic rents accruing from such rights. A kaleidoscope into the future suggests that this dynamism will remain.

Oil and gas producers and consumers must somehow reach consensus to safeguard the energy security of the world. The emergence of new players whether from developed countries such as the US or developing countries in SSA is not a threat to existing producers but opportunity to grow the energy market of the future.

I thank you all for your attention.


Adewale Odubiyi
Owner, Nigeria Oil & Gas Forum

Nigeria Oil & Gas Forum


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