Kayode Oluwadare, CEO, Green Fort Ltd

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Nigeria's stagnating oil reserves 16 Apr 2020

A discussion about Nigeria's oil reserves might be ill-fitting during the current oil price crash. But the country’s energy security and competitive advantage in petroleum exploration make the discussion a pressing national agenda.
According to the 2019 BP Statistical Review of World Energy, the total proved reserves of oil as at the end of 2018 was 1.73 trillion barrels, with Organization of the Petroleum Exporting Countries (OPEC) accounting for 72 per cent of the global reserves. At current production levels, these reserves would last for 50 years.

The top five countries in the world by oil reserves are Venezuela with 300.3 billion barrels (bb), Saudi Arabia (297.7 bb), Canada (167.8 bb), Iran (155.6 bb) and Iraq (147.2 bb). Nigeria had the second largest reserves in Africa with 37.5 bb as of December 2018, after Libya (48.4 bb) with Algeria coming third on the continent (12.2 bb).

Following the steep drop in oil prices between mid-2014 and early 2016, oil and gas producers globally embarked on cost-cutting measures and restructuring of their operations. This led to a decline in investment in the sector, causing a contraction in the reserves of many oil-producing countries. While Saudi Arabia and the United States have rapidly increased their reserves over the period between 2008-2018, major oil producers like Russia have been struggling to halt their shrinking reserves.     

As Russia's net oil reserves declined from 106.4 bb to 106.2 bb from 2008-2018, Saudi Arabia grew its reserves by 33.6 bb in the same period, while the US, thanks to its shale oil boom, increased its reserves from 28.4 bb in 2008 to 61.2 bb two years ago. According to the BP report, Nigeria recorded net reserves of less than a billion barrels in the same period.    

Accounting for 2.2 per cent share of the global oil reserves, Nigeria stands favourably among countries with relatively high energy security. However, the country has not done enough to shore up its reserves in the last decade, despite the rhetoric of stakeholders to that effect. In 2018, the Nigerian National Petroleum Corporation (NNPC) said it would increase the country’s crude oil reserves by one billion barrels yearly from 37 billion to reach 40 billion by 2020. But this target is unlikely to be met, despite the NNPC's discovery of crude last year in the Kolmani River II Well on the Upper Benue Trough, in the north-eastern part of the country. The discovery will add about one billion barrels to Nigeria’s crude oil reserves.

It is important to note that at the current reserve and yearly production levels, the longevity of Nigeria's reserves – technically referred to as reserves-to-production (R/P) ratio – is 50 years. Demand for oil is currently low due to the decline in economic and social activities caused by the global spread of the COVID-19 coronavirus. But when oil demand rebounds, especially from Asia where there is usually a high demand for Nigerian light sweet crude during upcycles, downward pressure on Nigeria's existing reserves will ensue.

The potential future expansion of Nigeria’s economy and population is another factor that will contribute to reducing the reserves. Domestic oil consumption, currently estimated at 428,000 barrels per day, is expected to increase in the next few years. But year-on-year addition to the reserves will struggle to compensate for production, which keeps depleting the reserves.

The country needs to reverse this trend. To do this, concerted policy actions to boost investments in the oil and gas sector are fundamental. The uncertainty and delay in the passage of the Petroleum Industry Bill (PIB) is one of the key factors militating against investments in new oil fields to raise the country's reserves. According to Nigeria Natural Resource Charter (NNRC), an estimated $235 billion has been lost as a result of the non-passage of PIB. To further improve investor confidence, insecurity in the oil-producing region has to be successfully addressed.

All of these will not be easily achieved. Not unlikely, recent gains may even be eroded. The number of active rigs – a technical indicator of the level of exploration, development and production activities in the country's oil and gas sector – shrunk from 59 in 2013 to only nine in 2016. But according to data from OPEC in 2019, active rigs in Nigeria rose to 13 in 2017 and reached 32 in 2018. However, the latest episode of oil price collapse in the international market, where prices have dropped to below $30 per barrel, will lead to further cost-cutting by oil producers.   

Most exploration, development and production investments in Nigeria need oil price to be above $40 per barrel to be profitable. Under these circumstances, including a downbeat outlook for the future of oil prices, the government would need to sweeten the pot to reduce the obligation on investors in the oil and gas sector. The traditional international oil companies (IOCs) with Joint-Venture (JV) and Production Sharing (PS) Agreements with Nigeria have in recent years reduced their exploration and development activities by concessioning their holdings in onshore oil and condensates fields in order to maximize their gains in the deep-sea offshore fields.

The Deep Offshore and Inland Basin Production Sharing Contract (Amendment) Act, 2019 enacted in November does not adequately address the need to encourage investments and new projects in the industry. Instead, the legislation introduces a new royalty regime that aims to increase the share of royalties payable to the government from oil contracts.  

The Department of Petroleum Resources (DPR)’s 2018 Nigerian Oil and Gas Industry report shows that Production Sharing Contracts (PSCs) also have a high reserves depletion rate of 3.10 per cent and a life index of 32.15 years, compared to JVs, which have a depletion rate of 1.8 per cent and a life index of 56.34 years. This means a much deeper review of the PSCs is needed to mitigate the threat to Nigeria's energy security. Since production sharing agreements lead to a faster depletion of Nigeria’s reserves, then perhaps more exploration should accompany those activities as part of Nigeria’s benefits from them.   

Nigeria also needs to domesticate adequate technical know-how in exploration activities, which are currently dominated by foreign experts. Reducing the cost of procuring the expertise for exploration by having them done by indigenous production companies will help to scale up the exploration.

But the country has to diversify its energy sources. The transition to cleaner energy due to the increasing demand for climate change mitigation also means investment in fossil fuel projects will not be as robust as it used to be in the long run. This means that investing in Nigeria’s energy security would also require the country to be a major player in the renewable energy space. China has positioned itself to be the world’s renewable energy superpower, according to the International Renewable Energy Agency (IRENA).

But in the meantime, there is an urgent need to ramp up domestic and foreign investment in the exploration and development of new and moribund oil fields. Investors require a safe business climate to commit their funds into the country's assets, which Nigeria currently needs to leverage to implement its infrastructure and other macroeconomic policies.

To further reinforce investors' confidence in the sector, all hands must be on deck to fast-track the passage and the implementation of the PIB. Furthermore, the government must fulfill its cash-call obligation to its existing JV partners as this will send a positive signal to potential investors that might have been discouraged by the government's huge cash-call deficits.

To drive down the high technical cost in the industry, exploration activities in the less expensive onshore and shallow water fields should be prioritized over the very expensive and usually time-consuming offshore deep-sea drilling operations. The government also needs to show strong commitment in addressing kidnapping, militancy and vandalization of oil and gas installations.