Nigeria needs to urgently revise the contracts governing its onshore oil blocks if it wants to stem the decline of production in a low oil price environment, the head of Oando, Nigeria’s biggest independent oil company said February 11.
Nigeria’s state-owned NNPC, which manages the Nigerian government’s average 57% equity interest in joint venture oil businesses with foreign companies including Shell, ExxonMobil, Chevron, Total and Eni, has struggled in recent years to fund its share of operations.
Nigeria is now struggling to meet monthly cash call obligations for joint venture oil and gas projects due to low global oil prices, which have slashed Nigeria’s oil earnings, NNPC said in the week ended February 5.
“There has been a reduction in the cash available to finance the NNPC share of our joint ventures, thus leading into us mortgaging production, reducing capacity, reducing our ability to generate reserves, reducing our production,” Adewale Tinubu told Platts on the sidelines of the International Petroleum Week conference in London.
A wave of divestments by foreign oil companies of onshore assets has seen indigenous producers increase their output in the last few years and Oando has been one of the companies at the forefront of the trend.
But Tinubu said the government needs to look at converting its onshore assets into production sharing contracts which were widely used for offshore projects.
Under PSCs, NNPC holds the concessions while the oil companies fund development of the mostly deepwater offshore blocks and recover their costs from the production after royalty payments.
“This will relieve the government of the pressure of providing capital expenditure and can focus on earning royalties and its own share of production and its own share of profit,” he said.
Tinubu noted the PSC model has worked for offshore production — which currently is over 1 million b/d — and the template needs to be applied to its onshore assets.
“It seems like an obvious choice for us to make. We do need speed and a timeline towards actualizing that. That is my fundamental request for a reform,” he said.
Nigeria first introduced the PSCs, a form of operating arrangement with foreign oil companies, in 1993 to help solve NNPC’s inability to fund its share in joint venture oil operations.
But the contracts terms have recently come under fire for being too generous and NNPC last year said it was looking to renegotiate the PSC terms with foreign producers to help stem the impact of the oil price slump on government revenues.
Nigerian oil output has stagnated at around 2 million b/d even though the country has the capacity to produce up to 3.2 million b/d, largely because of underinvestment in exploration and also due to oil theft, pipeline sabotage, and corruption.
Shifting focus upstream
Oando has significantly grown its upstream business in the past few years and Tinubu said this was part of transforming Oando into an integrated oil company.
Oando acquired four onshore oil blocks — OMLs 60, 61, 62, 63 — as well as two offshore blocks — OMLs 131 and 145 — in 2014 from ConocoPhillips for a total of $1.65 billion.
The acquisitions bolstered Oando’s oil production to 53,169 b/d in third-quarter 2015 from 35,307 b/d in the year-ago period. The Q3 average is, however, down slightly from Q2, when it produced 56,917 b/d.
The company is expected to release its 2015 results next month.
“We wanted to balance our portfolio to have a substantial export presence and that is what upstream provides for us,” Tinubu said. “It is a powerful tool to have to be in the export market because you do have your own dollar supply which provides substantial support for your downstream infrastructure investments. That was a priority for us,” he said.
Oando, listed on the Nigerian, Johannesburg and Toronto stock exchanges, said last year it had a five-year production target of 100,000 b/d.
Oando, which is also Nigeria’s largest fuel retailer, sees the priority for the Nigerian downstream sector is to first “revamp and improve” the state’s existing refineries, then expand refining capacity by new investments, Tinubu said.
He said Nigeria’s reliance on oil product imports was not such a bad idea in the short term due to the low oil prices and also because of the excess refining capacity in Europe.
“Clearly we need to use this lag time toward revamping our refineries and increasing the refining capacity we have … we do have aspirations to participate in that … but no immediate plans,” he said.
Nigeria’s four refineries, which have a combined nameplate capacity of 445,000 b/d of crude, were shut for seven months in 2015 and the utilization rate was 4.88%, making it very reliant on imports.
The poor performance of the refineries, caused mainly by mismanagement and years of neglect, has forced Nigeria to import almost all its domestic fuel needs, estimated at more than 1.2 million mt/month.
He said that according to the new pricing template issued by the government it was paying no subsidies on gasoline as the landing costs had fallen due to the low oil prices which was providing some cushion to the country.