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How Nigeria Races to Extract Oil Before It’s Too Late: QuickTake

Nigeria Races to Extract Its Oil Before It’s Too Late

Nigeria’s vast reserves of oil and gas have generated riches but have also led to decades of conflict and corruption. Resentment has fed bouts of militancy in the petroleum-rich Niger Delta, the low-lying waterways bordering the Atlantic Ocean, where minority ethnic groups have struggled for a share of the wealth. Now Nigeria’s leaders want to almost triple crude production just as a warming world seeks to move away from fossil fuels. They aim to fill a void left by Royal Dutch Shell Plc, which pioneered development of the nation’s fields more than 60 years ago but is now pulling back from Nigeria.

1. What is Nigeria doing?

After years of stagnant oil output, the government enacted a law in August cutting taxes on energy companies to more globally competitive levels. Production royalties will range from 5% to 15%, depending on location, down from 7.5% to 20%. The move seeks to end uncertainty that’s held back investment and led to license disputes. The government also wants to revamp dilapidated state-owned refineries to wean the country off imports of processed fuels. “We are in the last mile of the oil economy,” Timipre Sylva, Nigeria’s petroleum minister, said when the law was passed. “We are in a race to produce as much oil as we can.”

2. How will the new law share the wealth?

Under the law, oil companies must set aside the equivalent of 3% of their spending to fund education and other projects in the communities affected by exploration. While campaigners had pressed for 10%, this could still amount to about $500 million a year. Oil accounts for about half of government income and more than 90% of foreign exchange earnings in Nigeria, where 80 million people, or about 40% of the population, live in abject poverty. Swings in oil revenue have led to devaluations of its currency, the naira. There’s a history of oil riches largely benefiting a politically connected elite. Nigeria is often held up as a poster child for the problem known as the “resource curse,” when mineral or energy wealth distorts an economy by destroying incentives to develop other industries. 

3. Why is Shell pulling back? 

Shell and other international companies have been offloading onshore and shallow-water fields to Nigerian producers, a trend that could accelerate. Instead, Shell is focusing on deep-water offshore fields. Those developments, which account for about half of the nation’s output, are more profitable and less prone to conflict. The shift follows lawsuits in Nigeria, the U.K. and the Netherlands brought by Niger Delta communities that accused Shell of polluting the area and destroying their livelihoods, which rely on fishing and farming. In August, Shell agreed to pay the Ejama-Ebubu people $111 million to resolve a dispute over a pipeline rupture during a civil war more than half a century ago. Shell, which planned to drop “Royal Dutch” from its name, says theft and sabotage are responsible for most spills.

4. Who stands to gain?

Mainly local energy firms. Prime candidates include Nigerian tycoon Tony Elumelu’s Heirs Holdings Ltd., which sealed a $1.1 billion deal in January 2021 to buy one of Shell’s oil blocks, and Lagos-based Seplat Energy Plc, which has expressed interest in shallow-water fields. The new law also has its critics. Fuel retailers oppose a measure they say could hand Aliko Dangote, a Nigerian who is Africa’s richest person, a dominant position over the sale of petroleum products when he finishes building what will be one of the world’s biggest refineries. They want to be free to bring in imports.

How Nigeria Races to Extract Oil Before It’s Too Late: QuickTake

5. Isn’t the world using less oil? 

Not yet. Although some forecasters predict oil demand will peak soon, the International Energy Agency, the energy forecaster, predicts it will level off in the mid-2030s before dropping very slightly through 2050. Oil and gas consumption in Africa could double by 2040. Much of the additional demand will come from Nigeria itself, where a population of more than 200 million is set to double by the middle of the century. One of the country’s challenges will be to reduce its crude production cost — among the highest in the world and close to three times that of Saudi Arabia. Both are members of the Organization of the Petroleum Exporting Countries, or OPEC, the global oil cartel.

6. How might it play out in energy markets?

Nigeria pumps about 1.4 million barrels of oil a day, less than its OPEC quota and down from 2.5 million in 2005. While it’s Africa’s biggest crude producer, it attracted just 4% of the $70 billion committed to the continent’s oil and gas sector from 2015 to 2019, according to accounting firm KPMG. President Muhammadu Buhari’s administration wants to increase production to 4 million barrels a day by 2025. That could cause friction with other members of OPEC, which limits supply to keep prices up. 

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