Issue 125 • 2 November 2007

Yar’Adua tested by oil dossier, the outcomes are far from certain for Nigeria’s oil industry

Plans to revise oil contracts and the priorities given to gas supplies, controversy over equity crude liftings and debate over the extent that President Yar’Adua can escape the shadow of his predecessor. The Yar’Adua presidency is slowly taking shape, but ambiguous signals coming from Abuja leave more questions to be asked than the answers already available about Nigeria’s future direction, write Jon Marks and Our Gulf of Guinea Correspondent.

When President Umaru Musa Yar’Adua followed on from the previous resident of Aso Rock by taking over the oil portfolio in his new government he added further degrees to the steep learning curve on which he had embarked by agreeing to stand in place of Olusegun Obasanjo.

To some visitors Yar’Adua continues to plead that he is only now learning the oil industry, as well as the other onerous duties of Nigeria’s head of state, and that patience is needed; to others he is signalling that he has a vision, in which change must come sooner rather than later.

By creating a National Energy Council (NEC) to deal with emergencies, with himself at its head, Yar’Adua is personally identifying with a most problematic sector, which he decided early on must take an inordinate amount of his attention. The planned changes analysed by African Energy in early September are now working their way through the system (AE 121/1).

Even so, the signals coming from the Rock are ambiguous, to such a degree that it is not just a resurgent militant campaign in the Niger Delta – that in the past fortnight has targeted workers and their families from major joint venture (JV) players Eni, Royal Dutch Shell and Total – that has helped drive global oil prices to $90/bbl.

Adding to IOC jitters were statements by Yar’Adua’s Special Energy Adviser Rilwanu Lukman that “the oil contracts in place [with the JVs, that also include Chevron and Exxon Mobil Corporation, and production-sharing contracts] provide for periodic review and renegotiation [and] that time has arrived.”

The Oil and Gas Sectors Reform Committee (OGSRC) headed by Lukman is looking at various options for altering existing contracts. “We haven’t completed our work,” former oil minister and Organisation of Petroleum Exporting Countries (OPEC) secretary-general Lukman said: “We’ll take as long as we need to come up [with] the changes.”

In the run-up to the 2007 election African Energy suggested that Yar’Adua had an outlook and advisors who might be prone to implementing a more ‘resource nationalist’ agenda than Obasanjo (AE 109/16 & 24). But Lukman’s ‘bombshell’ may not be anything so sinister as a signal that Nigeria is embarking on a Hugo Chavez-style revolution – indeed, it can be argued that Lukman was simply stating the facts.

A number of older contracts are up for renewal; Nigeria is not forcing anything by saying they should be reviewed. And given how technology has improved and with the current oil price outlook it is hard to argue in favour of maintaining terms that now appear so favourable to operators. Every other producer, including the United States, has been revisiting terms agreed many years ago.

Nigeria has waited until the contracts were up for revision – and senior officials have consistently argued that it was in the longer term national interest to maintain effective relationships with operators.

NNPC restructuring and financing

Lukman is looking forward to the much-anticipated restructuring of Nigerian National Petroleum Corporation (NNPC) and its relationships with the joint ventures that have so far defined the Nigerian industry’s development.

The government hopes to complete the NNPC restructuring – announced in September – within six months to a year. This is an ambitious target given the size of the operation, which will create five new companies and see institutions like the Department of Petroleum Resources (DPR) abolished – and the likely extent of institutional opposition to reform.

Abuja is looking to production-sharing contracts for its model contract, getting away from the old JV model and its huge cash-calls on government – which has too often been unable to oblige with the funding IOC partners have needed for developments. Analysts say the contracts up for revision are most likely the early PSCs, which would include Bonga, rather than the more recent 2005 and 2006 licensing round or Nigeria/São Tomé and Príncipe Joint Development Zone PSCs, whose terms are tougher.

This ‘new NNPC’ is likely to be structured as a new generation national oil company, coming to the international capital markets to raise funds, possibly as early as 2008.

It could also go to Lagos’ booming local capital markets, where Nigerian banks are sitting on a pile of money they cannot otherwise spend; such a policy would also fit with the government’s ‘local content’ imperatives.

According to Lukman, the OGSRC is exploring ways to raise money in Nigeria and abroad to reduce the burden on the state. “We have used the oil and gas industry as a kind of national cash cow,” Lukman said: “Now we want to take a conscious decision to use these resources for an intelligent and proactive means of actually driving our economy forward.”

Nigeria will not want to alienate the markets even before it has started its fund-raising drive, and thus Lukman – a safe pair of hands in the tempestuous Nigerian environment – has been careful to insist that NNPC will not annul existing agreements.

Calls to reassess long-standing but not always satisfactory relationships discomfit IOCs, but are only natural for a new political leadership committed to tackling the Niger Delta, governance abuses, the lack of capacity for Nigerians to participate fully in their economy and other critical issues. Viewed from this perspective the glass is half full.

Crude allocations cause concern

But critics say there is also plenty of cause for concern. Confusion over the allocation of oil liftings from equity crude is one example that raises questions about the new administration’s commitment to transparency and ability to extricate itself from decades of cronyism that have infected Nigerian public life.

NNPC in mid-October eventually selected 14 firms to lift crude in November from the federal government’s JV share, including five multinationals – Addax, Arcadia, Glencore, Trafigura and Vitol – and six local companies. Analysts calculated that about 800,000 b/d was thus committed in the allocations, which were made under new rules; these include a three-month sales limit and more stringent terms of lifters, who must prove they are significant players with established track records.

Since then President Yar’Adua has come under substantial pressure to include more players in the process, market-watchers told African Energy – not least from Obasanjo, who is understood to have visited his successor to discuss the issue.

More names were subsequently added to the list, including companies linked to Obasanjo and his business allies, including Aliko Dangote, who were said to be less favoured by the new incumbent. As African Energy went to press it was calculated that some 1.5m-1.6m b/d had been committed for lifting, valid for what is likely to be a very hectic three months. Several of the names mentioned are little- or unknown.

A fight over equity crude is thus expected. Adding to the confusion, NNPC acting group managing director Abubakar Lawal Yar’Adua (no relation) has set a tough price for products sales, which analysts said could lead to shortages in the market in coming months as lifters failed to meet their commitments.

A new set of political battles seems to be brewing over trading. Experienced traders such as Arcadia, Glencore and Vitol have already positioned themselves for this.

Pressure points for IOCs

Meanwhile IOCs may be coming under yet more pressure from the centre. Among recent pressure points are the following – and the list is far from exhaustive:

• gas supply strategy – President Yar’Adua is among those convinced that more gas must be put into the domestic market to overcome chronic electricity supply problems; IOCs, whose investments are based on exporting, are less convinced. The Committee on Emergency Gas Supply Strategy to Power Plants and the Domestic Sector in late October declared itself unanimous in agreeing that gas should be prioritised for emergency supply to power plants and homes. Minister of State for Energy (Gas) Odusina Emmanuel Olatunde on 24 October said their recommendations would be presented to the president for urgent consideration. Were more gas to be channelled into IPPs, analysts believe this could put in question supplies to planned export schemes, including Nigeria Liquefied Natural Gas (NLNG) Train Sevenplus – at 8.4m t/yr the world’s biggest train so far – and even more grandiose schemes like the Trans-Saharan Gas Pipeline;

• new LNG projects – NLNG’s huge 3.7m t/yr Train Six is set to come onstream, but the outlook for other liquefaction schemes is less clear with the Yar’Adua government exhibiting diminishing enthusiasm for big LNG projects. Olokola Liquefied Natural Gas (OK LNG) in Ondo and Ogun states is now regarded by some in Abuja as a ‘Yoruba project’, and questions are being asked about the tendering process that led to the main construction contract award to Technip. Meanwhile, the Brass LNG partners are pushing ahead with their plans in Bayelsa State. However, like OK LNG this scheme has yet to reach a final investment decision, and may also be affected by Abuja’s changed gas sourcing priorities.

• gas flaring – DPR head Tony Chukwueke on 29 October said that any penalty imposed on oil producers for gas flaring beyond the 2008 deadline should target only the operators and not their partners – in other words NNPC, which holds majority stakes in the joint ventures which are operated by Chevron, Eni, ExxonMobil, Shell and Total. The government has yet to decide whether to penalise producers and how this would work, Chukwueke told Reuters news agency. He added that the World Bank was acting as a mediator in talks with the industry on this issue.

With DPR set to disappear, Chukwueke’s own position is in doubt.

Questions, questions

Then there is the question of what steps Nigeria takes genuinely to encourage investment in the deep water. Operators have long complained that Nigeria saw them spend billions of dollars on developing PSCs but then allocated quotas to each operator to meet the OPEC ceiling with a bias towards the JVs, which in the current price environment offer the government much better returns.

Chances are the IOCs would happily settle for better terms if the trade-off was a more efficient, transparent oil sector – where transaction costs would be much lower – and a genuine commitment to bring new fields into production as soon as possible. That then begs a bigger, separate question of how the reform process fits into Nigeria’s wider obligations to OPEC.

All this suggests there is a huge amount of horse-trading within the Nigerian ruling elite, the national and international oil industries to come.