THE steady decline in the nation’s oil reserve coupled with the lull in exploration activities in recent times, industry stakeholders have argued, are serious cause for concern considering the adverse effects this could pose on the economy, report Ibrahim Apekhade Yusuf and Ambrose Nnaji

IF the widespread concerns over the nation’s depleting oil reserves are anything to go by, then it may be correct to say that Nigeria’s economy, which depends solely on oil-generated revenue considering the contribution of the sector to 85 to 90 per cent of the GDP, may suffer some setbacks.

At the risk of being accused of making some fatuous pontification, at this juncture, a short anecdote would suffice.

Points to ponder
Nigeria has total refining capacity of 445,000 bdp, but has never reached full production because of sabotage and operational failures.

Port Harcourt refinery is supposed to generate at least, 210, 000 barrels per day, but manages only a fraction, just as the Kaduna Refinery and Petrochemical Company (KRPC), which has been producing about 110,000 barrels per day with Warri Refinery making up the balance.

However, according to informed sources, there has been a steady decline in the country’s oil reserves in the last couple of years, with many of the multinationals pulling out of the joint venture partnerships with the Federal Government, for reasons which border on the superficial to the complex, chief among which is the continued restiveness in the Niger Delta.

Besides, the policy matrix of government, with a penchant for bureaucracy, may have also made it a disincentive for prospective investors to come into the sector analysts have said.

For instance, the much touted Petroleum Industry Bill (PIB), which is expected to set new rules of engagement in the sector has been a source of constant antagonism between the government on the one hand, the oil majors, and the labour union, most of who have continued to canvass views for and against the bill.

Of course, the result is that there has been a general lull in activities in the sector, especially in the downstream sector of the petroleum industry, with everybody literally adopting “a wait-and-see attitude”, according to Mr. Isaac Arowolo, the immediate past president of the  Nigerian Association of Petroleum Explorationists (NAPE), arguably one of the vocal stakeholder group in the sector.

The inability of the Obasanjo administration to appoint a minister designate for the Ministry of Petroleum between 1999 and 2007 analysts further argued, may have also affected investor confidence largely, just as the volatility in the international oil market had a telling effect of crude oil sales, thus making the sector less competitive for new prospects.

The post-Obasanjo years, analysts maintained, leaves nothing to cheer about as the sector is still mired in what has been largely described in some quarters as “bosom traps.”

Reserves Position as at January 1, 2010
Nigeria’s reserves position from the years preceding 2008 to December 2009, not only shows the critical situation in the sector, but raises questions about the inability of the government to device means and ways of addressing this malaise.

According to the Department of Petroleum Resources, during the period under review, the nation’s probable and proven oil reserves was at 31.81 billion barrels of oil, while condensate reserves was 5.35 billion barrels. Total oil and con ensate reserve was 37.16 billion barrels

Compared to same period last year, the Oil reserves dropped by 1.6 billion barrels (4.79%); Condensate reserves increased by 0.152 billion barrels (2.92%), just as oil and condensate reserves decreased by 1.444 billion barrels

The decrease was due to companies relenting in exploration activities and full field studies but rather concentrating on development drilling and production.

As at June 2010, the oil reserves depletion rate was 2.81% based on estimated annual production volume of 894.79mmbbls and the remaining oil reserves indicate a life index of 35.55 years.

Modus operandi in the downstream sector
What processes, if any, does oil exploration activities entail?

Mr. Isaac Arowolo, a senior geologist with Chevron Nigeria Limited, and the immediate past president of NAPE, who should know, offers plausible explanations, even as he attempted a prognosis of the crisis bedevilling the sector.

According to the geologist, “Exploration is when you look for new oil then you have a lot of activities that will precede this and you have your data accreditation, data analysis, your project economies, and your decision to drill. When you do drill and you find, then you appraise by drilling additional wells to define how much volume of hydrocarbon you have discovered. It is only then you can be talking about reserves, which are simply addition from exploration. So, reserves are the volume that you have already defined that you have left, yet to produce.

“Since you produce on a daily basis, against your will, you will be depleting your reserves. You can only maintain your reserve base or increase it if you continue to add to it. And that’s where exploration comes into play. That’s why exploration is at the forefront of your increasing or maintaining your reserves because there are some of those discoveries that have been made that have not been appraised in the past. If you do appraisal of these discoveries and you define that you have reserves that can be produced then you can add those to your reserve base. That is another way you can increase your reserve base. But if you continue to produce and you do not add as much as you are producing or you are adding at all, then your reserves will be decreasing, it will be nose-diving. And when that happens, the only way you can reserve it is to find a way of adding to it more than you are removing from it. And it is long-term thing to do; you need to plan ahead for it.”

Expatiating, he said: “When you talk about production, you got to bring the oil and gas from the sub-surface, so you need your developed wells, you will need your studies, your production facilities, your float lines, and pipelines to really make sure that it goes from the sub-surface to the market. Again, it is not something that can be done overnight.

If you are talking about new field development, it is something that will take several years, depending on the size of the project you are talking about and the complexity and location because if you have some on land. i.e. swamp, shallow, it is not the same as something in deep water that will take several years to develop. And even when you have your production facilities if it is vandalized and you do not have access to it for a long time, it does take time to bring some of these wells back on, as some may not even come back until you have to do a major intervention. All these will affect production ultimately.”

Investigation by The Nation has further revealed that Nigeria’s crude oil refinery capacity may have suffered a fresh setback after a damaged major pipeline forced a shutdown of the Kaduna Refinery and Petrochemical Company (KRPC), which has been producing about 110,000 barrels per day, a fortnight ago.

This is coming on the heels of a force majeure declared by Shell on exports from its Bonny Terminal, thereby shutting-in 220, 000 bpd of exports.

The country was scheduled to export up to 10 cargoes this month, equal to about 317, 000 bpd and about 15 per cent f Nigeria’s daily oil exports this month of 2.1 million bpd.

For the incurable optimist, who still believes things might get better in the sector, this year, the submission made by the Principal Secretary to the President, Mr. Hassan Tukur penultimate Thursday in an interview with Reuters, may have foreclosed any chances of interested investors getting licenses for their bid rounds this year.

The President’s aide, who spoke in clear terms said, everything would have to be put on hold until the Petroleum Industry Bill is passed into law.

“I don’t see the major licensing round before it is passed”, he reportedly said, when the subject of the bid rounds was raised.

The Organisation of Petroleum Exporting Countries’ member holds periodic licensing rounds for new blocks and has said the next will be a chance for domestic companies and foreign firms new to Nigeria to gain a foothold.

The special adviser to the president on petroleum matters, Professor …ebodaghe, has however said these fears are unfounded.

Ebodaghe, who spoke at a public forum in Abuja recently, said the country was doing everything humanly possible to boost its oil reserve to an appreciable level.

While admitting that the current production output, which oscillates between 3.67 to 3.87billion bpd was inadequate, he was however quick to add that the Federal Government was determined to raise the stakes higher by meeting the 40billion bpd within the next two years.

But a former staff of the Department of Petroleum Resources, who would not be named, in an interview with The Nation recently said the nation faces a bleak future as far as petroleum resources are concerned, just as he described as “laughable”, the presumptions of the government in its planned reserves projection, saying “it is mere platitudes which is not likely to se the light of day.”

According to our source, the under capacity utilization of the nation’s three refineries, coupled with the menace posed by the restive youths in the Niger Delta, is at the bottom of the crisis bedevilling the sector.

More worrisome, he said, is the fact that the Federal Government has consistently applied cosmetic measures rather than taking holistic steps to nip the crisis in the sector in the bud.

Citing the report credited to the Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Austen Oniwon, who spoke in Port Harcourt at a town hall meeting with members of staff in the NNPC’s Eastern zone last weekend, of plans by the Federal Government, to intensify the search for oil in the Chad Basin, the source declared matter-of-factly: “As far as I am concerned, I don’t think it is a step in the right direction. It is like putting the burning the bridges at both ends. As much as one is not totally opposed to new oil discoveries given the probable short lifespan of our current reserves which may not last for another four decades, what should pre-occupy the minds of the government for now is to boost the infrastructure in the sector.

“The country has a lot to learn from our neighbours, like Ghana for instance. They discovered oil in the former Gold Coast just few years ago, but that has not made them to discountenance other sectors, which are equally s vital as oil if not much more. Agriculture still accounts for over 35 per cent of the country’s GDP, just as it employs over 55 per cent of the workforce in the country. What that tells me is that, the government has foresight, in not letting the oil become an end in itself. S, Nigeria should take a cue from that”, he emphasised.

Way forward
Short of blaming the government for criminal negligence of the sector, Isaac Arowolo, who is very passionate about the sector, however offered useful suggestions, which he reckons, would help in no small measure to put the country back on track in its quest towards attaining self-sufficiency in the downstream sector.

“First of all, I will say that the ways we can increase reserves include exploration activities, you have to look for new reserves, you drill new prospects and find new oil and then you can add those oils to your reserve base or you appraise some of the findings that have not been appraised and define in economic sense in the scale of economic hurdle then it can be part of your reserves”, he said, even as he added a caveat: “But there are a lot of things required for this to happen.”

Continuing, he said: “If you have to scale the economic hurdle then, the investment climate will have to be conducive. You don’t wait to go and sink millions of dollars when the chance of you recouping your costs is very slim. In the past when the price of oil was going down, and Nigeria still wanted to maintain or increase the reserve base, that was the time government put in place the Memorandum of Understanding which guaranteed certain merging of profits. So companies were encouraged to go into explorations.”

Stressing further, he said: “However, in the current situation, especially with the new reserves, that you are looking that may be coming from deep water; you need the incentives for people to go into that kind of environment to take the risk to drill this prospect. But a number of reforms that are coming up is like people now have a wait-and-see attitude, as to how is this thing going to affect the investment that I am going to be putting into this because you don’t want to be caught in the web, especially after sinking too much money into the transaction, and nothing comes out of it at the end. So the reforms would have to be favourable to exploration activities and that is the only time you can begin to encourage the companies really to go into these areas and invest so that new reserves can be added.

“Otherwise, companies would be more comfortable producing what they have already found because if the terms are not right for finding new ones, you don’t want to go into this. Besides, their funds are competing for projects elsewhere and not just in Nigeria. Some of these companies have interest all over the world. So, it’s where they have the best terms they are going to be diverting funds to. That’s why on of the management sessions during the Deep Offshore West Africa Conference (DOWAC 2010), discussed the Nigeria Oil and Gas reforms and the implications for investment in the industry. So it will affect some oil explorations and may also affect other projects. The Nigeria content law, all of these are being weighed by would-be investors. Its only when they find it economically viable that they will go into this new project.”

While citing the example of three flow stations, including Bonga, Agbami, Apo, which recently came on line, these ones, he stressed, added to the production.

One way to sustain such developments, he further stressed, is that the environment has to be conducive.

“Where you have unrest, where you have act of vandalism, or where you have major attack on oil installations, it becomes a problem. Shell only last week called for force majeure because one of their pipelines was tampered with. A force majeure is something that protects against the contract because these companies have contracts with their  suppliers and if you say you are going to b giving me 10 barrels per day of oil for instance, and then you have breached the contract between us.

But if it is as a result of something you have no control over, then I want to let you know that something has happened and I will not be able to meet this contract, that’s what force majeure is all about”, he said, just as he reiterated that: “Safety and issues of unrest, kidnappings, all have negative effects on production. You can’t talk about the oil industry today without talking about the insecurity in the Niger Delta.”

On the possible impact such incidents could wrought on the economy, he said: “Since oil accounts for a very large percentage of the Nigeria’s economy, about 85-90 per cent, so whatever that will affect our production will directly be felt by the Nigerian economy. When the unrest was at the highest peak production really came low.”

Corroborating Arowolo, in an interview with The Nation, the former president of NAPE, and a major stakeholder in the oil and gas industry, Mr. Victor Agbe-Davies, observed that no meaningful oil activities would take place in a state of war and rancour.

According to him, the Niger Delta unrest which has led to the vandalization of pipelines, kidnapping of oil workers, among others, may have significantly disrupted exploration activities in the oil region.

While calling for peace in the Niger Delta region, Davies however urged the Federal Government to put up measures that would ensure friendly environment for the host communities.

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