Law firm Olaniwun Ajayi grants Petroleum Economist detailed insight into Nigeria’s changing oil and gas landscape
Nigerian law firm Olaniwun Ajayi is one of the largest and most prominent legal practices in Africa and is closely involved with the oil and gas industry. The firm advised on NNPC’s transition into a private company and Nigeria LNG’s Train 7 project, and was involved in the financing for the Dangote refinery and the Anoh gas processing plant, among many other developments. Dr Gabriel Onagoruwa, a co-founding partner and chair of the project development and finance practice of the firm’s London office, spoke with Petroleum Economist about how Nigeria’s oil and gas sectors are changing, and about the growing role played by indigenous companies.
Do you see Nigeria being able to reverse declining oil production and once more make its OPEC quota?
Onagoruwa: Largely, the factors that have influenced the decline in Nigeria’s oil production, and hampered its ability to meet the 1.74m b/d oil production target set by OPEC, are crude oil theft and infrastructural deficit. We maintain the view that, with the implementation of the host-communities development trust programme under the [Petroleum Industry Act: PIA], the issue of insecurity that is discouraging onshore oil operations in the Niger Delta region will be addressed.
“The Nigerian government and private players in the Nigerian oil and gas industry alike are making concerted efforts towards utilisation of associated gas”
At the risk of [making a] prediction, the current administration’s objective of shoring up its foreign exchange reserves may encourage it to address these challenges. Coupled with the government’s drive to encourage private-sector-driven investment into the oil and gas industry, we can expect to see some active steps being taken to attain short-term fixes.
Other long-term fixes, such as encouraging the involvement of indigenous oil companies in the oil production value chain, are being set in motion, as seen in the recent regulatory approvals of the Seplat-ExxonMobil and Oando-NAOC acquisition deals. These trends suggest that, with the onboarding of domestic companies onto the oil production value chain, Nigeria’s production quota will be met in the medium-to-long term.
What moves are the Nigerian government and Nigerian companies making to utilise associated gas, and what is being done to raise LNG production?
Onagoruwa: The Nigerian government and private players in the Nigerian oil and gas industry alike are making concerted efforts towards utilisation of associated gas, in alignment with the ‘Decade of Gas’ declaration made by President Buhari in 2021. For instance, for the second time in Nigeria’s history, the new president has appointed a junior minister focused on gas in the petroleum ministry, a signal that the prioritisation of gas as a natural resource will be integrated into Nigeria’s energy strategy. Recently, Nigeria’s midstream and downstream regulator issued a wholesale gas supply licence to a private sector operator for the first time, potentially allowing the entity to develop more gas pipeline networks to transport natural gas.
On 3 August, NNPC announced that it is partnering with [Nigerian fuel retailer] NIPCO for the delivery of CNG to Nigerians, including the construction of CNG infrastructure to be completed in 2024. Other NNPC gas developments include the Ajaokuta–Kaduna–Kano gas pipeline project, which is expected to flow 2bcf/d upon completion, as well as the Obiafu–Obrikom–Oben gas pipeline in Rivers State.
LNG is not left out from the mix as NLNG’s Train 7 project is expected to expand Nigeria’s LNG production capacity from 22mt/yr to about 30mt/yr.
While there is more to be done in Nigeria in terms of infrastructure development, the concerted efforts of regulators in issuing operational licences, and a joint effort by government-owned entities and private sector participants in unlocking production means the utilisation of gas is on the rise.
How much of a role will floating LNG (FLNG) have?
Onagoruwa: FLNG brings a unique piece of the puzzle into Nigeria’s gas infrastructure demands.
NNPC signed pioneering FLNG deals with [Nigerian firm] UTM Offshore and [Norway’s] Golar LNG in 2022 and 2023 respectively, which are laudable considering their potential to significantly boost the domestic utilisation and export of LNG. While both deals are still at the early stages, and are considerably long-term projects, the impact of the role of FLNG will hinge on how it helps Nigeria utilise stranded gas reserves in remote or offshore areas without the need for extensive pipeline infrastructure. The mobility of FLNG facilities allows for flexibility in gas production, as well as shorter development timelines compared with onshore liquefaction plants, which are some of its biggest attractions to the Nigerian market, with its nascent pipeline infrastructure.
What changed with the passage of the PIA, and do you think Nigeria needs further reforms to benefit its oil and gas sector?
Onagoruwa: The PIA introduced a raft of changes aimed at revolutionising the oil and gas industry, attracting investment, and ensuring the sector benefits both the Nigerian people and the Nigerian economy. One of the major changes was the restructuring of the state-owned national oil company NNPC into a limited liability company with shares jointly held by the country’s Ministry of Finance and Ministry of Petroleum on behalf of the federation. The restructuring is aimed at reforming NNPC to operate as a profit-oriented entity and without recourse to government funding.
“The influence of the PIA on the Nigerian oil and gas industry has been nothing short of transformative”
Another major change was the bifurcation of the petroleum resource industry into crude oil on the one hand and gas on the other. This reform, reflected in the distinct licensing for the two subsegments, will remove the role of gas production as a side attraction and promote its integral role in driving investment into Nigeria’s petroleum industry. In addition, the PIA mandates oil and gas companies with oil mining and prospecting licences to contribute a percentage of their annual operational expenses to a Host Community Development Trust Fund. This change is intended to address the concerns of host communities and ensure they benefit from the activities in their regions.
We have also witnessed the price deregulation of the downstream petroleum market, as the federal government seeks to shake off the domestic market’s reliance on subsidy-backed pricing models. Overall, the influence of the PIA on the Nigerian oil and gas industry has been nothing short of transformative. Its reach has been profound, with tangible impacts resonating across the upstream, midstream and downstream respectively.
On the need for further reforms to benefit the sector, the PIA allows for subsidiary legislations to be made by the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) and the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA), subject to the extent they are permitted to make such subsidiary legislations under the PIA. Coupled with the reforms being made by the subsidiary legislations, the general outlook for the impact of the PIA is still being judged by stakeholders, and it is expected that, subject to the urgent need for some reforms, the legislative framework under the PIA will remain in place, in the meantime, with minimal changes, as required.
The oil majors are selling off non-core assets in mature production basins, including Nigeria. Do you see Nigerian independents benefiting most from that trend?
Onagoruwa: The divestment of non-core assets by oil majors in mature production basins presents a significant opportunity for indigenous oil and gas companies. These indigenous entities are often better positioned to seize these opportunities due to the provisions of local content laws, their local knowledge, familiarity with the operating environment, and flexibility in adapting to changing market dynamics.
It is, however, important to acknowledge that, while oil majors may divest from certain assets, they may not necessarily be reluctant to invest in Nigeria altogether. As a matter of fact, the recent investment drive by Nigeria’s new administration across the European and Asian markets has yielded some positive results in terms of commitments made by foreign investors. Understandably, the government has also committed to addressing some difficulties such as security, which has been a challenge for IOCs operating onshore assets.
Will independent Nigerian firms be able to fill the gap if energy transition concerns continue to discourage IOCs from investing? Where will these firms source their finance?
Onagoruwa: Nigerian companies have the potential to play a key role in filling the gap, especially if concerns about the energy transition continue to discourage IOCs from investing. Some of these entities have demonstrated their agility and resilience and are well-placed to adapt to changing market dynamics.
In terms of securing financing—as you may have noticed from some recently concluded deals—the gap created by the exit and reduced participation of the usual Western international commercial banks in Nigeria’s energy space is quickly being plugged by the increased participation of African domestic, regional and international banks.
“African and Middle Eastern sources of funding are likely to assume a more prominent role in Nigeria’s upstream sector in the coming years”
Oil and gas traders and specialised private credit houses are also playing a very active role in providing financing to the sector under bespoke multi-sourced blended financing arrangements. Certain Africa-focused development finance institutions, such as the Africa Finance Corporation and [multilateral lender] Afreximbank also continue to provide much-needed support to ensure energy access and security in the continent remains a priority in a balanced approach to the energy transition. However, more needs to be done. Additional funds and investments are required to execute the projects needed to plug the energy deficit and accelerate the level of production in the sector. Global energy players, IOCs and international financial institutions should be more willing to deploy the necessary financial resources and expertise.
Will African and Middle Eastern sources of funding take on a greater role in Nigeria’s upstream in the coming years?
Onagoruwa: African and Middle Eastern sources of funding are likely to assume a more prominent role in Nigeria’s upstream sector in the coming years. Recently, we have seen a growing trend of regional collaboration and investment within Africa and the Middle East. Nigerian companies are increasingly seeking funding and expertise from regional entities. For instance, NNPC is in talks with Afreximbank for a $3.3b facility. Afreximbank provided a $635m reserve-based facility to fund the development of OML 52 and OML 112—the Okoro and Tubu oil and gas fields—in Nigeria. The Africa Finance Corporation also continues to support international and indigenous players in the Nigerian oil and gas sector. While these are positive signals, more investments are required for the efficient exploitation of the vast reserves available in the country.
Have you seen more renewed IOC interest in Nigeria’s upstream oil and/or gas since the Ukraine invasion highlighted the importance of energy security?
Onagoruwa: Russia’s invasion of Ukraine and the ongoing conflict has continued to have ripple effects across the globe, with a series of economic and trade sanctions imposed on Russia. Given Russia’s [former] status as the second-largest global exporter of crude oil and largest natural gas exporter, these sanctions have resulted in disruptions in the oil and gas global supply chain, with the bulk of Russia’s petroleum purchasers resorting to alternative suppliers, including Nigeria.
The reduced dependency on Russian gas has resulted in renewed emphasis on oil and gas investments in some parts of Africa and the Middle East. With no end in sight to the Russia-Ukraine crisis, it is expected the West will continue to explore further investments in oil and gas producing countries in Africa and the Mideast Gulf to bump up production levels to meet increasing energy needs. The EU imports 14% of its LNG from Nigeria, and reports in the international oil and gas market indicate the bloc could seek to double this figure.
How can the energy transition be conducted in a way that is fair to a country such as Nigeria, which still depends heavily on oil revenue?
Onagoruwa: First and foremost, it is imperative to acknowledge that the energy transition cannot be sudden or drastic in countries such as Nigeria. In other words, a ‘one size fits all’ approach cannot be adopted in regions like the African continent, which is known to contribute less than 4% of global emissions and lags on all fronts in relation to energy access and security.
To ensure fairness, a phased transition that enables the efficient maximisation of Africa’s natural resources is needed, under a framework that provides for the gradual reduction of fossil fuel dependence. Simultaneously, investments in renewable energy infrastructure and technologies should be prioritised. International cooperation on climate finance mechanisms is also crucial in supporting a fair energy transition. Financial and technical assistance for clean energy projects, capacity building and technology transfer must form the bedrock of the energy transition policy on the African continent. In addition, strong governance, transparency and inclusive decision-making processes are fundamental in ensuring the benefits of the energy transition are distributed fairly across the globe.
What measures or regulations are being undertaken to reduce flaring and carbon intensity?
Onagoruwa: The Nigerian government has made demonstrable attempts to reduce gas flaring and carbon intensity. An example is the Nigerian Gas Flare Commercialisation Programme (NGFCP)—aimed at reducing gas flaring by monetising flared gas—which was relaunched by the NUPRC in 2022 in alignment with the Nigeria Energy Transition Plan.
“The energy transition cannot be sudden or drastic in countries such as Nigeria”
Riding on the back of the robust provisions of the PIA, the NUPRC and the NMDPRA recently issued the Gas Flaring, Venting and Methane Emissions (Prevention of Waste and Pollution) Regulations, and the Midstream Gas Flare Regulations respectively, aimed at reducing and ultimately eliminating gas flaring in the midstream and upstream sectors, and promoting responsible gas utilisation and environmental sustainability. The regulations provide a regime for flare gas commercialisation, to implement the objectives of the NGFCP and ultimately deliver on the government’s commitment to a national flare-out target by 2025.
The government also encourages domestic gas utilisation through policies such as the Gas Master Plan and the Nigerian Gas Policy.
How disruptive has the end of fuel subsidies been in Nigeria and what results have you seen? Were subsidies ended too soon, considering the Dangote refinery is still not in operation?
Onagoruwa: The removal of fuel subsidies in Nigeria resulted in increased living costs due to inflation. The government has started implementing some social relief plans in response to this inflation and, largely, the fiscal and monetary reforms being put in place by a newly appointed central bank governor and minister of finance are tilting the economy towards a freer markets-driven model, in contrast to the policies of the previous administration. The jury is still out in terms of the long-term economic gains and fiscal sustainability that might be gained from removing the subsidies, but most obvious so far is the easing of the pressure on the country’s strained financial resources.
Ultimately, the success of this policy change will depend on factors such as the operationalisation of the Dangote refinery, transparent pricing mechanisms and effective social safety nets for vulnerable persons in the Nigerian polity, but that may be too early to call now.