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Is OPEC good for Nigeria?

The recent OPEC decision to cut oil production is bound to raise the issue of Nigeria's commitment to the oil cartel once more. Critics have long argued that Abuja's stance in maintaining the rigid quotas enforced by the Vienna-based group is not always in the national interest.

The recent OPEC decision to cut oil production is bound to raise the issue of Nigeria's commitment to the oil cartel once more. Critics have long argued that Abuja's stance in maintaining the rigid quotas enforced by the Vienna-based group is not always in the national interest. In a land rich in hydrocarbons, yet where the majority of people live on less than a dollar a day, surely it is better to produce and sell as much oil as possible, they say.

In its end of September meeting, OPEC agreed to cut global crude oil output from 25.4mnb/d to 24.5mn b/d with effect from November in a bid to shore up prices. Nigeria's allocation was lowered accordingly from 2.092mn b/d down to 2.018mn b/d.

The quota system is already a major test of the Nigerian government's resolve.

Indeed, many question whether the country and its producers even adhere to the system, or at least as strictly as they claim. Foreign oil companies are understandably keen to raise output if they can. The decision to lower its OPEC share of output puts more pressure on President Olusegun Obasanjo and his fragile administration. Abuja has publicly expressed its commitment to OPEC, including the revised quota figures, yet there remain several key questions to be answered over the long term. It all takes place against a backdrop of rising oil production in the west African country and some ambitious growth targets set by Obasanjo himself. In just a few years, Nigerian oil production capacity is expected to reach 3mn b/d; by the end of the decade this figure is likely to be 4mn b/d. In this context, the 2mn b/d OPEC quota begins to look rather modest.

Production build-up

Nigeria's president has given his full support to develop the country's vast oil and gas resources in a bid to bolster national income. The oil sector is Nigeria's primary source of foreign exchange earnings and represents a major slice of the federal budget as well as attracting much needed foreign direct investment.

The aggressive exploration programme undertaken by many of the world's major oil corporations offshore Nigeria in the last few years has yielded a string of new world class discoveries. Most recently, an appraisal well on the deepwater Usan discovery in the OPL 222 block confirmed the presence of a further 300mn barrels of oil. Another appraisal well, 3.5km to the south of the Ukot discovery, underlined its potential.

As Nigeria's reserves position continues to swell, oil companies are focusing their efforts on development issues. The latest addition to the country's oil production portfolio is the Amenam/Kpono field, operated by Elf Petroleum Nigeria Limited, a subsidiary of Total. The French firm announced the start up of Amenam Kpono in July, which will have a peak capacity of 125,000b/d. The field is located 30km offshore in water depths of 40m and straddles two concession areas OML 99, operated by Elf Petroleum and OML 70, operated by Mobil Producing Nigeria, a subsidiary of the US's ExxonMobil. Other major developments are taking shape. Mobil Producing Nigeria has just awarded major contracts for its East Area Additional Oil Recovery initiative. The US $ 1.7bn project will re-inject gas to improve oil recovery from multiple reservoirs operated by the company as well as help to eliminate gas flaring. The development is expected to increase production by around 100,000b/d and ultimate recovery by more than 500mn barrels. The package of work includes gas gathering pipelines, gas compression, gas re-injection pipelines and associated facilities. The project is located about 32km offshore in water depths of 26-34m while start up is scheduled for 2006.

State oil company Nigerian National Petroleum Corporation has also finally reached agreement with ChevronTexaco subsidiary. Star Deep Water Petroleum Ltd, and its partners Famfa Oil and Petrobras, on how to proceed with the giant Agbami field in OPL 216. The American company is now targeting peak production from the field of 250,000b/d with first oil sometime in 2007. The Agbami field ranks among the largest single discoveries in deepwater west Africa, with a structure spanning an area of 45,000 acres, that straddles OPL 216 and OPL 217. The initial discovery was announced at the beginning of 1999. Mobil Producing's current Nigerian oil production totals 750,000b/d, up from 520,000b/d in at the start of 2002.

The Nigerian offshore has been a rich source of discoveries for many of the multinational oil giants in the last few years, with exploration efforts supported by improved investment terms and conditions from Abuja. Other big offshore development projects underway include Royal Dutch Shell's Bonga field and ExxonMobil's Yoho and Erha fields. The build-up of production offshore Nigeria, and enhanced recovery from existing onshore fields, means Nigeria could struggle to adhere to the OPEC quota system in the coming decade. Although the country's quota is likely to rise - in line with the increased demand for oil as world economic growth influences consumption levels - it is unlikely to keep up with the electric pace of capacity expansion. At least part of the answer could lie at home with the development of new refineries and petrochemicals facilities to add value to the country's crude oil output. The government continues to flirt with the involvement of the private sector in the major refineries and also the establishment of new small-scale facilities. The creation of a viable local market for oil products is critical. A 12 per cent fuel price hike at the beginning of October was greeted with the customary howls of protest from Nigerians - not surprising given that no explanation was given by the authorities - yet this is what must take place to make the sector more attractive to investors. The reduction of federal subsidies, forcing up the price of petrol at the pump, also eases certain budgetary pressures for the government.

The development of Nigeria's extensive natural gas reserves could also present a long-term solution. With oil sales constrained under OPEC, Nigeria will still be free to maximise revenues from its gas sector, currently in its infancy, but growing fast.

Nigeria is the main driver behind flagship schemes such as the west African Gas Pipeline project, that will supply gas throughout the sub- region, and the proposed trans-Sahara link to Algeria, to export gas into Europe. There are also plans to create a viable domestic market for gas starting with large-scale industrial consumers and then moving into households. The power sector is leading the transition to using natural gas as a feedstock.

At the moment, Nigeria's gas exports are based squarely on liquefied natural gas (LNG), Nigeria LNG - a joint venture owned by NNPC, Shell Gas, Total LNG Nigeria and Italy's - commenced operations in 1999 and has built up a solid track record for reliable deliveries to Europe.

The reality of Nigeria LNG's sixth train expansion project is getting closer, after Total Gas and Power Limited signed up as a new base customer. The French company has agreed to take 1.2bn cubic metres a year (bcm/yr) when the plant commences operations for deliveries in both Europe and the US. In August, Endesa of Spain signed a similar sale and purchase agreement to take one bcm/yr at terminals in Huelva and Cartegena.

Although Nigeria LNG is still to take the final investment decision on the Train 6 expansion it seems increasingly likely that it will get the go ahead after receiving such strong support from the market. It means the Train 6 project, which would raise NLNG's total capacity by four million tonnes and by up to half a million tonnes per annum of liquefied petroleum gas, is now more than half subscribed.

It is currently engaged in building the fourth and fifth train expansion after securing outlets in Europe and the US. On completion of the Train 6 project, assuming it gets the go ahead. NLNG's overall production capacity will rise to 22mn tonnes of LNG per annum and four million tonnes of Natural Gas Liquids per annum. NLNG commenced operations in 1999 with a capacity of 5.9mn tonnes from two trains. A third train was added last November.

Other international companies are keen to tap into the success of the Nigeria LNG plant on Bonny Island. A number of international groups are developing their own projects to sell LNG to the Atlantic Basin market, essentially Europe and North America. ExxonMobil is leading the West Niger Delta LNG initiative, which also groups ChevronTexaco and ConocoPhillips. The plant could be operational by 2005.

With these large investment projects in the pipeline, it would seem the country is well positioned as a major player in the energy industry. However, the country also needs to further diversify its portfolio (where oil and gas account for 80% of the state budget). Because of this energy dependency, the Nigerian economy and its people will continue to suffer when OPEC arrives with bad news.

Author: Sam Maxwell

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