Nigeria’s own entrepreneurial energies could resuscitate its struggling oil and gas sector

The wreckage of the 'Trinity Spirit', a floating oil production and storage vessel, is seen after it exploded and sank off the coast of Nigeria on Friday. Reuters

The Trinity Spirit, a floating oil production and storage vessel, exploded and sank off the coast of Nigeria on Thursday. Ten crew were on board, their fate so far unknown. The disaster is emblematic of the country’s struggling oil and gas industry. Yet Nigerians’ own entrepreneurial energies could offer a way out.

The Trinity Spirit was operated by local company Shebah Exploration and Production. Its processing capacity of 22,000 barrels per day seems to have been unused in the last two years, and it is unclear how much of the ship’s two million barrels of storage was actually filled at the time of the accident. Shebah is in receivership owing to inability to discharge its debts, and the production licence appears to have been in the process of revocation.

Nigeria matters. Its 213 million people is by far the largest population in Africa. The continent’s leading economy, it has diplomatic, military and cultural heft throughout west Africa. It is also Africa’s biggest producer of oil, and the largest in Opec outside the Middle East, the sixth-largest overall.

The core Nigerian problems are manifold and long-running. Corruption and lopsided reliance on oil has stymied broader economic development. Petroleum accounts for a moderate 5.8 per cent of gross domestic product, but makes up 80 per cent of budget revenues and 95 per cent of export earnings.

Output has slipped jerkily since 2010. Now Nigeria and Angola are the countries struggling the most to reach their Opec+ production targets. Although Lagos' allocation rose last year, Nigeria's production fell to less than 1.5 million bpd in December, well below the 1.7 million bpd it would now be allowed.

Conflicts with local communities, sabotage, pollution and attacks from armed gangs hurt onshore operations – 150,000 bpd of oil, worth almost $5 billion annually at current prices, are siphoned off. The government vacillates between violent oppression and pay-offs, which keep things quiet but are expensive and fill the militias’ coffers.

The 16-gigawatt electricity capacity nationwide is barely more than the emirate of Abu Dhabi, and less than half is operational because of a lack of gas fuel. Perversely, flaring of unwanted gas remains a massive problem: Nigeria is the seventh-largest offender globally. Even this represents a major improvement, down 70 per cent on levels early this century.

Along with pollution, corruption, insecurity and legal and fiscal uncertainty, the high carbon footprint because of flaring will be a growing burden on the competitiveness of Nigerian oil. African rivals such as Ghana, Senegal, Mozambique and Uganda have attracted far more foreign petroleum investment since 2015.

International companies have been leaving the onshore and shallow-water. Shell Petroleum Development Company (Nigeria) was for long one of the company's core global assets, where generations of local and foreign staff won their spurs. Production began even before independence in 1960.

Now the UK super-major is selling its 30 per cent stake, potentially worth $4bn, the culmination of a decade-long process of shedding most of its Nigerian presence. Four local companies, including the largest indigenous producer Seplat, are likely bidders. Seplat has also said it is in discussions to buy ExxonMobil’s shallow-water assets. In May, 57 marginal fields were auctioned by the government, with 161 locally-based bidders.

The transfer of ownership is a mixed blessing. On one hand, some buyers are financially or technically incapable. Shebah’s accident followed a blowout in November from a well owned by Aiteo Eastern, another indigenous producer, which spilled oil and gas for five weeks. As in jurisdictions such as Ecuador, claims for pollution clean-up and decommissioning costs may haunt the departing super-majors for decades.

On the other hand, local companies may invest more intensely in new production, handle community relations better and develop more Nigerian skills and employment.

International companies are not leaving entirely: Shell, TotalEnergies and Eni retain their stakes in Nigerian Liquefied Natural Gas, which started construction on a seventh export unit in June, crucial for a hungry global market. The country met 10 per cent of Europe’s LNG imports in 2020.

And Shell, ExxonMobil and others are still important players in deepwater fields, whose distance from the coast protects them to a degree from the sabotage and militancy onshore.

After a two-decade saga, the Petroleum Industry Act (PIA) finally passed last year. It contains a mix of good and bad provisions. It regularises payments to host communities, while requiring that they protect oil infrastructure in their territory. Companies will be penalised for pollution and flaring.

The loss-making Nigerian National Petroleum Corporation (NNPC) is restructured, turned into a commercial entity, which can raise its own financing, and mandated to explore the country’s frontier areas.

The streamlined taxation system should finally give certainty to restart deepwater exploration and development. This is still among the most promising areas in the world and crucial to any hopes of reaching Nigeria’s targeted three million bpd capacity.

In May, Shell approved the long-delayed Bonga South-West field, which would yield 150,000 bpd. But it has just emerged that tenders for a production vessel are on hold and may not proceed until 2024.

Mohammad Barkindo, a former leader of NNPC, is now just bowing out after six years as Opec secretary general. Nigeria has long been a crucial player and the leading African voice within Opec. Now, it is one of the countries most exposed to a potential decline in oil demand and to stricter global climate policy. Production will keep declining for some time before any turnaround.

The process of the PIA and the NNPC restructuring has been messy and remains unclear. The development of a truly capable indigenous sector onshore is also tangled and incomplete, as the Trinity Spirit disaster illustrates. But there are some signs for optimism that the country can finally build on its great natural and human resources.

Robin Mills is chief executive of Qamar Energy, and author of The Myth of the Oil Crisis