Emerging Investment Opportunities in the Nigerian Oil and Gas Sector

1. Introduction

The Nigerian petroleum industry is divided into three major sectors: upstream, midstream, and downstream. The downstream is commonly regarded as the engine hub of commercial activities, encompassing crude oil refining, marketing, and distribution of refined products such as Gas and LPG products. Additional opportunities exist in transportation and haulage.

Statistics indicate that there are over six thousand (6,000) independent petroleum products marketers and six (6) major marketers distributing and marketing products across the country. Nigeria currently consumes an estimated sixty million (60,000,000) liters of refined petroleum products (PMS, DPK, and AGO) per day. With a population of over one hundred and eighty million (180,000,000) people and an estimated economic growth rate of 5.7% over the past five years, the market for refined petroleum products is established, growing, and sustainable.

2. Upstream Sector Growth

Nigerian Oil and Gas reserves have grown tremendously since the discovery of hydrocarbons in 1956. Reserves increased from 0.184 billion barrels of oil in 1958 to 25.93 billion barrels of oil and 158 trillion cubic feet of Gas as of December 2000. This growth was achieved via two main factors:

• The introduction of various government incentives for increasing oil reserves and gas utilization.
• The negotiation of a Memorandum of Understanding (MOU) to guarantee a notional profit margin of US $2/bbl, including a Reserves Addition Bonus clause which qualifies operators for tax credits.
• The opening of other basins, including Benin, Anambra, Benue Trough, Chad, and the Deep and Ultra-deep offshore areas.

The opening of these basins increased the number of companies exploring for hydrocarbons in Nigeria to 59, with 46 discovering oil or gas in significant quantities. This resulted in the conversion of 91 Oil Prospecting Licenses (OPLs) to Oil Mining Leases (OMLs).

Marginal Fields and Drilling Incentives

Government has awarded approximately 24 of the 200 Marginal fields to 32 local companies. These fields have an estimated reserve of about 300 million barrels of crude. To encourage deeper exploration, incentives are provided for wells that investigate depths in excess of 500 meters beyond the deepest well in the field, moving beyond the previous 3,000-meter investigation limit.

3. Upstream Investment Opportunities

Significant investment opportunities abound in technical and civil works, including:

• Surveying (tropical, planimetric, and sea-bottom).
• Civil Works, including mud pit construction and concrete works at rig sites.
• Seismic data acquisition and interpretation.
• Drilling operations and pipelining.
• Manufacturing of consumable materials for exploration, such as explosives and detonators.
• Development of local substitutes for medium-pressure valves, pumps, and drilling cement.

4. Downstream Sector and Fiscal Incentives

Given the enormous potential in the downstream sector, the government has implemented several fiscal incentives for investors across different phases of gas production and transmission.

Gas Production Phase

• Tax Rate: Applicable tax rate under the Petroleum Profit Tax (PPT) Act is set at the same rate as company tax (30%).
• Capital Allowance: 20% per annum for the first four years, 19% in the fifth year, and 1% remaining.
• Investment Tax Credit: Currently at 5%.
• Royalty: 7% onshore and 5% offshore.

LNG and Transmission Projects

For LNG projects, the applicable tax rate under PPT is 45%, with a capital allowance of 33% per year for the first three years. Gas transmission and distribution projects benefit from pioneering status tax holidays. Additionally, all dividends distributed during a tax holiday are exempt from taxation.

5. Gas Utilization and Domestic Markets

In 1998, the government approved additional incentives to support the gas industry, extending fiscal benefits to industrial projects such as power plants, gas-to-liquids plants, and fertilizer plants. The initial tax holiday for these projects was extended from three to five years, and gas transfers are processed at 0% PPT and 0% Royalty.

Downstream Gas Opportunities

• Domestic production and marketing of Liquefied Natural Gas (LPG).
• Manufacturing of LPG cylinders, valves, and regulators.
• Installation of filling plants and retail distribution.
• Development of low-cost gas burners to encourage the transition from wood to gas.
• Establishment of processing plants for refined mineral oil, petroleum jelly, and bituminous-based building materials.

6. Refining, Petrochemicals, and Ancillary Services

To reduce investor risk, speculative seismic data acquisition is utilized in deep offshore areas. Nigeria’s production cost per barrel is among the lowest worldwide, and the economic environment ensures easy repatriation of profits. Government policy provides an even field for operations under the monitoring of the Department of Petroleum Resources.

Opportunities in refining and petrochemicals include:

• Turnaround maintenance of refineries through joint ventures with foreign technical partners.
• Establishment of chemical industries for Naphtha and special boiling point solvents.
• Production of Linear Alkyl Benzene, Carbon Black, and Polypropylene.
• Small-scale production of solvents such as chlorinated ethane and formaldehyde.
• Ancillary businesses including lubricating oil processing and oil can reconditioning.