Okoroma_Kumar_Rad_Al-Salman_Nigeria

POLITECNICO DI TORINO

MASTER OF SCIENCE IN PETROLEUM ENGINEERING 02OUL - RESOURCES AND ENVIRONMENTAL SUSTAINABILITY

2014-2015

NIGERIA

Technical and Economic Overview on a Hydrocarbon (Oil/Gas)Producing Country

AUTHORS:

Justice Uzoma Okoroma (S219188) Milan Kumar (S214398) Amir Rad (S219690) Mohammed Shyaa Salman Al-Salman (S214286)

PROFESSORS:

Prof. Deborah Shields Prof. Blengini Giovanni Andrea

January, 2015

EXECUTIVE SUMMARY

Hydrocarbon, also known as oil and gas, is one of the world's most important natural resources. Its' prices on world markets tend to be volatile. As such, when a country is heavily dependent on natural resources, its economy lives and dies with variations in resource prices. Nigeria is such a country, its' economy is so dependent on oil and gas resources, making it vulnerable to “Dutch Disease.” The impact of resource curse is evident in the nations' decreased productivity in other economic sectors, particularly agriculture and manufacturing. Nigeria is also gifted with renewable energy sources like wind and solar which have not been fully exploited or harnessed.

This research aims at describing Nigeria's oil and gas industry and it's relevant technical, economic and sustainable development characteristics. A careful, rigorous study of the structures of demand and supply of Nigeria's hydrocarbon is performed, consequently creating a basis on which the present-day market situation can be understood and future trends can be predicted. The major findings from these investigations are expository and raise serious concerns, especially in regard to government policies. In the end, recommendations are made.

It was discovered that the demand of hydrocarbons are more in Nigeria than the supply, the demand is also inelastic. Consumption of major petroleum products has been on the rise. Contrary to increasing hydrocarbon demand, the production and export rates are falling. Decline in OPECs' oil price is drastically reducing Nigeria’s revenue from crude oil exports, and its' crude oil prices are presently traded sharply lower in futures market.

Nigeria's hydrocarbon deposits are located in the Niger Delta sedimentary basins (South of Nigeria), relatively new discoveries in the deep waters near Gulf of Guinea have been made. Nigeria's hydrocarbon is renowned worldwide, it is light and sweet, easily transported, and more economic and environmentally safer (i.e. relatively) to produce. The hydrocarbon production chain runs through about five areas: exploration, production or drilling, transportation, refining or processing, and distribution or retail. The major oil and gas producers are the International Oil Companies (IOCs): Shell, ExxonMobil, Chevron, Total and Eni.

Despite the huge economic benefit derived from oil export in Nigeria, oil producing areas (the Niger Delta) have remained grossly socio-economically underdeveloped and environmentally degraded. Major social impacts include youth militancy, state violence, inter-communal conflicts and increased poverty. Severe environmental degradations include depletion of water resource, bio-diversity depletion, low agricultural production, greenhouse gases (GHG) emission, noise and water pollution. The Nigeria government is serious concerning policies and interventions that improve the oil sector’s contributions to the Nigeria economy, recent and ongoing examples include the oil subsidy removal, deregulation of the downstream oil-sector, excess crude oil revenue and Petroleum Industry Bill (PIB).

Some forecasts in Nigeria's market demand and production perspectives include: further increase in daily demand for petroleum products, further rise in deepwater production investments despite high production costs, etc.

A number of recommendations are put forward. The Nigerian government, producing firms and other stakeholders in the oil and gas sector should cultivate the following core values: accountability, corporate governance and responsibility. Nigeria should return to agriculture, new investments should be made in growth inducing sectors like manufacturing industry. Government must retrofit the refining sector or privatize them in order to meet domestic demand and increase revenue earned via petroleum products export. The environmental and social impact of oil and gas related activities should be incorporated in economic planning and public policy formulation. Preference must be placed on sustained improvement in the general well being of the people, especially in the Niger Delta. In response to geopolitical issues, although the major producing firms have adopted fair sustainability policies, now practice corporate social responsibility, and follow good water and energy management plans; there is still a dire need to consider long-term mitigation strategies like substantial reduction in gas flaring, investment in agriculture and education, youth development programs, community development, micro-credit and health assistance. The IOCs still face a couple of sustainability troubles and challenges.

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CHAPTER 1: INTRODUCTION

Hydrocarbon, also known as oil and gas, is an organic compound and consists of hydrogen and carbon. It is a naturally-occurring substance found in certain rock formations in the earth The majority of hydrocarbons is obtained as crude oil. More than 80% of the Nigeria's hydrocarbon is deposited and produced in the Niger delta region. Nigeria produces the maximum amount of oil in the Africa continent, it is the fourth leading exporter of Liquefied Natural gas (LNG) in the world and the sixth largest oil producer country amongst the Organization of Petroleum Export Countries (OPEC). Nigeria's hydrocarbon is renowned worldwide, its' crude oil is classified as light-sweet crude oil blend due to low level of sulphur content and because it is predominantly light. The blends have low values of viscosity indicating that they can be transported easily. Therefore, producing Nigeria's hydrocarbon is more economic and environmentally safer (i.e. relatively) as compared to other blends. In order to extract the maximum value from hydrocarbon, it needs to be refined into petroleum products, which includes gasoline or petrol, liquefied petroleum gas (LPG), naphtha, kerosene, gas oil and fuel oil.

The objective of this research is to analyze the structures of demand and supply of Nigeria's hydrocarbon, based on which the present-day market situation can be understood. This research aims at describing Nigeria's oil and gas industry and it's relevant technical, economic and sustainable development characteristics.

The study is guided by the research hypothesis that Nigeria's oil and gas sector is an important aspect of the country’s economy; in the view of the aforementioned, the research explores the following:

1. What is Nigeria's level of demand and consumption for hydrocarbons and in what forms? 2. Where can these resources be found in Nigeria? 3. How are the hydrocarbons being produced and transported and who are the major producers? 4. What are the environmental and social consequences of production, use, and disposal? 5. How is the Nigeria's oil and gas market structured? 6. How important is the sector in Nigeria's economy and what is the government’s relationship to the industry?

In order to answer the above queries, the adopted research methodology is to focus on the documents of the Nigeria's hydrocarbon industry which are available, documents of the Nigerian governmental agencies and any other necessary material which relates to oil and gas in Nigeria. In addition, due to the fact that the research work is empirical in nature, this creates the need for the use of secondary data to achieve the objectives of the study. The secondary data were obtained through the library research, from relevant books, journals, internet, newspapers, magazines, and seminar papers. Data collected are presented basically with the use of graphs, table and charts in other to easily interpret the results since pictorial representation enhances clarity.

The abovementioned hypothesis would also be subjected to a test which would suggest the impacts of oil and gas related activities on Nigeria which not only aims to contribute to literature on Nigeria's oil and gas industry, but also to economic theories referenced and used herein.

Lastly this research seeks to contribute towards policy making of the Nigerian government on oil and gas issues.

This work is organized as follows. Chapter one serves as introduction to the study. Chapter two looks at the hydrocarbon end-uses and structure of demand in Nigeria. Chapter three presents the production and structure of supply, as well as sustainability issues and sustainability reporting. In chapter four the market analysis of Nigeria's crude oil and natural gas is carried out. Finally, chapter five states our conclusions with relevant recommendations.

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CHAPTER 2: END USES

2.1. End-uses of Hydrocarbon produced in Nigeria

The present end-uses of hydrocarbon in Nigeria can be narrowed to simply petroleum products and electricity; these covers the residential, commercial, transportation uses, etc, and also dominate the energy market. Energy is always an important resource of any country. Nigeria is an energy resources rich country with abundance of non-renewable energy resources like crude oil, natural gas and coal, and renewable energy resources like wind, solar and bio gas [1]. The total primary energy consumption in Nigeria is given in the figure 2.1 below.

Figure 2.1 Energy Consumption in Nigeria. U.S Energy Information Administration [2]

The main uses of petroleum products are for transportation, lubrication, electricity and manufacturing. Petroleum products include: Premium motor spirit (PMS), Household kerosene (HHK), Aviation turbine kerosene (ATK), Industry fuel, High pour fuel oil (HPFO), Low pour fuel oil (LPFO), Liquefied petroleum gas (LPG), Bitumen, Base oil, etc.

As compared to oil products, the natural gas consumption is more, the demand for natural gas is rapidly increasing and it is expected that by 2020 the gas demand will be 246% more than 2010. Natural gas is used in various industries like fertilizer production, power generation, methanol production, aluminum smelting, cement production, steel manufacturing and residential consumption as bottled propane gas [3].

Always the demand of hydrocarbons are more in Nigeria than the supply. The consumption of petroleum products stood between 80% and 90% of the total commercial energy consumption over 35 years. From the data of World Bank, the electrification rates in Nigeria was 50% by 2010. And since almost 80 million people were unable to access electricity, people still use the traditional biomass as source of energy in some villages. As the population of Nigeria increases, so the demand for petroleum products also increases. The average demand growth rate of petrol, diesel and kerosene are 22%, 18% and 19% respectively [1].

The price of petroleum products not only depends on the crude oil price but also on other factors such as refining cost, transportation cost and distribution cost. The price of fuel fluctuates many times in a month and are different in various states. The table 2.1 below shows the population growth and the changes in petrol price. From this table, if we consider the minimum and maximum fuel price (in percentage) as the percentage change in price, and the percentage change in population as the percentage change in quantity demanded, then we can calculate the price elasticity of demand using the midpoint formula as detailed below.

oil11% natural Gas

5%

hydro1%

traditional biomass and waste 83%

Total primary energy consumption in Nigeria, 2011

3

Year Month Fuel Price Population 2000

June 1 N 30 122,877,000 June 13 N 22

2005

January 1 N 51 139,586,000 August 26 N 65

Table 2.1: Price fluctuation and Population growth in Nigeria between 2000 and 2005 [4][5][6][19]

Price elasticity of demand =

139586000 − 122877000�139586000 + 122877000

2 �×100

65 − 22�65 + 22

2 �×100

= 12.7398.85 = 0.13

Since the value is less than 1, the hydrocarbon demand in Nigeria is inelastic. This is true since it is difficult for consumers to find alternative to the use of gasoline, kerosene and diesel.

2.2. Economic importance of hydrocarbon end-uses

Since the end of the civil war and particularly, the crisis of adjustment in the mid 80s, oil exploration became a central and strategic factor in Nigerian’s economy. Putatively, oil began to occupy a strategic position in Nigeria in the late 1960’s having successfully displaced agriculture. Accounting for over 80% of the federal Government Revenue and 90% of export earnings since the 1970’s, oil has had perceived impact on Nigeria society and economy. [7]

Prior to the attainment of political independence in 1960, agriculture was the mainstay of the Nigerian economy contributing over 70% of the Gross Domestic Product (GDP), employing about the same percentage of the working population, and accounting for about 90% of foreign earnings and Federal Government revenue. As at the time, oil accounted for only 0.3% of the GDP and was quite insignificant in foreign earnings, this scenario was to change massively in the 1970s. Agriculture's overall contribution then reduced gradually over the years as oil suddenly became of strategic importance to the world economy through its supply-price nexus. Recently, the oil sector in Nigeria accounts for over 95% of export earnings, about 40% of GDP, about 70% of Federal Government revenue, and above 90% of new investments [8]

The oil and non-oil contributions to the total federally-collected revenue is shown in figure 2.2 below. The negative performance of the oil sector as depicted in figure 2.3 was due largely to the decline in crude production resulting from theft and intermittent closure of oil installations.

Figure 2.2 Oil and non-oil revenue (% of GDP) [9] Figure 2.3 Oil and non-oil Quarterly Real Growth (%) [10]

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2.3. Future perspectives of development

Nigeria is gifted with renewable energy sources due to geographic location, proper harnessing of these sources can alter the demand for hydrocarbons. Unfortunately, the utilization of renewable energy sources in Nigeria remains quite limited.

Hydro Energy: hydro power currently provides 29% of the total electricity supply. Recently, it was reported that Nigeria has over 278 unexploited small hydropower sites (SHP) with total potentials of 734.3 MW. The total technically exploitable hydropower potential based on the country’s river system is predictably estimated to be about 11000 MW of which only 19% is currently developed. If the potential of hydropower is properly used, it will help the country, especially the rural communities. [11].

Wind Energy: wind energy is available at an annual average speed of about 4 m/s at the far northern region and 2 m/s at the coastal region of the country. There are several ongoing researches at different universities in Nigeria to develop capability for the production of wind energy technologies. [12]

Solar Energy: Nigeria lies within a high sunshine belt with average solar radiation of about 19.8 MJ/m2 and 6 to 7 hours of sunshine per day. It is possible to generate 1850000 GWh of solar electricity per year if only 1% of Nigeria’s land will be used. This amount of electricity is 100 times more than the current electricity consumption. [11] [13].

Biogas and waste: the sources of biomass are crops, forage grasses and shrubs, animal waste, waste from forests, agriculture, aquatic biomass, urban refuse, wood waste etc. For example, 1 kg of fresh animal waste produces about 0.03 m3 of biogas and Nigeria produces 227500 tons of fresh animal waste every day which can account for the production of 6.8 million m3 of biogas every day.

Other sources of energy and future technologies which can help Nigeria to produce more energy and consequently alter the huge demand for hydrocarbon are: geothermal, nuclear energy, tidal waves and ocean thermal gradient.

2.4. Major negative environmental and social consequences

Despite the huge economic benefit derived from oil export in Nigeria, oil producing areas have remained grossly socio-economically underdeveloped and pauperized. These areas, especially the communities, have also been subjected to severe environmental degradations such as depletion of water resources, bio-diversity depletion, land subsidence, low agricultural production, greenhouse gases (GHG) emission, noise and water pollution.

Akachi [14] examined some of the social consequences of environmental degradation in the Niger Delta, these include: youth militancy, kidnapping and hostage taking, state violence and suppression, intractable inter-communal conflicts, breakdown of cultural values, increased poverty and destitution amongst indigenes, and reinforced human underdevelopment. It is glaring that youth restiveness has pose threat to both oil companies and natural development. In fact, youth restiveness has metamorphosed into killing of both the companies’ officials and recent kidnapping of indigenes of host communities [15][16][17].

Key past events that exemplify the negative environmental and social consequences were discussed by Alamieyesgha [18]. In the oil producing states of Nigeria, an average of one oil spill occurs every week. In the delicate ecosystem of the Niger Delta, these oil-related accidents caused grave damages to the environment and all that it harbours. Protected by the Federal Government, the oil companies accuse the impoverished victims of being the cause of their tragedy. Over 100 youths, women and children perished in the Jesse inferno in Southern Nigeria. The figures of the dead in the Odi invasion have been estimated at about 2000. The felony that befell Ubeta Community in Ahoada West Local Government Area of Rivers is another case of the evil of oil exploration.[18]

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CHAPTER 3: PRODUCTION

3.1. Geographical distribution of hydrocarbon deposits

Nigeria's hydrocarbon deposits are located in the Niger Delta sedimentary basins (South of Nigeria) which extends over about 70,000 km² and makes up 7.5% of Nigeria's land mass, including relatively new discoveries in the Nigerian deep waters near Gulf of Guinea. The geological formation of the Niger Delta basin is Agbada formation which lies between the base, continental and source rock Akata formation, it is a mature hydrocarbon province with vast potential [20]. The Niger Delta remains one of the most prolific hydrocarbon provinces in the world. Figure 3.1 below shows the hydrocarbon exploration fields and concessions in the Niger Delta of Nigeria.

Figure 3.1 Hydrocarbon exploration and concessions in the Niger Delta region of Nigeria [21]

Apart from the Niger Delta basin, exploration activities are ongoing in other Nigeria's main sedimentary basins including Anambra, Benue, Bida, Benin and Chad frontier basins.

3.2. Main producing companies

The major producing companies in Nigeria's oil and natural gas sectors are the international oil companies (IOCs): Shell, ExxonMobil, Chevron, Total, and Eni. The Nigerian National Petroleum Company (NNPC) has Joint Venture (JV) arrangements and/or Production Sharing Contracts (PSCs) with these IOCs. Other companies active in Nigeria's oil and natural gas sectors are Addax Petroleum and several Nigerian companies.[2]

Shell: Shell Petroleum Development Company of Nigeria Limited (SPDC) has a JV with NNPC that is made up of NNPC (55%), Shell (30%), Total (10%), and Nigerian Agip Oil Company Limited (Eni) (5%). [2]

ExxonMobil: ExxonMobil operates in Nigeria through its subsidiary Mobil Producing Nigeria (MPN) with a JV arrangement with NNPC. MPN has a 40% stake in the JV, and NNPC holds the remaining 60%. It also operates through its affiliate Esso Exploration and Production Nigeria Limited (EEPNL), which has a PSC with NNPC. [2]

Chevron: Chevron Nigeria Limited holds a 40% interest in 13 concessions under JV arrangement with NNPC.[2]

Total: Total has participated in Nigeria's oil and natural gas industries since the 1960s and currently has multiple subsidiaries that participate in the oil and gas sectors. Total owns a 15% stake in Nigeria LNG [2]

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Eni: Eni subsidiaries includes Agip (and Saipem). According to Eni, its operations are regulated by PSCs and concession contracts. Eni owns a 10.4% share in NLNG and a 17% share in Brass LNG Limited. [2]

3.3. Geopolitical issues affecting production.

IOCs participating in onshore and shallow water oil projects in the Niger Delta region (South-South geopolitical zone of Nigeria) have been affected by geopolitical crises and instability in the region. As a result, there has been a general trend for IOCs to sell off their interests in marginal onshore and shallow water oil fields, mostly to local companies, and focus their investments on deepwater offshore projects [2]. For instance, Shell has temporarily shut in portions of its production several times over the past decade, while declaring force majeure on oil shipments, as a result of frequent sabotage to pipelines. More so, a handful of Chevron's facilities were destroyed in 2003 during civil unrest. The pipeline network transporting Escravos crude is often subject to pipeline damage from oil theft. As a result, Chevron announced in June 2013 that it will sell its 40% interests in five onshore/shallow water leases. Similarly, a portion of Eni's Brass River crude oil blend is lost regularly to pipeline damage and oil theft in the Niger Delta. As a result, Eni has shut in varying volumes of production since 2006. The ongoing insurgence by the Boko-Haram terrorist group in the North East geopolitical region has to be combated urgently; measures have to be taken to circumvent escalations towards the oil-rich Niger Delta.

3.4. Production or Supply Chain

The production chain for the hydrocarbon sector runs through about five areas. It starts with the exploration activities which involves the search for oil resources, then production activities which entails exploitation of oil and gas. Refining involves the transformation of crude oil into finished products such as fuel, kerosene and diesel. The final stage is the distribution of finished products to consumers through various modes such as pipelines, tankers and road networks. The supply chain of natural gas also start with exploration, the next stage is drilling to bring gas to surface. It is then processed, transported and distributed to the various consumers. These various activities are presented in figure 3.2 and figure 3.3 below.

Figure 3.2 Crude oil production/ supply chain [22]

Figure 3.3 Pictorial illustration of the oil and gas supply chain [23]

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It has been established that apart from hydrocarbon (oil and gas) cost, other costs such as refining, transportation and distribution costs adds up to the total cost incurred in the supply and distribution of petroleum products [24].

3.5. Environmental/social impacts of production and mitigation strategies

All the activities like exploration operations, development and production, refining of petroleum products, transportation and distribution, which are associated to both upstream and downstream operations cause environmental problems like destruction of farmland and marine environment, contamination of soil and sediment, air pollution, noise pollution, ground water contaminations. The main environmental issues arise from the improper dumping of hazardous waste, spills oil from pipeline vandalism, abandoned oil wells which were not correctly plugged, during removal of installed equipment, gas flaring and venting. [25]. From studies it found that currently there are over 2000 oil polluted sites needed to be remediated in Niger delta region. Since 1958 it is estimated that about 9 to 13 million barrels of oil have been spilled, 7000 spills have occurred between 1970 and 2000 and 35 oil spills has been recorded in Ogoni between 1993 and 2007. [26] [25]

The major social impacts of hydrocarbon production have already been discussed in chapter two, these include: youth militancy, kidnapping, state violence, inter-communal conflicts, increased poverty, etc.

Possible mitigation strategies include substantial reduction in gas flaring, investment in agriculture and education, youth development programs, micro-credit and health assistance, community development, etc.

3.6. Sustainable development issues and Sustainability Reporting

In response to agitations and unrest in the Niger Delta region, the NNPC and the IOCs have all changed their social investment strategy from "community assistance" (CA) to "sustainable community development" (SCD) [27]. With this new corporate social responsibility approach, emphasis is placed on the following: greater consultation and needs analyses prior to agreeing MOUs'; empowering communities to do things for themselves; local capacity building to ensure sustainability and multiplier effect of interventions; use of NGOs as key implementing mechanism.

Since 1997, major IOCs' in Nigeria have been reporting voluntarily on their sustainability performances; for instance, the Shell Sustainability Report 2013, published April 9, 2014, is its' 17th annual report. In the report, the Chairman of Shell companies in Nigeria, Mutiu Sunmonu [28, p.22-24] iterated Shell's long-term commitment to sustainable development in the Niger Delta, stating that over $130 million has been spent on community development projects in the past seven years. Shell follow and report to different external principles and standards, including Global Reporting Initiative (GRI) G3 guidelines (Shell is rated A+), UN Global Compact, Extractive Industries Transparency Initiative (EITI) and Millennium Development Goals (MDG).

Saipem, a subsidiary of Eni in Nigeria provides easy access to key indicators and information on its' sustainability policies and performances through its' annual Country Report. This Report is prepared in line with the principles of stakeholder inclusiveness, materiality, sustainability context, and completeness as outlined in the GRI (version G3.0)[29]. Along with the annual Sustainability Reports and the Project Sustainability Reports, the Country Sustainability Reports represent the main tools adopted by Eni to communicate to all stakeholders the Company’s commitment and performance with regard to sustainability. A set of Key Performance Indicators (KPIs) was selected to bolster the information provided to stakeholders; these include the areas of environment (environmental impact assessment, energy, water and waste), employees (training, health and safety), local communities (education, promoting entrepreneurship and community health promotion), clients, etc [30].

At this juncture, it will be imperative to state that a good majority of the producing firms (international and local) have good sustainability policies which they strive to follow. They practice corporate social responsibility, and

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have good water and energy management plans. This is consonant with, for example, the Eni Saipems' energy performance indicator [30, p.38-39] which reveals a consistent decrease in the volume of fuel consumed in the company over the years, and a remarkable reduction in water consumption plus the re-use of water from operations like hydro-testing. However, despite all the achievements revealed by all KPIs analyzed, the IOCs still face a couple of sustainability troubles and challenges, these include oil spills in the Niger Delta (pending court case in the Netherlands, against Shell), double standards, gas flaring, conflicts and corruption. More so, there are currently no factual data on possible life cycle assessments of their operations.

CHAPTER 4: MARKET

4.1. Production and Consumption trends

From various researches, it has been established that in the past three decades, Nigeria exported an average of 86% of produced crude oil to other country with a maximum export of 91% in 1980. Figure 4.1 below shows the production, consumption and export of produced crude oil from 1980 to 2013. Our focus, however, is on the relevant market data during the last 3 to 4 years, and this is carefully pointed out in the trends discussed below.

Figure 4.1 Crude Oil Production, Consumption and Export from 1980 to 2013 [31]

Recently, at an average daily production of 1.99 million barrels per day (mbd), Nigeria's crude oil output declined by 4.8 per cent below the level of 2.09 mbd in 2012. Massive crude oil theft and incessant vandalism of oil installations in the Niger Delta region with the attendant shut-ins impacted negatively on crude oil output. Aggregate export for the same period was estimated at 1.5 mbd, compared with 1.6 mbd in 2012 [32]. In contrast to the declining production and export rates, the oil demand is showing no sign of slowing down.

Also recently, the total volume of gas utilized and flared during the period was estimated at 751,829.4 billion standard cubic feet (bscf) and 183,177.3 bscf respectively, indicating a decrease of 23.1% and 13.3% below their respective levels in 2012 [32].

In addition, the consumption of major petroleum products in Nigeria has been on the increase with economic growth, table 4.1 below shows this trend.

0.00

500.00

1,000.00

1,500.00

2,000.00

2,500.00

3,000.00

1980 1985 1990 1995 2000 2005 2010

Thou

sand

Bar

rels

Per D

ay

Year

Crude oil Production, Consumption & Export

productionconsumptionExport

9

Table 4.1 Consumption of Petroleum Products, in tonnes (/1 - Revised, /2 - Provisional; source - NNPC) [33]

4.2. Hydrocarbon's characteristics and Trade status

Having reviewed some key researches carried out on the physicochemical characteristics of Nigeria's crude oil blends [34, 35, 36, 37], especially Oyekunle [37] and Onyema [36] works, it is clearly obvious why Nigeria's hydrocarbon is renowned worldwide. Most crude oil blends obtained from Nigeria are classified as light-sweet crude oil blends due to low level of sulphur content and also because they are predominantly light oil grade. What is more, the blends have low values of viscosity indicating that they can flow easily. This makes it easy for transportation through pipelines without the necessary addition of diluents at regular intervals often associated with heavy crude oil samples. Therefore, the cost of producing Nigeria's hydrocarbon is cheaper.

However, the low viscosity associated with these oil blends has a demerit, they can easily flow and spread out quickly into the environment in event of oil spillage. They could also be a source of heavy metals in the environment.

In general, the low levels % of water, salt contents and pour point observed for the oil blends coupled with other physiochemical parameters show that, Nigeria’s crude oil blends have characteristics which enhance their preferences in the oil market and refinery operations. [38]

4.3. Market Prices, Price variations

Nigeria oil price dynamics are subject to different factors, mainly the balance of supply and demand, the macroeconomic and geopolitical situation, conditions of global financial markets, etc. There has been a huge concern in Nigeria about the drop in crude oil prices over the last few months. From a figure of $104 per barrel on August 1, 2014, the OPEC basket of prices collapsed to about $82 per barrel on October 28, 2014 [39]. The basket of prices used by the OPEC, which is the average price of all the varieties of crude sold in the international market, is $46.69 per barrel as at January 7th, 2015 [40]. The causes of the present oil prices decline are slowing global oil demand and the rise in US shale oil production, amongst others. Further price drops may result in more difficulties within the country, considering that its' 2014 national budget was evaluated on a benchmark of $77.50 per barrel [39]. There are indications however, that this budget benchmark will be reduced before final approval.

It is imperative to note that since 1973 when the Nigerian government took over from the private oil companies, petroleum prices in the domestic market have been under government control [41].

Prior to 2014, the prices were relatively stable, especially between 2012 to 2013 when it fluctuated at an average of approximately $111 per barrel for Nigeria's Bonny Light. This price trend is illustrated in figure 4.2 below.

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Figure 4.2 Average Spot Prices of selected Crudes traded in the International Oil Market [32]

4.4. Policies and Government interventions

The Nigeria government is reported to be serious concerning policies and strategies that improve the oil sector’s contributions to the Nigeria economy; unfortunately this is not the case when it comes to environmental impacts. Several attempts had been made in the past by successive Nigerian governments to effect legislation against gas flaring; yet, the situation remains unchanged. Gas flaring related policies include: Associated Gas Re-injection (Amendment) Decree No 7 of 1985, Associated Gas Re-injection Act 26 of 1990 and Gas flaring (Prohibition and Punishment) Bill of 2008 [42]. The failure of the oil companies to end gas flaring is mainly due to lack of political will by the Nigerian Federal Government to enforce its' own legislations. In any case, the IOCs have come up with individual policies like the SPDC Gas Flaring Policy [43] and Agip's Gas Flaring Policy.

A key government intervention since early 70s has been petroleum products subsidies. This has led to increase in government expenditure resulting in budget deficit over the years, and further produced a dead weight loss to the economy. Moreover, a subsidy in actual sense is supposed to bring about lower prices, but in Nigeria where refined petroleum is imported, international prices often affect the domestic prices despite the subsidies on them. Several studies have demonstrated the subsidies effects to an economy [44][45][46][47][48]. The government eventually came out with an economic reform concept of oil subsidy removal so as to reduce government expenditure and channel the accruing funds into providing basic social amenities to the populace [49].

Others include deregulation of the downstream oil-sector, excess crude oil revenue, Petroleum Industry Bill (PIB).

4.5. Futures market

Some Nigerian blends sell as foreign streams through the New York Mercantile Exchange (NYMEX) under the Light Sweet Crude oil Futures. The Nigerian Bonny Light and Nigerian Qua Iboe are delivered at a 15 cent per barrel premium. Here, margins are required for open futures or short options positions; however, the margin requirement for an options purchaser will never exceed the premium. [50]

According to the Nigerian Guardian News [51], Nigeria has intensified search for new markets for its crude oil in Europe, Asia, South America and Africa. This is as a result of recent reductions in U.S crude oil import from Nigeria by 97% due to its massive exploitation of shale oil. Figure 4.3 and figure 4.4 show trends for the recent closing crude oil futures price and crude oil spot price respectively.

Also, the further decline in OPECs' oil price has drastically reduced Nigeria’s revenue from crude oil exports. Recently, crude oil prices traded sharply lower in futures market.

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Figure 4.3 Closing Crude Oil Futures Price [52] Figure 4.4 Crude Oil Spot Price [52]

According to the Dow Jones Business News, Nigerian all-share stock index fell 2.8% taking declines to nearly 30% in 2014. Nigeria's naira also slipped to 187.45 against the US dollar, a record all-time low. [53]

CHAPTER 5: CONCLUSION

5.1. Forecasts of market demand

According to the Nigerian National Petroleum Corporation, the estimated daily demand for petroleum products in Nigeria is expected to grow [54]. The combined crude oil refining capacity of all the domestic refineries in Nigeria has never reached full production capacity due to poor maintenance and operational failure, poor energy integration, inefficient heat exchanging networks, etc [55]. An analysis of the energy demand over the period 2009 to 2035 by the Energy Commission of Nigeria indicated increased demand for petroleum products in the country [56]. Tables 5.1 below shows the projected demands.

Table 5.1 Petroleum products demand projections (Reference scenario = GDP growth rates of 7%; source - IAEA/ECN) [57]

Nigeria's Vision 2020 envisages that the capacity of domestic refineries will increase to 750,000 b/d by 2015 and 1,500,000 b/d by 2020 [58]. Still, the projected domestic production of petroleum products is consistently lower than demand in the period and the country will still depend on import of petroleum products.

These observations are expository and raise some policy issues, the following recommendations are made. Since the greatest surge in oil demand will come from the transportation sector fro which oil is the principal energy source, the Nigerian government will need to encourage mass transportation to curb PMS demand growth rate which arises from high growth in passenger transportation demand by car. Lastly, as a matter of urgent national priority, government must establish new refineries to meet domestic demand, in collaboration with the private sector. This will also increase revenue earned via petroleum products export.

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5.2. Future perspectives and trends in production There is a bright future for deep water offshore production. As traditional onshore reserves are depleted, offshore resources will play a greater role in supplying the growing demand. Technological development helps oil companies to increase the depth of offshore fields; today, technology allows producers to drill at depths that exceed 3,000 m. However, there will be growing operating and production costs for offshore projects in Nigeria due to huge capital requirements, tougher safety regulations following the Deep Water Horizon accident, high tax burden, etc. Despite these high cost of production and operating risks, deepwater production will continue to grow. After 2015, when a number of new large fields will be put in operation, we expect to see significant production growth in Nigeria.

5.3. Addressing sustainable development issues and environmental concerns It may be pertinent to re-iterate that the sure strategies to mitigate the adverse environmental and social effects of production include: substantial reduction in gas flaring, investment in agriculture and education, youth development programs, micro-credit and health assistance, community development, etc.

In Nigeria, government must continue to encourage the integration of hydrocarbon exploitation into sustainable development, preference must be placed on sustained improvement in the general well being of the people, especially in the Niger Delta. The well being of the poor and disadvantaged people is of utmost importance and must be explicitly factored into the process of development of oil and gas resources. The environmental consequences of extracting and using oil and gas should be incorporated in economic planning and public policy.

Conclusively, in the 2004 budget statement made by the current Nigerian Federal Minister of Finance (Dr./Mrs. Ngozi Okonjo-Iweala) [8, p.2], she stated, inter alia:

“…We have suffered a great deal in this country from our inability or unwillingness to manage our oil resources properly. When oil prices are high, a great deal of optimism

sets in and we tend to spend all that we earn to meet our admittedly tremendous needs…”

The Nigerian government, producing firms and other stakeholders in the oil and gas sector should cultivate the following core values: accountability, corporate governance and responsibility. Nigeria should return to agriculture by providing technical input and financial support, new investments should be made in growth inducing sectors like manufacturing industry. A lot depends on policy formulation, economic policies should be formulated in such way that government intervenes in the market with crude oil reserves (for domestic refining) to keep the prices of refined petroleum products within bands that will enhance growth of the domestic economy. Nigeria’s oil and gas wealth must be used to achieve rising income per capita, better education, better health, full employment and social stability. Security challenges and the Boko-Haram insurgence should be tackled urgently.

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