Domestic Players and the Sustainable Development of the Nigerian Oil and Gas Industry

INTRODUCTIONThe Nigerian oil and gas industry is the primary source of revenue for the government and has an industry value of about $20 billion. It is Nigeria’s main source of export and foreign exchange earnings and as well a major employer of labour. A combination of the crash in crude oil price to below $50 per barrel and post-election restiveness in Nigeria’s Niger-Delta region resulted in the declaration of force majeure by many international oil companies (IOC) operating in Nigeria. The declaration of force majeure resulted in shutdown of operations, abandonment or selling of interests in oil fields and laying off of staff by foreign and indigenous oil companies. Although the above occurrences contributed to the drag in the Industry, perhaps, the major cause is the unfruitful presence of the Federal Government of Nigeria (FGN) as the dominant player in the Industry (owning about 55 to 60 percent interest in the OMLs).While, it is unfortunate that many IOC’s playing in the Industry divested their interests in oil mining leases (OMLs) and oil prospecting leases (OPLs) granted to them by the FGN; on the flip side, it is a positive development that indigenous companies acquired the divested interests in the affected OMLs and OPLs. Hence, domestic investors and companies (Nigerians) now have the opportunity and significant role to play in the sustainable growth and development of Nigerian oil and gas industry.This paper x-rays the roles expected of Nigerians and the extent that they have successfully discharged same. It also looks at the challenges that are inhibiting the sustainable development of the industry. This paper finds that the chief factor limiting domestic investors from efficiently playing their role in the sustainable development of the industry is the overbearing presence of the FGN in the Industry and its inability to fulfil its obligations as a dominant player in the Industry.In the first part, this paper discusses the roles of domestic investors, and in the second part, this paper reviews the challenges and factors that inhibit domestic investors in sustainably performing the identified roles.THE ROLE OF DOMESTIC INVESTORS/COMPANIESThe roles domestic investors play in promoting sustainable development in the oil and gas industry include:

Providing Capital

Enhancing Personnel and Technical Capacity Development

Promoting Technological Capacity and Transfer

Supporting Research and Development

Providing Risk Insurance

Capital Injection/ProvisionOil and gas projects and services are capital intensive. Hence, financial capacity is essential to drive growth in the industry. Given the increased participation of domestic investors in Nigeria’s oil and gas industry, naturally, they have been saddled with the responsibility to provide the capital required to drive industry growth.As at 2012, Nigerians had acquired from IOC’s about 80 of the OMLs/OPLs (30 percent of the licences) and about 30 of the oil marginal fields awarded in the Industry. Dangote Group is currently undertaking a $14 billion refinery project, partly sponsored by a consortium of Nigerian banks. Another Nigeria company, Eko Petrochem & Refining Company Limited, is also undertaking a $250 million modular refinery project. In the midstream sector of the industry, there are many indegenous owned transport vessels and storage facilities; and in the downstream sector, domestic investors are actively involved in the marketing and sale of refined crude oil and its by-products through the filling stations located across Nigeria, which filling stations are mostly owned and funded by Nigerians.Capital is also required to fund education and training of Nigerians in the various sectors of the Industry. Education and training are vital in filling the gaps in the country’s domestic technological and technical know-how. Thankfully, Nigeria now has institutions solely for oil and gas industry related studies. Furthermore, indigenous oil and gas companies, in partnership with IOC’s, now undertake pieces of training for Nigerians in different areas of the industry.

However, funding from the domestic investors is not adequate when compared to the financial needs of the Industry. This inadequacy is not a function of financial incapacity of domestic investors, but due to the overbearing presence of the FGN through the Nigerian National Petroleum Corporation (NNPC) as a player in the industry; in addition to regulatory bottlenecks such as pump price regulations that inhibit the injection of capital in the downstream sector.Personnel and Technical Capacity ImprovementOil and gas projects are often highly technical and complex. As a result, there is a high demand for technically skilled professionals. To sustain the growth of the industry, domestic investors have to fill the capacity gap through training, hands-on experience in the execution of industry projects, management or operation of already existing facilities and obtaining the necessary international certifications such as ISO certification 2015 and American Society of Mechanical Engineers (ASME) certification. There are currently domestic companies that undertake projects such as exploration and production of crude oil, engineering procurement construction, drilling, fabrication, installations, oil by-products shipping and logistics, offshore fabrication-vessel building and repair, welding and craft sales and marketing. Recently, Nigerians participated in the in-country fabrication of six modules of the Total Egina Floating Production Storage Offloading (PSO) vessel and integration of the modules on the FPSO at the SHI-MCI yard.Technological Capacity and TransferTechnological capacity in the oil and gas industry is primarily related to managerial competence in project management and compliance, the assurance of international quality standards in project execution and operational maintenance. Hence to build technological competency starts with in-country development of management capacities to grow the pool of skilled personnel. A particular research found that there is a vast knowledge gap between domestic companies and IOC’s. And ‘that indigenous oil companies suffered from fundamental lack of quality management, limited compliance with international quality standards, and poor preventive and operational maintenance attitudes, which lead to poor maintenance of oil facilities.’To effectively play their role in enhancing the technological capacity in the Industry, domestic companies started partnering with IOC’s in project construction and execution and operational maintenance. For instance, as mentioned earlier, domestic companies partnered with an IOC in the successful completion of in-country fabrication of six modules of the Total Egina Floating Production Storage Offloading (FPSO) vessel and integration of the modules on the FPSO at the SHI-MCI yard. Other instances include: the first assembled-in-Nigeria Subsea Horizontal Xmas Tree and the fabrication; installation of subsea equipment like flexible flowlines, umbilicals and jumpers on Agbami Phase 3 project; Installation of 32km 24″ Sonam to Okan NWP pipeline; the fabrication and load-out of the Okan PRP Topsides; Bridge Fabrication of Okan PRP jacket, amongst others.It is common knowledge that since the enactment of the Nigerian Oil and Gas Industry Content Development (NOGICD) Act in 2010, all projects executed across the sectors of the Industry have had the active involvement of Nigerians. The Act ensured an increase in technological and technical capacities, but also a gradual process of technology transfer from the IOC’s to Nigerians. The Act in its Schedule reserved specific Industry services to domestic companies. The rate of involvement and the quality of services of Nigerians has increased tremendously with the result that there are now many domestic oil servicing firms.Research and DevelopmentThe building of technological capacity and the ability to generate innovations that will drive an industry forward are hinged on research and development (R&D).Domestic investors are yet to pay attention to R&D. Nonetheless, the Nigerian Content Monitoring Board (NCDMB) has indicated its intentions to set up R&D for the oil and gas industry covering engineering studies, geological and physical studies, domestic material substitution and technology adaptation. It is hoped that domestic investors will pick up the slack in their support for R&D in the Industry.Risk InsuranceThe risks in the Industry are vast and substantial, especially in respect of capital assets. It is possible to reinsure pipelines and facilities against sabotage, depreciation, drying up of an oil well or such hazards that disrupt the operation of an offshore or onshore facility, including transportation.Initially, Nigerian insurance companies were not able to underwrite huge risks in the Industry. However, since the release of Insurance Guidelines for the oil and gas industry in 2010, Nigeria underwriters have been recapitalised. Each of the underwriters now has a minimum capital base of between N3 billion, N5billion and N10billion. The underwriters have taken steps to increase their technical capacity through training and retraining, to acquire the needed technical expertise to assess risks accurately and also to avoid the incidence of an underwriter exposing itself to risks that are beyond its capacity.Interlude: The drag in the oil and gas industry and the playersRegardless of the foregoing points that illustrate the efforts made by domestic investors in the Industry, there are still substantial limitations to the growth of the Industry, especially with reference to the upstream sector which is the soul of the Industry. The major reason is that domestic investors/companies are a fraction of the Industry players, particularly the upstream sector where they control about 30 percent of the OMLs/OPLs. Therefore, regardless of how well the domestic investors play their role in the sustainable development of the Industry, their efforts will still be undermined by the actions/inactions of the other players. The other players are the IOC’s and the NNPC/FGN, with the NNPC/FGN holding majority interests in upstream sector: noting that activities in the downstream sector are specifically reserved for Nigerians under the Schedule to the NOGICD Act, while the indigenous investors and companies have a fair share of participation in the midstream sector which is contractually regulated.The FGN operates in the Industry through the NNPC. The NNPC carries out its operations in the Industry through business relationships with its partners using any of the following three arrangements: participating joint venture (JV), production sharing contract (PSC) and service contract (SC). The most used of the three is the JV, whereby the NNPC/FGN holds majority interests, and to an extent dependent on which company is the JV partner (NNPC/FGN owns 55 percent of JVs with Shell, and 60 percent of all others).What is clear from the above is that the complementary roles of the dominant player, the NNPC/FGN, is very significant to the sustainable development of the industry, the efforts of domestic investors/companies notwithstanding. The NNPC/FGN has two main obligations of funding and policy direction for the Industry but has consistently fallen short of these roles. Therefore, the failure of the NNPC/FGN to play its role, diminishes the efforts of domestic investors.Factors inhibiting the role of domestic investors/companies in the sustainable development of the IndustryFirst, exploration activities in the Nigerian oil and gas industry are mostly operated through JV agreements between the NNPC (owning 55 or 60 percent interest as the case may be) and private companies. The JV arrangement is such that the NNPC/FGN has only funding responsibilities while the other partners have the responsibility of exploration and production of oil. Hence, the JV partners provide the technical and technological capabilities in construction, operation and maintenance of the facilities. Historically, the JV partners have kept good faith with their obligations, but the NNPC/FGN have consistently breached its obligation when called upon to remit its contribution.

The NNPC/FGN have a chronic habit of either failing to pay or underpaying its JV funding obligations. It allegedly owes the JV partners about 6 years cash call arrears of $6.8 billion (negotiated to $5.1 billion in 2016) and $1.2 billion cash call debt for 2016 alone. This has resulted in waning JV oil production for some years. There are two sides to the issue of the FGN’s debt obligation to the JV partners. First is that the FGN, most of the time, does not have the financial capacity to meet its JV cash call obligations. Secondly, the bureaucratic bottlenecks involved in the approval of the FGN portion of the cash call which is funded through budgetary allocations and therefore exposed to the whims and caprices of politics and inordinate delays.Second, the JV partners usually wait for unduly long periods to obtain the consent of the FGN to execute projects from as low as $10 million, notwithstanding the urgency of project and which project may be incidental to ongoing JV operations.Third, the lack of clarity about the policy direction of the FGN is even more worrisome. The Petroleum Industry Bill (PIB) has been stalled in the National Assembly since 2008 and there does not seem to be any commitment to expedite the legislative process on the key areas of the PIB. Noting the vital nature of the industry to the health of the Nigerian economy, it is surprising that the current government is yet to indicate its policy direction in respect of the PIB and other issues bugging the Industry.RecommendationsEither of the two recommendations made below can position the Industry for sustainable development and profitability for the long-term:

FGN should transfer its interest to domestic investors/companies; or

Convert the JVs to PSCs.

Indigenous companies and investors have shown capacity and potential to shoulder the responsibilities of the Industry; it will be a good business decision for the FGN to deregulate the Industry and transfer its interest to domestic investors. This would promote corporate ethical standards and attract more investments to the Industry. More so, it would grow domestic capacity and the profitability of the Industry. With this arrangement, FGN/NNPC will focus attention on sound and timely policies for the Industry.In the alternative, the FGN/NNPC may decide to convert the JV arrangement to PSCs. Unlike the JV’s where the FGN has a funding obligation, and JV partners are required to wait for the long process of JV receipts to recover its operational cost; under the PSC, the FGN would be the sole holder of the OML while the JV partners would be converted to contractors. Hence, the contractor will obtain the necessary funding, execute the project and the cost will be recovered from oil production. The challenge with this recommendation seems to be that the contractor may not be entitled to the profit made from the sale of the crude oil.The domestic investors can only drive sustainable growth and development if they operate in a business environment bereft of the difficulties and poor business habits of the NNPC/FGN as a business player.

Precast Construction: Awesome And Unique Construction Segment

The concept of precast construction (which also refers as “prefabricated construction”) includes those buildings where the majority of structural components are standardized and produced in plants in a location away from the building, and then transported to the site for assembly. These components are manufactured by industrial methods based on mass production in order to build a large number of buildings in a short time at low cost.

The main features of this construction process are as follows:

  • The division and specialization of the human workforce
  • The flawless use of tools and other equipments, usually automated, in the production of standard, interchangeable parts and products

Since 2005, the demand for new commercial and residential buildings has been on the top than the other types of construction. Practically, precast construction is always more economical when compared to conventional multifamily residential, commercial, industrial or institutional construction anywhere in world.

As per the load-bearing structural, precast construction can be categorize into the following categories:

  • Large-panel systems
  • Frame systems
  • Slab-column systems with walls
  • Mixed systems

List of Structural Precast Detailing Services:

  • Precast Concrete Detailing
  • Precast Wall Panels Detailing
  • Precast Concrete Cladding Panels Detailing
  • Precast Concrete Tilt-up Panels Detailing
  • Precast Shop Drawings
  • Precast Concrete Stairs Detailing
  • Precast Erection Drawings
  • Precast Concrete Column Detailing
  • Precast Concrete Beam Detailing
  • Precast Concrete Slab Detailing
  • Post Tension Detailing
  • Double Tee Detailing
  • Non load bearing & Load bearing
  • Column Cover and Cornices
  • Hollow Core Slab Detailing Services
  • Column Cap Plate Detailing
  • Flat Slab Detailing Services

As far as the concept of precast products is concerned, many states across the United States require a precast plant to be certified by either the Architectural Precast Association (APA), National Precast Concrete Association or Precast Prestressed Concrete Institute (PCI) for a precast producer to supply their product to a construction site sponsored by State and Federal DOTs.

There are some numerous products which are utilizing precast/ prestressed concrete and majority of precast products can fall under one or more of the following categories:

  • Agricultural Products
  • Building and Site Amenities
  • Retaining Walls
  • Transportation and Traffic Related Products
  • Utility Structures
  • Water and Wastewater Products
  • Cemetery Products
  • Prestressed/Structural Products
  • Double Wall Precast – Concrete Sandwich Panels

Furthermore, Tilt-up construction is also plays an important part of Precast Construction process. Of course, a question comes into your mind that, so what is the difference between tilt-up and other types of construction?

The answer is, in traditional forms of wall construction, the walls can be built with CMU blocks or blocks faced with brick. A tilt-up building’s walls are created horizontally in large slabs of concrete called panels. The panels are then lifted, or tilted up, into position around the building’s slab. This means the tilt-up structure’s exterior wall is virtually finished when it is tilted into place.

Tilt-up construction provides numerous advantages over steel buildings either it is residential, commercial, institutional or other types of industrial building construction projects. Generally speaking, a one- to two-story structure larger than 50,000 square feet with less than 50% wall opening space is an excellent example for tilt-up concrete construction.

Benefits of Tilt-up Construction:

• Savings Construction Costs: by using this construction method, raw material costs can be reduced and of course it will also reduce the overall construction cost as well. In tilt-up construction method, the workers are typically lesser than the workers used in traditional construction. This way contractor can reduce labor costs. Because of the economies of scale, the larger the footprints for the building, the more these savings improve the project’s total cost.

• Fast Construction Schedule: Tilt-up construction offers several opportunities to “compress” the schedule and deliver the building very quickly. To erecting the walls in tilt-up construction is a faster process than building walls using traditional construction techniques. The trades can begin work earlier in the process on a tilt-up project, which allows greater overlapping of project phases. Because the building is made of ready-mix concrete from local sources, the chances of delay project is less than the traditional construction method.

• Safety: Tilt-up concrete is a proven, safe method of construction.

• Flexibility: Tilt-up concrete buildings are not prefabricated. Each one is custom-designed for the client’s needs and preferences.