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Questions abound over state oil company's bidding round for seven deep water blocks

Three months ahead of national elections, the government wants to sell oil production leases to cash in on energy crisis

Trying to reverse a long-term fall in oil and gas production capacity and investment, the government has opened a bidding rounds for seven offshore fields close to Lagos – but will struggle to raise funds at a time of rising interest rates and when most big international oil companies are selling assets in the region due mainly to security worries and global policy trends.

Despite the global energy crisis, the main sources of finance such as banks, asset managers and sovereign wealth funds are either ruling out fossil fuel investments or at least tilting strongly towards renewable energy projects.

Most of the best prospects for new production are along Nigeria's coast where industry estimates suggest there are at least 13 billion barrels untapped. Deep water offshore projects run by ExxonMobil, Shell, and TotalEnergies are producing over a third of Nigeria's oil this year and are seen as the most profitable investments in the sector.

Onshore operations, increasingly run by local companies, produce less oil and face multiple political and security threats. Investment in shallow water and onshore operations has slumped in recent years ; at their current level, investments in deepwater operations can only slow a longer-term decline in national output.

This will be the first major auction of production leases in Nigeria's oil and gas offshore fields for at least 15 years. It coincides with the new industry laws under which the state-owned Nigerian National Petroleum Corporation (NNPC) is becoming a commercial entity (AC Vol 62 No 14, A last bid for oil investors).

In 2021, NNPC made  674 billion naira (US$1.54bn) profit, its second year in profit since its accounting rules were reformed. After the legal and operational problems linked to an auction for marginal fields in 2019-2020, the NNPC opened a bidding round earlier this year for firms wanting to monetise and process the associated gas that is flared by oil-producing companies.

Three key factors are driving the race to boost Nigeria's oil and gas output:

  • Production fell to under a million barrels a day (b/d) in August and September, the lowest for over two decades, allowing Angola and Libya to overtake Nigeria's output;
  • European importers are looking for alternatives to Russia's oil and gas as sanctions and the war in Ukraine are set to continue;
  • The gradual phasing out of fossil fuel consumption in western economies means the window to export oil and gas to the United States and Europe will close within a decade.

Substantive security and political questions will affect the success of the planned bidding round. Top of the list are the revelations that over 400,000 barrels a day of Nigeria's oil is being stolen, much of it via illegal pipelines established a decade which suggest high-level collusion between criminal gangs and rogue military officers and oil company officials (AC Vol 63 No 21, Grand corruption wrecks Niger delta clean-up).

The revenue crunch at the centre and falling disbursements to state governments has unleashed a vicious cycle in which militants in the oil-producing areas attack company installations forcing them to cut output and exports further.

Oil theft and sabotage, as well as poor maintenance, forced the 180,000 b/d Trans-Niger Pipeline to shut in June. At the same time, three major export terminals – Bonny, Brass and Forcados – were closed.

Partisan politics, with national elections due next February and March, will also shape investment decisions (AC Vol 63 No 20, An election umpire besieged on all sides).

Companies may fear the bidding round, with the up-front fees such as signature bonuses, could be used as a fund-raising mechanism for political parties.

The location of the fields on offer, deep offshore and south of the commercial capital, is being promoted by the Nigeria Upstream Petroleum Regulatory Commission as ideal for the Lagos export-free zone, a project closely linked to former governor of Lagos state, Bola Tinubu, who is now standing as presidential candidate for the ruling All Progressives' Congress. Also in the area is the 650,000 b/d oil refinery, a $20bn plant which would be the biggest single process refinery in the world, being built by the Dangote Group and due to start operations by early next year.

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