By Oye Atilade BSc, MSc, MBA, PMP
Oil exploration started in Nigeria in the 1900s, over one hundred years ago. In 1903, the Nigerian Bitumen Corporation conducted exploratory work in the country but due to the lack of technological and financial resources by small oil companies, large oil companies took over the exploration of commercial oil. The first test well was drilled in Owerri in 1951 and in 1956, Shell-BP found oil in Oloibiri and the first oil field began production in 1958. The oil and gas industry is the largest sector in the world and is a critical element of the global economy. Also known as the Petroleum industry, it includes exploration, extraction, transporting, refining, and marketing. The largest volume products are fuel oil and gasoline (petrol).
Oil has become the world’s most important source of energy. Its products underpin modern society, supplying energy to power industry, and providing fuel for vehicles and airplanes. Oil is burned to heat water and produce steam which propels the blades of a turbine and through a generator, produces electricity. Petroleum is the foundation of industries as it is the primary material for many chemical products, including pharmaceuticals, fertilizers, solvents and plastics.
Crude oil and natural gas are made up of hydrocarbons, which are naturally occurring substances found in the earth’s crust. They are created by the compression of the remains of plants and animals in sedimentary rocks such as sandstone, limestone, and shale. As layers of sediment were deposited on the ocean floor, the decaying remains of plants and animals were integrated into the forming rock and eventually transformed into oil and gas after being exposed to specific temperatures and pressure ranges.
Oil and gas being less dense than water, migrate through porous sedimentary rock toward the earth’s surface and when the hydrocarbons are trapped beneath less porous cap rock, a reservoir is formed. By drilling through the cap rock into the reservoir, a productive oil or gas well can be constructed and the hydrocarbons pumped to the surface.
The industry is divided into three major sectors: Upstream, or exploration and production (E&P) companies. They find reservoirs and drill oil and gas wells; Midstream companies transport crude oil and natural gas from the wells to refineries; and Downstream companies refine and sell the finished products. Drilling companies contract their services to E&P companies to extract oil and gas and well-servicing companies conduct related construction and maintenance activities on well sites.
The Organization of Petroleum Exporting Countries, OPEC, controls 81% of the world’s total proven crude oil reserves, and accounts for an estimated 44% of global crude oil production. The current members are Algeria, Angola, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, the Republic of the Congo, Saudi Arabia, the United Arab Emirates and Venezuela.
According to the United States Energy Information Administration, (US EIA), Venezuela has the largest proven crude oil reserves in the world with about 18% of all global oil reserves, but its production rate is much lower than many countries mainly due to outdated technology. Saudi Arabia has the second-largest and is the top oil-producing country but there is speculation that the country may exhaust its oil reserves in about 60 years.
The other top oil-producing nations are the U.S., Russia, Canada, and China. China’s Sinopec Group ranks first on the list of the world’s leading oil and gas companiesof 2019, ahead of Shell and Saudi Aramco.
The Oil & Gas Industry in Nigeria
Nigeria’s proven oil reserves are estimated by the EIA at 22 billion barrels, but other sources say there could be as much as 35 billion barrels, which will make it the tenth most oil-rich nation. Demand and consumption grows at a rate of 12.8% annually but most of the oil extracted by the multinational oil companies is refined overseas, and only a limited quantity is supplied to Nigerians.
Deepwater production, an alternative area of production, mainly involves underwater drilling that goes at least 400 metres (1,300 ft.) below the surface, thus expanding the possible sources for finding new oil reserves. The four major oil refineries in Nigeria are the Warri Refinery and Petrochemical Plant which can process 125,000 barrels of crude a day, the New Port Harcourt Refinery (150,000 barrels), the ‘Old’ Port Harcourt Refinery with negligible production, and the defunct Kaduna Refinery.
The Port Harcourt and Warri Refineries both operate at only 30% capacity. The Dangote Refinery, expected to open in the early 2020s, will have a 650,000 barrels daily capacity. As recently as 2010, Nigeria provided about 10% of overall U.S. oil imports and ranked as the fifth-largest source for oil imports in the U.S. However, Nigeria ceased exports to the US in 2014 because of the impact of shale production in America; India is now the largest consumer of Nigerian oil. According to the EIA World Factbook, Nigeria’s main export partners include India, Brazil, Spain, France, and the Netherlands. Natural gas reserves are well over 5,300 km3, three times crude oil reserves. The Nigerian Liquified Natural Gas Company, operated jointly by several companies and the state, began exploration and production in 1999. In 2008, the government prepared a Gas Master Plan that was intended to promote natural gas production and encourage the supply of natural gas to domestic power stations to help alleviate the country’s electricity shortages.
There is also an export gas pipeline, known as the West African Gas Pipeline, which would allow for transportation to Benin, Ghana, Togo, and Côte d’Ivoire, but development has been slow. Nigeria loses about $18.2 million daily from flared gas.
The Niger Delta is home to more than 20 million people and 40 different ethnic groups. It is the largest wetland and maintains the third-largest drainage area in Africa. This incredibly well-endowed ecosystem, contains one of the highest concentrations of biodiversity on the planet, and supports abundant flora and fauna, arable terrain that can sustain a wide variety of crops, economic trees, and more species of freshwater fish than any ecosystem in West Africa. The environmental impact on the region means it could experience a loss of 40% contributed to by the carelessness of the oil industry.
Oil spills are common and have a major impact on the ecosystem, with up to 13 million barrels spilled since oil drilling started. Bunkering occurs when a saboteur taps a pipeline illegally but in the process of extraction the pipeline is sometimes damaged.
Drinking water is frequently contaminated, and a sheen of oil is visible in many localized bodies of water. Offshore spills, which are usually much greater in scale, contaminate coastal environments and cause a decline in local fishing production. Nigeria flares more natural gas associated with oil extraction than any other country. It is costly to separate commercially viable associated gas from oil, hence gas is flared to increase crude production and gas flaring contributes to climate change. It releases large amounts of methane, accompanied by carbon dioxide, which has very high global warming potential and poisonous effects for humans, livestock and vegetation.
According to the World Bank, most of Nigeria’s oil wealth gets siphoned off by 1% of the population but some of this money is simply lost due to lack of knowledge, expertise, capacity and mismanagement.
OPEC supply has been falling in the last few years under a pact with Russia and other non-members to support the market and the resulting higher oil prices have bolstered non OPEC output. The organization has also announced that it will supply a diminishing amount of oil in the next five years as output of U.S. shale, and other rival sources expands, along with U.S. sanctions on members like Venezuela and Iran. Efficiency gains and use of alternative fuels were also cited for the lower demand outlook. Rising climate activism in the West will also affect long-term demand. It said it expected oil use in industrialized countries, or those in the Organization for Economic Cooperation and Development, to decline after 2020.
Thoughts for the Future
Nigeria has the opportunity to use oil to turn it into an industrialized nation. It could lift most of the people out of poverty and give them a good standard of living. This will serve to begin to harness the potential of Nigeria and Nigerians for rapid socioeconomic development. Just providing electricity to all homes across the nation, will reduce the level of poverty and multiply productivity and creativity.
After one hundred years of oil, the country needs to start building the proper capacity to refine its own oil like the Dangote Oil Refinery in the works but this should not be the only one. To encourage competition and discourage monopolistic practices, other oil refineries should be supported including a national one. Even if global demand goes down, local demand can match supply, with a view to exporting to other African countries as well. The current refineries can be restarted. By learning to refine its oil, the country can also learn to refine natural gas too which as a clean fuel, is an alternate source of energy to crude oil. Nigeria also needs to start exploring alternative energy sources since as the world’s supply of oil increases, its demand for Nigerian oil decreases, and the negative effects of oil production. Electric cars are on the rise which will affect the global demand for oil.
Finally, honesty, integrity, transparency and accountability should become core principles and watchwords of the oil and gas industry and indeed of all industries across the nation. These are core engines for any successful economy. The opposite as we have seen over the years, leads to poverty, and socioeconomic decline and stagnation, which affects the entire country and its people. Let us begin to build the Nigeria of the future.
Photo Credit: Guardian Nigeria