Nigerian Petroleum Industry - Term Paper Example

?Nigerian Petroleum Industry: Oil and Gas Sector Analysis Table of Contents Introduction 3 Industry Overview 3 PEST Analysis 7 Big Issues and their future implications 12 Porter’s five Forces Model 13 Competition within the industry 17 Response to the outside competition 17 Conclusion 18 Reference List 19 Appendix 22 Introduction Nigeria is well known for its huge abundance of natural resources, especially hydrocarbons. It is ranked as the tenth largest oil producer in world, third in Africa and most productive oil producer in the region of sub-Saharan Africa. The economy of Nigeria is largely dependent on the oil, which contributes to almost 95 percent of foreign exchange income. In the year 1956 oil was first discovered at Oloibiri in the Niger Delta after exploring for half a century. During sole concessionaire, Shell-BP made the discovery of oil in Nigeria. In the year 1958 the country joined the ranking of oil producers, when for the first time the oil field extracted oil of about 5,100 bpd. The exploration rights was given to the foreign companies for extracting oil from the offshore and onshore areas adjoining to the Niger Delta after year 1960 (Nigerian National Petroleum Corporation, 2010; Ajayi LP, 2013). The above discussion shows that the oil industry of Nigeria plays a significant role not only for the up gradation of the economy of country but also occupies a leading position in the world ranking. This study focuses on the analysis of the oil and gas sector of Nigeria and identifies the strengths and weaknesses of this sector. Industry Overview The hydro carbon resources of Nigeria are the mainstay of the country’s economy. In Africa Nigeria has been the largest producer of oil and since 1971 it has been the member of Organization of Petroleum Exporting Countries (OPEC). The annual growth of real Gross Domestic Product (GDP) was forecasted to be at 7.5% in the year 2010 and is expected to grow and maintain this momentum till 2015 unless any unprecedented incident happens (Akinsipe, n.d.). It is also expected that the demand for oil will increase from 288,000b/d in the year 2010 to 395,000b/d in year 2015, which signified an average growth of about 6 to 7 percent (Akinsipe, n.d.). The oil revenue of the Nigeria has been experiencing an exponential growth due to the continuous increase in the prices of crude oil. The continuous increase in the crude oil price has resulted into the increase of revenue over a range of 55% to 60%, which has exceeded the budgeted benchmark price of $65 as on 2011 (Akinsipe, n.d.). As per reports of the National Bureau of Statistics, the revenue of the country from the export of oil rose by 46% to $59 billion in the year 2010 (Akinsipe, n.d.). This happened due to the rise in the price of crude oil, which compelled the companies to increase their security in the Niger Delta and started to raise their production as well. In four year starting from 2006 the revenue generated from the exports of oil and gas in Nigeria reached $196 billion, with only oil accounting for about 95% of foreign exchange income and 80% of government income (Akinsipe, n.d.). The Nigerian National Petroleum Corporation (NNPC), which is a state owned organization accounts for more than 40% of the gas supply and over 50% of oil production (Akinsipe, n.d.). However, large number of partnerships with the international oil company (IOC) is seen to contribute towards the prediction of rise in the production of oil and liquid from 2.34 million b/d estimation in the year 2010 to 2.75 million b/d by 2015, which will be subjected to the OPEC quota policy (Akinsipe, n.d.). In 2011 Nigeria recorded an oil production of almost 2.53 million barrels per day (bbl/d) (Akinsipe, n.d.). But this oil production is much below the total capacity of 3 million (bbl/d) due to disruption in the production that comprised of the compromised portion of total oil produced by the country. According to the International Monetary Fund (IMF) about 95 percent of the export earning and 75 percent of the federal government revenue came from the hydrocarbon sector for the year 2011, which suggests that the Nigerian economy is heavily dependent on the hydrocarbon sector (Akinsipe, n.d.). The oil industry of Nigeria is principally located in the Niger Delta, which is a prime source of conflict. The local groups are often seen to attack the oil infrastructure and staff in order to gain a share of the oil wealth. This forces the companies operating in the area to declare force majeure on the oil shipments. Apart from this, the oil theft which is popularly referred to as bunkering, leads to severe damage of pipelines that leads to loss of production and pollution, which in turn emphasizes the companies to shut down their operations (A BusinessDay Media Ltd, 2013). The environmental damages caused by oil spill and unhealthy relationship between the international oil companies and local communities have exaggerated the mass protest by the local groups. The local communities has been blaming the industry for causing pollution of air, water and soil, which has lead to loss of arable land and reduction in the fish stock (U.S. Energy Information Administration, 2012). Beside oil, Nigeria is also recognised to have the largest natural gas reserve in Africa. Flares are common in the production of natural gas that is associated with oil production. Apart from flares poor infrastructure is also responsible for limiting the growth of this sector. However, in recent years the expansion of infrastructure supporting liquefied natural gas (LNG), construction of regional pipelines and framing of policies and regulations that bans the flaring of natural gas is expected to exaggerate the growth of this sector. This growth is also expected to increase the domestic use and export of energy generation. Uncertainties in the regulatory framework and investment policies of Nigeria have caused slowdown in the exploration activity of oil and gas and delay the development of the projects like the LNG project (U.S. Energy Information Administration, 2012). However, the gas production is also expected to increase from 35 billion cubic metres in the year 2010 to 59 billion cubic metres by 2015 (Akinsipe, n.d.). The consumption of the gas is also expected to rise and reach to around 26 billion cubic metres by the end of the period for which the forecasting has been done (Akinsipe, n.d.). However, this rise in the consumption will lead to an export of not more than 33 billion cubic metres (Akinsipe, n.d.). This is a major threat for the export business of liquefied natural gas (LNG) of Nigeria unless some fresh supplies of LNG are located or developed. The adverse conditions that the sector is currently facing is expected to be eradicated by the delayed and long awaited Petroleum Industry Bill (PIB) that is expected to remove all the uncertainties related to the regulatory framework and investment for the oil and gas industry of Nigeria. In the year 2008 the first draft of the PIB was introduced that aimed towards restructuring the hydrocarbon sector, clarifying the operational and regulatory roles of the Nigerians institutions of energy and increasing the local content and government’s control over the sector. However, this bill has been restricted to pass and enforced due to lack of support, especially from the International Oil Companies and the continuous debate within the government of Nigeria. After several revisions have been made to the PIB, some positive indication regarding acceptance of bill from the side of IOCs has been received but new doubts have aroused from Shell recently. Currently PIB has been send to the National assembly of Nigeria (U.S. Energy Information Administration, 2012). As per the estimations of EIA the total energy consumption of Nigeria in the year 2010 was around 4.4 Quadrillion Btu, which is equivalent to 111,000 kilotons of oil (U.S. Energy Information Administration, 2012). A significant part of consumption, which is about 82 percent of the total energy consumption, goes towards the traditional wastes and biomass. This percentage of share is represented by the use of biomass that is required for cooking and off-grid heating in the rural areas. In the year 2009 the IEA data revealed that the electrification rate of Nigeria amounted to almost 50 percent for the whole country, excluding those 76 million people who are unable to access the electricity (U.S. Energy Information Administration, 2012). However, some of the other sources have reported that the rate of electrification throughout the country is as low as 45 percent. Therefore, it can be concluded that Nigeria has vast resource of coal, natural gas and renewable energy that can be used for the generation of domestic electricity. But the country lacks policies that would harness and support the growth and development of the infrastructure that would lead to the progress of this sector. Achieving the goal and utilising the flared natural gases properly is solely dependent on the capabilities of the government of Nigeria. PEST Analysis Political After several years of military regime and staggering from one military rebellion to another, finally Nigeria has found their elected leadership. People’s Democratic Party (PDP) has been dominating since the civilian rule in the year 1999. The al-Qaeda align Boko Haram has been conducting armed movement that has caused insurrection in the northern states, which is Muslim dominated (BBC News, 2013). The present political scenario of Nigeria depicts that the country is ruled by one single powerful and big party while others are divided into small and weak parties. The stronger party is seen to dictate control and measures over the resources and political life of the country. The continuous exercise of weakness is left unchallenged except some of the critical comments made by the patriotic Nigerians. The present situation is such that the inefficiency in the governance by the ruling party is not consuming any electoral debate due to the divided weak opposition (Adeleye, 2013). Nigeria is the most populous country of Africa and ranked at the ninth position as the most populous country in the world. According to the current estimation the population of Nigeria is 150 million (UNICEF, n.d.). One among every five African is a Nigerian. Long years of military dictatorship, poor governance, political instability, insufficient investment and corruption have created adverse affect on the basic service and infrastructure of the country. Presently the government is facing two major challenges; firstly corruption and secondly though it is the most populous country but the government has failed to stop the division of the country in the lines of religion and ethics. Corruption is one of the primary challenges for the government of Nigeria that is raising both the cost and risk for the local and foreign investors to conduct business in the country (UNICEF, n.d.; U.S. Department of State, 2010). The government of Nigeria has taken stringent measures in combating corruption by passing anti corruption bill and establishing the Economic and Financial Crimes Commission and Independent Corrupt Practices Commission. The government is also struggling hard to boost the economy, which in 1970s have experienced oil boom and till now has been benefitting from the high price of crude oil in the world market (BBC News, 2013). Economy Oil rich Nigeria has been troubled by poor macro-economic management, inadequate infrastructure, corruption and political instability. In the year 2008, the government has started following the economic reform. The previous military ruler of Nigeria failed to diversify the economy of the country, which is over dependent on the capital exhaustive oil sector that is responsible for about 80 percent of the budgetary revenue and 95% of foreign exchange earnings. After signing a standby agreement with IMF in the year 2000, Nigeria received a deal of debt restructuring from the Paris Club and a credit of $1 billion from the IMF, both of which gave huge support to the economic reform occurring in the country. However, Nigeria was pulled out in April 2002, as it failed to reach the exchange rate and spending targets. This made the country ineligible for getting any additional debt forgiveness from the Paris Club. Abuja in November 2005 gained approval for debt-relief deal from Paris Club. After 2008 the government of Nigeria began to exhibit their will towards the initiation and implementation of market-oriented reform as advocated by IMF. This market oriented reform includes resolving the disputes that is taking place between different regions within the country related to the earning from the oil industry, modernization of the banking system and lastly removing the subsidies. A strong growth in the GDP was seen during the period of 2007 and 2012 due to the massive growth of non-oil sectors and exponential increase in the price of crude oil (Central Intelligence Agency, 2013; The Economist Newspaper Limited, 2012). The GDP of Nigerian is growing at a faster rate than that of the total oil output. It is experiencing considerable inflation at a steady exchange rate. In the year 2012 the government oil revenue was seen to decline from an estimated value of 23.6 percent to 19.7 percent of the GDP (The World Bank, 2013). A similar type of decline in the government oil revenue is expected even if the oil prices increase. In such a situation the budgetary pressure may increase and validate the prudent fiscal stance. President Jonathan has formed an economic team that comprises of reputable and experienced members. He has also announced plans for enhancing fiscal management, diversifying the economic growth and increasing the transparency. Some of the chief impediments in the growth of the economy are slow implementation of reform and lack of infrastructure. The economic reform is further supported by the development of stronger public-private partnership for power, agriculture and road. The financial sector of Nigeria was affected adversely by the global financial crisis but revived quickly by the immediate and stringent measures taken by the governor of Central Bank. The compulsory higher capital requirement imposed by him strengthened and restructured the sector (Central Intelligence Agency, 2013). As per the reports of Nigeria Economic Report, the Nigerian Federalist System has every potential for supporting the rapid diversification of the economy and generating employment for the youth. Social Nigeria has experience explosive growth in the population for the past few decades and is ranked high for its growing fertility rates. According to the estimations given by United Nations (UN), the country will be responsible for contributing significantly to the world population by 2050. Nigeria is the home for four major ethnic groups namely Yoruba, Igbo, Hausa and Fulani. People of Nigeria speak more than 350 languages all over the country. Nigeria exhibits stark difference between the level of wealthy and poor. Though the country is rich in natural resources but the economy of the country is incapable of providing support to the basic needs of the people. Such a disparity in the level of poverty and growth in the GDP indicates skewed distribution of the wealth of country. In the year 2004 United Nations Human Development Index ranked Nigeria at the 151th position but this position declined to 158th rank in the year 2007 among 177 countries (UNICEF, n.d.). This signifies that the rank of Nigeria in human development has experienced downwards trends. About 64 percent of the Nigerian households claimed that they are poor and about 32 percent of the household identifies them as the one whose economic conditions have deteriorated by significant amount over a period of one year (UNICEF, n.d.). The government of Nigeria has launched Millennium Development Goal that aims to remove extreme hunger and poverty from the country but the reports of the National statistics suggests that poverty is declining and the progress towards the goal is very slow. Poverty still remains a major challenge for the country and the growth in the population signifies that numbers of poor are increasing steadily. The life expectancy has also reduced by significant amount; in the year 1990 it was 47 years, which has reduced to 44 years in 2005. Though Nigeria has vast resources of oil but majority of the population is poor. About 71 percent of the population is living on daily earning of less than $1 and 92 percent of the population is living below the income of $2 per day (UNICEF, n.d.). General living conditions of Nigeria is also poor, which creates adverse affect on the health care system of the country. HIV or AIDS is a major issue that creates concern for the health of children, young men and women (UNICEF, n.d.). The decaying infrastructure of the institution is a major reason for leaving the educational system neglected. Only 66 percent of the total population is literate in which men exhibits higher rate of literacy (UNICEF, n.d.). Technology Technology can be defined as the systematic application of industrial art and manufacturing methods that enhances the efficiency of human activities (Akaninwor, 2008). Technology has been defined by Drucker (2007) as means through which task can be accomplished. Nigeria appears to be technologically weak and depends on other nation to meet up their technological requirement. In terms of technological productivity, development of Nigeria is much lower as compared to other countries. The country is seen to be technologically backward when they go for producing capital goods like earth moving equipments, trains, cars, drilling machines, lathe machines and tractors (Uwaifo and Uddi, 2009). The country is also incapable of exploiting the natural resource, in which it excels from every aspect. The foreign organizations are seen to provide their expertise and technology in order to help Nigeria to utilise its natural resources. Proper technological development has not taken place in the agricultural sector, which signifies that agriculture is not mechanised, instead still unsophisticated methods are used for agricultural production by those who are involved in the process. For the supply of spare parts, Nigeria is dependent on other countries. Against finished goods, Nigeria exports their raw material to other countries. It is even incapable of producing their military hardware which is required for defence whenever any crucial situation arises. The attitude of the government of Nigeria towards uplifting the technological backwardness is both appalling and disgusting. Nigeria might be the only country that has huge number of branded cars but none of the cars are designed in that country. The Policy makers are seen to take decisions related to the technological development of the country without consulting the technologists or the engineers. However, in some of the cases where good policies have been framed, their problem arises due to the lack of implementation or monitoring of the process. This is caused due to the problem in the methodology that the policy makers follow in order to take nationwide implementation steps, which does not sustain in long run (Uwaifo and Uddi, 2009). Big Issues and their future implications Nigeria is having vast reserve of natural resources based on hydrocarbons. This provides an opportunity to the country to exploit the natural resources, in order to strengthen its economy. However, the oil and gas industry of Nigeria is not free from limitations. The biggest limitation that the industry is presently suffering is lack of infrastructure, corruption, lack of support from the local people, threat of theft and lack of technology. Corruption is raising the cost and risk for the local as well as the foreign investors, who are looking for opening their business in Nigeria. Lack of infrastructure is another issue, which the government is struggling to address. In both the two cases, the government should take immediate and firm actions to make the infrastructure proper and soon enforce the anti-corruption bill. The macroeconomic management of the country is very weak. They are looking for diversification of the economy, but it is slow and is getting affected by the poor infrastructure. Theft is also a major issue that is affecting the oil and gas industry. Oil theft is popularly known as bunkering, which is done by the local antisocial by cutting the pipelines that in turn causes pollution in air, water and soil. Apart from this, it also causes loss in productivity for the organizations who are dealing in oil extraction. This is seen to cause huge damage to the environment and is arousing protest among the local people. These peoples are seen to protest against the organizations, which are affecting their work. Technology is also a big problem for Nigeria. Nigeria is recognised to be technologically backwards country. Most of the technical support that the country requires is taken from the outside countries. This is also seen to affect the oil and gas industry of Nigeria and calls for immediate action from the government. Porter’s five Forces Model Porter’s Five Forces model is a generic framework that segregates the structure of the industry into five competitive forces or variables. The theory created by Michael Porter suggested that the five forces that influence the industry are given through this framework. The strategic business managers who seek to create a competitive edge over the rivals need to use this framework in order to understand the industry better and then frame the strategies. He stresses that competitive position and economic development of the business, which is generated from the interplay, occurs between the five generic forces. The five forces that act within the industry are bargaining power of the suppliers, bargaining power of the buyers, threat of substitute product, threat of new entrant and the competition that exists within the industry. The structure or attractiveness of the industry like the ability of the business to earn, the rate of return on an average exceeds the cost of capital, are determined from this framework. A study of the interplay between these structural forces helps in determining the competition and the intensity at which it is occurring within the industry and also helps in identifying the technical and economic factors (Nemati and Barko, 2004). Competition that exists within the industry The model of traditional economics claims that competition with the industry may make the profit for the firms operating within the industry equals to zero. However, competition is never perfect and firms are sophisticated passive price takers. Every firm within the industry is struggling to gain competitive advantage. The future of the gas and oil industry is seen to change. The growth in the production of both gas and oil has boosted up in order to supply the rising demand in the western market and the competition between the various private companies for accessing the reserve. There is high competition between the countries that are under Organization of the Petroleum Exporting Countries (OPEC). OPEC is seen to supply almost 50 percent of the total oil required (Mitchell, Marcel and Mitchel, 2012). The countries that are under OPEC are facing intense competition not only within themselves but also from the other new sources of petroleum like pre salt and deep water deposits in the Atlantic. However, the competition is seen to be eliminated by constant and increased supply in the oil without any increase in the price. Therefore, it can be concluded that the rivalry within the industry is high, since other nations are also dealing in the same product. Threat of Substitute In the framework given by Porter, substitute product refers to products that are created by other industries. According to the economists, when the demand for the product gets affected by the change in the price of the substitute, then there is threat from the substitute. The price elasticity of the product is also seen to be get affected by the substitute product since if more substitute are available then there is an increase in the demand for the alternative products. A close substitute product has the ability to raise the price within the industry. The rising demand of oil along with rising price has craved the path for other industries to create cheaper substitute that would easily replace the need of petrol. Some of the industries are seen to manufacture vehicles, aircraft, shifts and efficient engines that would consume lesser amount of fuel. New technologies are getting implemented that is leading the way for creation of unconventional gas and oil in many parts of the world. The vehicle industry is looking towards manufacturing efficient vehicles that would replace oil. Bio fuels are also seen to replace oil products (Mitchell, Marcel and Mitchel, 2012). Gas can also act as a substitute product for oil. The supply of gas is expected to increase in forms of both conventional and unconventional gases like shale gas, which is relatively lower in price is also creating expansion of the gas industry. Many of the companies dealing in oil business are now seen to switch to gas industry. Hence the threat of substitute is very high (Mitchell, Marcel and Mitchel, 2012). Threat of New Entrant The incumbent rivals not only pose threat to other firms operating in the industry but also the new firms that are entering into the industry are seen to affect the competition within the industry. If the entry and exist within the industry is free and firms are easily able to enter and leave the market then profit is nominal. The petroleum industry of Nigeria is expected to get threatened if any new player enters into the industry. In a recent report Lagos Chamber of Commerce and Industry (LCCI) has suggested that the discovery of countries having oil reserves may create threat for the petroleum industry of Nigeria. Mr. Goodie Ibru, the president of LCCI has claimed that United States of America who is the major importer of crude oil of Nigeria is exploring to find some other means so that they can become the net oil exporter. As forecasted by the US Energy Information Agency (EIA), US will be importing about 6 mbpd oil, which is about a third part of the total oil consumption done by US by 2014 (Osagie, 2013). This is due to the fact that the country will move closer to oil dependence in the year 2035 (Osagie, 2013). The import of oil from Nigeria to US has dropped from 1.1 mbpd to 333,000 bpd, displacing the oil of West Africa from the market of US (Osagie, 2013). This is the result of more and more players entering into the market. Recently offshore oilfield has been discovered in Angola, which is expected to produce highest volume of oil in Africa, leaving Nigeria far behind. Hence, the threat of new entrant is very high for the oil and gas sector of Nigeria. Bargaining power of the customers The bargaining power of the customers indicates that the customer bargains for more services and improved quality that compels the competitors to play against each other. This leads to increase in the competition within the industry, which in turn reduces the profitability of the players within the industry. For the petroleum industry, the demand is always rising and at the same time the number of players operating in the industry is also seen to increase. The increase in the number of players is offering more and more choices for the customers and thus increases their bargaining power. The customers are seen to bargain with the oil and gas producers and are switching to those who are proving the service and the product at a cheaper rate. Bargaining power of the suppliers For extraction of petroleum strong infrastructure is needed. There are large numbers of oil companies operating in the industry; however, only a few among them are seen to occupy a significant position and dominate the industry. This is because of the fact that operating in this industry requires huge capital investment in form of refining, constructing pipelines and rigs etc. Though there is no cut throat competition between the suppliers, but the suppliers dealing in drilling are seen to have significant power. Therefore, it can be concluded that the bargaining power of the suppliers is moderate. Competition within the industry There are large numbers of players in the oil and gas industry of Nigeria like Chevron, Exxon Mobil, Shell and Nigeria National Petroleum Corporation. Exxon Mobil is the largest operator in the oil and gas industry of Nigeria. It has got large number of refineries, which are concentrated in regional clusters, that in turn helps in supply and operational optimization. The superior quality of refinery helps in establishing competitive advantage for the organization (Exxonmobil, n.d. (a); Vanguard Media Limited, 2013; Exxonmobil, n.d. (b)). On the other hand Shell uses its competitiveness and innovativeness as the strategy to gain competitive advantage against the competitors. The company claims that the unique skill set in terms of technology creates new opportunities for the company (Shell, 2013; Anon., 2011). Response to the outside competition The oil and gas industry of Nigeria has many advantages and many setbacks at the same time. During the period of militancy the production in the Niger Delta was 1.6 million barrels per day in the year 2009 whereas due to the amnesty program initiated by the government caused this to rise to 2.4 million barrels (Nigerian National Petroleum Corporation, 2013). Transfer of asset transaction was done from ENI, Total and Shell. The industry is facing huge competition as many other countries are joining the oil and gas industry. Apart from this, Nigeria has some severe disadvantages that the government is trying to eradicate. The Federal State Government needs to enhance policy coordination and cooperation in some of the major key areas. These key areas include firstly macroeconomic management; secondly well coordinated policies that would enhance public services and connectivity of the market and finally apprehension of national principles in the public financial disclosure and management (Central Intelligence Agency, 2013). Conclusion The chairman of the Oil Producers Trade Section of the Lagos Chamber of Commerce and Industry, Mark Ward stated that Nigeria is the nation, which is highly ambitious. According to him Nigeria is aspiring to become one among the top twenty countries in the world in terms of economy by the end of 2020 through the development of large, competitive, sustainable and diversified economy (The Guardian, 2013). He believes that Nigeria has all the potential and capabilities to achieve such a status. Over the last few decades the economy of Nigeria has exhibited excellent growth in terms of economy that has grown by 8 percent every year. However, this growth has created an opportunity for benefits only in a specific segment of people. Therefore, it can be concluded that the huge reserve of oil along with the rising demand and increasing price acts as the greatest strength for petroleum industry of Nigeria. Reference List A BusinessDay Media Ltd, 2013. 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Exxonmobil Advocates Partnership for Strategic Oil Sector Growth [online] Available at < http://www.vanguardngr.com/2012/03/exxonmobil-advocates-partnership-for-strategic-oil-sector-growth/> [Accessed 27 August 2013]. Appendix I: Porter’s Five Forces Model Source: (Ahlstrom and Bruton, 2009) II: Crude Oil Reserve Source: (Akinsipe, n.d.) Read More