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OVERVIEW OF THE NIGERIAN ENERGY & NATURAL RESOURCES INDUSTRY

Published: 26 Nov 2018

Introduction

The Nigerian Energy and Natural Resources Industry is comprised of the Oil and Gas, Power, and Mining sub-sectors. A marked feature of this Industry is the predominance of the Federal Government’s influence and control which may be attributed to the highly centralized federal system of government adopted in the country. Instructively, the Nigerian Constitution vests entire property in and control of all minerals, mineral oils and natural gas in, under or upon any land in Nigeria or in, under or upon the territorial waters and the exclusive economic zone of Nigeria in the Government of the Federation.  The reason for this may not be unconnected to the fact that ever since crude oil was first discovered in Nigeria, the Sector has grown to become the largest revenue and foreign exchange earner for the country. The Power Sector is also effectively under the supervision of the Federal Government notwithstanding the fact that power is a matter in the concurrent legislative list and should thus be within the competence of both the Federal Government and State Governments.  This is because the scope of powers granted to the Federal Government on electric power is wider than that granted to the State Governments. In any case, the doctrine of covering the field is apposite and of full validity in Nigeria, meaning that even where both the Federal and State Government validly enact laws on power, the Federal law will supersede the State Laws and the State Laws will be kept in abeyance until the Federal law is repealed.

The Oil & Gas Sector

Oil was first discovered in Nigeria in commercial quantities in the year 1956 in Oloibiri - present day Ogbia Local Government Area of Bayelsa State. Thereafter, more discoveries were made in Afam and Bomu in Ogoni Territory of present day Rivers State. By 1960, a total of Eight Hundred and Forty Seven (847,000) tonnes of crude oil had been exported. Presently, Nigeria’s daily production of crude oil is between 1.8million bpd - 2.1million bpd with a maximum crude oil production capacity of 2.5million bpd. 

Furthermore, according to a report by the Department of Petroleum Resources , majority of Nigeria’s oil and gas assets are located in the Niger Delta region with seventy- eight (78) of the One Hundred and Fifty Nine (159) oil fields in Nigeria. Similarly, two of the three crude oil refineries in Nigeria are also located in this region: the Warri Refinery and Petrochemical Company situate in Delta State; and the Port-Harcourt Refining Company Limited situate in Rivers State. Both refineries are owned, managed, and operated by the Nigerian National Petroleum Corporation (NNPC), the Federal Government owned State Oil Company.

As earlier pointed out, all oil and gas resources within the territory of the country is vested in the Federal Government as of right. Accordingly, any private investor that wishes to participate in the exploration and exploitation of these resources must do so with the consent and approval of the Federal Government first had and obtained. These consents and approvals are issued only to a company incorporated in Nigeria under the Companies and Allied Matters Act and  are broadly of three kinds: the Oil Exploratory License (OEL); the Oil Prospecting License (OPL); and the Oil Mining Lease (OML).

Oil Exploration Licence

An Oil Exploration Licence (OEL) is granted by the Minister charged with the responsibility for petroleum matters under the powers conferred by Section 2(1)(a) of the Petroleum Act and it confers the holder with the right to conduct preliminary exploration surveys. The scope of grant as well as the permissible activities within the purview of this Licence are succinctly set out by Section 15(1) of the same enactment.  Similarly, the legal rules governing the issuance and operation of an Oil Exploration Licence are found in Paragraph 1 of the First Schedule to the Petroleum Act. The Licence which is non-exclusive, is granted for a period of one year and subject to renewal annually. 

Additionally, the Licence is granted only in areas over which there are no existing rights, such as Oil Prospecting Licences and Oil Mining Leases. However, the grant of an Oil Exploration Licence in respect of any area does not preclude the grant of another Oil Exploration Licence or of an Oil Prospecting Licence or an Oil Mining Lease over the same area or any part of it.

Oil Prospecting License

An Oil Prospecting License (OPL) allows for more extensive exploration surveys. It is an exclusive licence given for a period not exceeding 5 years for land and territorial waters areas and seven years for continental shelf and Exclusive Economic Zone areas including any renewal periods. It includes the right to carry away and dispose of oil discovered while prospecting.  As stated in section 15(1) of the Petroleum Act, “prospect” in relation to petroleum, means the search for petroleum by all geological and geophysical methods, including drilling and seismic operations. 

Essentially, petroleum prospecting is the search for commercially valuable accumulations of petroleum.  The grant of this Licence is made by the Minister by virtue of his powers under section 2(1)(b) of the Petroleum Act following a successful open bidding exercise. An OPL granted to a foreign company is typically issued with a covenant by the foreign company to assign the OPL to the NNPC upon making a commercial discovery. The foreign company will subsequently enter into a joint venture arrangement, production sharing contract or a risk service contract with the NNPC.

Oil Mining Lease

The grant of an Oil Mining Lease (OML) allows for full scale commercial production upon the discovery of oil in commercial quantities (currently defined as a flow rate of 10,000bpd) . This right is granted by the Minister by virtue of his power under Section 2(1)(c) of the Petroleum Act. The Lease confers the exclusive right to carry out prospecting, exploration, production and marketing activities in and under the specified acreage for a period not more than 20 years upon the payment of royalty reserved therein among other considerations to the Federal Government of Nigeria.  

It is useful to note that an Oil Prospecting Licensee who has fulfilled the work commitment according to Paragraph 30 (b) and 31 of the Petroleum (Drilling and Production) Regulations of 1969 and the conditions otherwise applicable to the individual License may request that the License be converted to an OML. However, an OML will only be granted upon confirmation of the potential for economic production of petroleum from the licensed area. Only the holder of an OPL is entitled to apply for conversion of an OPL to an OML, through the DPR for approval.

Regulatory Agencies

The Oil and Gas Sector is a highly regulated Sector with several government agencies assuming supervision over players and stakeholders in the Sector. Some of the key agencies are:

The Ministry of Petroleum Resources

The Ministry of Petroleum Resources acting through the Minister of Petroleum Resources Resources exercises general supervision over all petroleum operations carried on under licences and leases issued under the Petroleum Act  and may make regulations prescribing anything required to be done under the Act.  Likewise, the Minister of Petroleum Resources is by virtue of the Petroleum Act,  the competent authority to issue the respective licences for oil exploitation in the country.

The Department of Petroleum Resources (DPR)

The DPR is an arm of the Ministry of Petroleum Resources established with the primary aim of monitoring and ensuring compliance with the terms governing the award of licenses to companies engaged in petroleum operations as well as compliance with international Sector standards and practices. In the same vein, the DPR issues permits called Oil and Gas Sector Services Permits (OGISP) which could either be in the form of general, major and specialized permits to oil and gas companies without which they would be unable to operate in the Sector.

The Nigerian National Petroleum Corporation (NNPC)

The NNPC is the Federal Government owned Oil Company established to undertake the exploration of crude oil on behalf of the Nigerian State, and protect the interest of the Federal Government in the oil and gas Sector. Typically, the NNPC collaborates with other private owned oil companies in the exploration of oil and gas resources,  albeit retaining the majority interest and control over the oil and gas asset concerned. This collaboration may be in the form of a Joint Venture Agreement (JVA) which is the most common especially for oil and gas assets onshore, Production Sharing Contracts (PSC) typically employed for offshore oil and gas assets, amongst others.

Nigerian Content Development and Monitoring Board (NCDMB)

The NCDMB implements and ensures compliance with the provisions of the Nigerian Oil and Gas Sector Content Development Act of 2010 also called the Nigerian Local Content Act.  The Act was enacted with the sole aim of providing for the development of indigenous content and expertise in the Nigerian Oil and Gas Sector by ensuring that priority would be given to indigenous service companies.  The Act also makes obligatory the utilization of Nigerian human and material resources for the provision of goods and services in the Petroleum Sector with acceptable quality, health, safety and environmental standards in order to stimulate the development of indigenous capacities. 

The Electric Power Sector

The history of electricity development in Nigeria can be traced back to the end of the 19th Century, when the first generating power plant with a total capacity of 60kW was installed in Marina, Lagos, in 1896. As of today, the country has a total installed capacity of 12,522MW out of which 85% is produced by gas while the remainder is produced by hydro-electric and coal sources.

It is also worthy of mention that prior to recent reforms, the Electric Power Sector was highly centralized and monopolized by the Federal Government acting through the then National Electric Power Authority (NEPA). Unsurprisingly, NEPA unilaterally controlled all aspects of the generation, transmission and distribution sectors of the Sector up until the deregulation of the Sector which led to the unbundling of NEPA and its successive holding company – Power Holding Company of Nigeria (PHCN) in 2013. The PHCN was unbundled into 18 companies as follows: six (6) generating companies, one (1) transmission company (i.e. Transmission Company of Nigeria-TCN), and eleven (11) distribution companies. Of these, only the TCN is solely owned by the Federal Government, while the Federal Government’s interests in other companies formed from PHCN has been significantly reduced by the Government’s divestment of its majority interest to private individuals. This unbundling process marked the climax of reforms initiated in the Sector.

Under the new framework pursuant to the enactment of the Electric Power Sector Reform Act 2005, private investors who intend to participate in the Electric Power Sector are required to obtain licences from the Nigerian Electricity Regulation Commission. Specifically, Section 62 (1) of Electric Power Sector Reform Act (EPSRA) 2005 provides that any person intending to engage in the business of electricity generation, transmission, system operation, distribution or trading shall be required to obtain an operator’s licence from the Nigerian Electricity Regulation Commission. On the basis of this section, the following are the various permits that are obtainable under the Nigerian regulatory regime:

Generation Licence

A Generation License authorises the licensee to construct, own, operate and maintain a generation station for purposes of generation and supply of electricity in accordance with the Electric Power Sector Reform Act, 2005.  Notably, an Electricity Generation License is only required for any power generation activity above 1MW. An Electricity Generation Licence could either be On-Grid, where the holder is expected to enter into an agreement with the TCN for connection, evacuation, and wheeling of the power to the national grid; Embedded, where the holder generates power and evacuates through either the existing distribution facilities of a distribution licensee (privatized Discos) or through an independent distribution licensee; or Off-Grid, where the Licensee generates and sells power directly to a single buyer.  

Transmission Licence

This is a Licence granted under Section 65 (1) of the ESPRA, and it authorizes the licensee to undertake grid construction, operation and maintenance of a transmission system within Nigeria, or to set a transmission system that connects Nigeria with a neighbouring country.

System Operation Licence

A System Licence is granted under Section 66 (1)(a-e) of the ESPRA and it authorizes a licensee to undertake system operation activities as specified in the Licence such as: generation scheduling; commitment and dispatch; transmission scheduling and generation outage co-ordination; transmission congestion management; international transmission co-ordination; procurement and scheduling of ancillary services and system planning for long term capacity; administration of wholesale electricity market among others.

Distribution Licence

A Distribution Licence is granted under Section 67 (1) of the Act and it authorizes the holder to distribute electricity from grid supply points to the point of delivery to consumers or eligible customers. Furthermore, a distribution licensee is empowered to construct, operate, and maintain a distribution system and facilities for the purpose of supplying their customers electricity; installation, maintenance and reading of meters; billing and collection of bill payments; and other distribution services as may be prescribed.

Trading Licence

This is a Licence granted under Section 68 (1) of the Act and it permits the licensee to engage in the purchase and resale of electrical power and ancillary services from power generation companies and independent power producers to their eligible customer.

Regulatory Agencies

Some of the key regulatory agencies of the Nigerian Electric Power Sector are:

Nigerian Electricity Regulatory Commission (NERC)

The NERC was established under Section 31 of the EPSR Act as an independent regulatory agency and charged with the responsibility of regulation and overall co-ordination of the activities of the electricity sector in Nigeria. The NERC also licenses persons engaged in generation, transmission, and distribution of electricity in the country as well as determines electricity tariffs upon consultation with relevant stakeholders. Some of the general objectives of the NERC include: to create, promote and preserve efficient Sector and market structures and to ensure optimal utilization of resources for the provision of electricity services; to create, promote and preserve efficient Sector and market structures and to ensure optimal utilization of resources for the provision of electricity services; to ensure that regulation is fair and balanced for licensees, consumers, investors and other stakeholders.

Energy Commission of Nigeria (ECN)

The Energy Commission of Nigeria (ECN) was established under Decree No. 62 of 1979 as amended in 1988 with the statutory mandate for strategic planning and coordination of national policies in the field of energy. The functions of the ECN include to serve as a centre for gathering and dissemination of information relating to national policy in the field of energy; to inquire into and advise the Government of the Federation or the State on adequate funding of the energy sector including research and development, production and distribution; to monitor the performance of the Energy Sector in the execution of government policies on energy; to serve as a centre for providing solutions to inter-related technical problems that may arise in the implementation of any policy relating to the field of energy.

Transmission Company of Nigeria (TCN)

Nigeria operates a centralized national grid managed by the TCN under a technical service contract with Manitoba Hydro International. The TCN is solely owned by the Federal Government and undertakes the following licensed activities: electricity transmission; system operation; and electricity trading.

Nigerian Bulk Electricity Trading Plc (NBET)

The NBET is a government-owned public liability company established in accordance with the provisions of the EPSR Act as an electricity trading licensee that engages in the purchase of electrical power and ancillary services (from independent power producers and the successor generation companies) and subsequent resale to distribution companies and eligible consumers. The primary objective of the NBET is to ensure bankability of the Electricity Sector.

The Mining Sector

Nigeria is blessed with abundant mineral resources spread out in all parts of the country. Some of these resources with significant deposits in the country include: Coal, Iron Ore, Lead/Zinc, Tin, Gold, Gypsium, Uranium amongst other. Section 1(1) of the Nigerian Minerals and Mining Act, which is closely worded with Section 44(3) of the Constitution of the Federal Republic of Nigeria, provides that: 

the entire property in and control of all mineral, in, under or upon any land in Nigeria, its contiguous continental shelf and all rivers, streams and watercourses through out Nigeria, any area covered by its territorial waters or constituency and the Exclusive Economic Zone is and shall be vested in the Government of the Federation for and on behalf of the people of Nigeria.

Accordingly, based on the above quoted provision, exclusive proprietary ownership of minerals is vested in the Federal Government of Nigeria. Furthermore, Section 2(1) of the Nigerian Minerals and Mining Act 2007 prohibits the conduct of any mining activity in the country except in accordance with the requirements of the Act. In the same vein, the Act provides that only a body corporate duly registered in accordance with the Nigerian Companies and Allied Matters Act (CAMA) 1990 may be granted a mining right. There are basically five types of mining rights that may be issued under Section 46 of the Act to wit:

Reconnaissance Permit

A Reconnaissance Permit is granted for a period of one year and it authorizes the holder to obtain access into, enter on or fly over any land within the territory of Nigeria available for mining purposes to search for mineral resources on a non-exclusive basis.

Exploration License

An Exploration Licence confers on the holder, exclusive rights to conduct exploration activities within the land area covered of not more than 200 square kilometers for a period of 3 years subject to renewal for two further terms of two years each.

Mining Lease

A Mining Lease grants the holder on an exclusive basis, the rights to access, use, occupy and carry on mineral exploration within the mining lease area for a period of 25 years subject to renewal on the 24th anniversary of each term upon compliance with the terms of the current lease.

Quarry Lease

A Quarry Lease confers the holder with the rights to carry out quarrying operation including the excavation and disposal of quarriable minerals such asbestos, china clay, gypsum, marble, etc over a land area not more than 5 square kilometers for a period of 5 years subject to renewal.

Small Scale Mining Lease

A Small Scale Lease is granted over am area not less than 5 acres but not exceeding 3 square kilometers and the terms of its grant is as determined by the Small Scale and Artisanal Mining Department of the Ministry of Solid Mineral and Department.

Regulatory Agencies

Pursuant to the reforms initiated in the Natural resources Sector following the enactment of the Nigerian Minerals and Mining Act 2007, the following are the key agencies with oversight roles over the Sector:

The Ministry of Solid Minerals

The Minister of Mines and Steel Development is charged with the overall administration of the mining industry including the issuance of Mining Leases to investors in the Sector.

The Mining Cadastre Office (MCO)

The MCO considers, processes and issues applications for mineral titles excluding Mining Lease, and maintains cadastral registers. The MCO is also responsible for reviewing, suspending, and revoking mineral titles; receiving and disposing applications for renewal, extension of mining area amongst others.

Mines Inspectorate Department (MID)

The primary function of the MID is the supervision of all reconnaissance, exploration and mining operations with a view to ensuring that they comply with the provisions of the Act. The MID also monitors and ensures strict compliance by mining title holders with extant rules and regulations relating to health and safety, mining operations amongst others.

Conclusion

Nigeria is richly endowed with Natural Resources, much of which is yet to be harnessed. Presently, the proven reserves of crude oil in the country is about 25 billion barrels making it the world’s 10th largest reserves.  The country also has huge deposits of natural gas of about 184 Trillion Cubic Feet representing 38% of Africa’s reserves, and 2.6% of global reserves.  Equally, there are numerous potentials in the Electric Power Sector particularly as regards power generation, transmission, and distribution. This is because with a population of 180million, and daily power generation averaging between 3,000 – 5,000 megawatts, Nigeria is in deficit of her energy needs. This portends uncommon opportunities for investment with high prospects for profitable returns in this Industry. Interestingly, all these three sectors: the Oil and Gas Sector; the Electric-Power Sector; and the Mining Sectors have all witnessed reforms in recent years which has introduced efficiency, with less bureaucratic hurdles in the operations and management of these Sectors. This is more so coupled with the Federal Government’s ease of doing business initiative which is aimed at attracting foreign investment to the country.  Indeed, it is without a doubt that Nigeria is prepared and positioned for high-yield investments in her Energy and Natural Resources Industry.

Olayinka Alao

Firm: Renaissance Practice
Country: Nigeria

Practice Area: Energy & Natural Resources

  • 32b, Olushola Steet Off Iwaya Road
    Yaba
    Lagos





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