Growing Oil Reserves in Nigeria: Is PIB 2012 Pragmatic in Its Provisions?

1. Growing Oil Reserves in Nigeria: Is PIB 2012 Pragmatic in Its Provisions? Professor Wumi Iledare, Ph.D. Senior Fellow, U.S. Association for Energy Economics 2014 President, International Association for Energy Economics Director, Energy Information Division & U.S. Central Gulf PTTC

2. Presentation Outline • Introduction • Some Basic Definitions • Oil Reserves in Nigeria: A statistical Overview • Reserves Growth Components • A review of Competing Factors • Key PIB Provisions Relevant to Reserves Growth • What are the major provisions of importance? • Qualitative PIB effects on oil reserves growth • Concluding Remarks and Recommendations

3. Classification of Reserveswww.spe.org

4. Some Important Definitions • Resources are the stock of oil deemed extractable in an undefined future— • Contingent—estimated on a given date to be potentially recoverable from discovered accumulations but for some contingencies • Prospective—potentially recoverable from un discovered accumulations • Reserves are resources presumed recoverable on a given date forward under currently known technology and economic conditions

5. Reserves Definitions and Implications • Quantities of petroleum that are anticipated to be commercially recoverable from known reservoirs from a given date forward under current economic and operating conditions and technology • Reserves cannot be measured, they can only be estimated and some degrees of uncertainty are involved. • Time line is associated with each reserve estimate, hence the term “original oil in place” or “ultimate recovery”. • “Ultimate recovery” means petroleum reserves which are expected to be recovered over the life of a well, reservoir or field.

6. Classification of Reserves

7. Nigeria within the Context of Global Oil and Gas Resources

8. Conventional Oil : Countries with Largest Reserves & Production EOY 2012

9. Proved Oil Reserves Trend s:Evidence suggests, if there is no “Wolf” at the door yet… ! But there are new “kids” in the block

10. AfricaProved Reserves Trend : Libya dominates, Angolais emerging … !

11. Are other African countries emerging as key new players globally in terms of reserves growth? OAFC from 12% in 1990 to 15% in 2012 Angola from 3% in 1990 to 13% in 2012

12. Reserves Growth in General is Driven byResearch & Development, economics, and fiscal regimes • Recoverable reserves growth is assured but the extent of the size of growth may be imprecise. • Technology does not just hasten or enhance extraction from existing resources but it equally facilitates growth in reserves thereby limiting depletion • Economics and fiscal policy do affect resource discovery and production, just as geology does.

13. NigerianOil Extraction Trend : Is it growing in proportion to its reserves additions, there by limiting reserves growth Extraction MMBbls Evidence of production volatility from 1995

14. Africa Oil Extraction Trend s : OPEC members still dominate the continent! But, OAFR are emerging! Extraction MMBbls

15. 2000 1990 2012

16. Proportion of Recoverable Reserves Extracted Since 1981: Nigeriacompares favorably well … …for a barrel of oil produced today is gone..

17. Nigeria Oil Resources and Supply Outlook: Is the itReplacing Extracted Reserves Adequately? • High replacement rate is a good indicator of the longevity of the oil in a petroleum producing province . • It reflects the robust state of the global exploration and production (E&P) business. • Supports sustainability of E&P business in Nigeriaproducing province!

18. Comparing TotalReserves Added & Extracted:More Reserves Added than Extracted Since 1981, Billion Barrels World LATAM In a cumulative sense, more reserves having added than extracted and Nigeria leads…

19. NigeriaOil Resources and Supply Outlook: Can CurrenylyEstimated Proved Reserves adequately to Sustain higher production? • R-P ratios of 36.6& 55.3years reflect African& Global historical criticalvalue between 1980 and 2012. • R-P in Nigeria shows verifiable sustainability of reserves at the historical maximum extraction rate. • Itssustainability premium at its historical maximum extraction rate of 895 MMBbl is 2.1years before depletion begins fast What can be done to grow reserves to sustain oil production at a higher level?

20. Challenges Fundamental to Reserves Growth in Nigeria • Fundamentals of petroleum demand and supply • Rig availability and affordability • Resource ownerships dominated by host government • Competition for scarce investor’s fund for exploration • Access to affordable technology & Mature fields • Insecurity of assets and human capital • Shale oil and gas expansion in North America • Uncertainty knowing the governance structure of Oil and Gas institutions • The non passage of the industry reform bill since its origination in 2000

21. Perhaps, overcoming these challenges may help grow oil reserves because…! • Components of reserves growth: • Revisions • Extensions • New Pool Discovery • New Field Discovery • Wildcat Discovery • Geology matters but so do fiscal policy incentives and economic environment • The role of government is Important and this is evidence in what the government is doing or not doing with the PIB

22. Institutional governance framework for regulatory agencies—autonomous, independence, & self-sufficient Upstream leasing process, contractual agreements, & contracting—Transparency and accountability Midstream and downstream licensing, marketing petroleum and its products, and regulations—deregulation reduces anticompetitive effects NNPC governance structure and joint venture oversights Fiscal instruments and contract terms specification process Taxation schemes, deductibles for tax purposes and security of assets Significant Provisions in PIB 2012 that may Impact Growing Reserves in Nigeria

23. Creating business environment with institutional transparency and accountability requires easy access to information and minimization of discretionary power by government functionaries. Reforms that would address transparency and accountability dilemma head-on must provide simple text information on all contractual agreement and ensure publicising the owners and beneficiaries. Perhaps government functionaries can be educated to realize that discretionary awards of petroleum blocks can create anticompetitive business environments. Concluding Remarks

24. First, good governance of the oil sector matters for creating an enabling environment to grow reserves. The central government exercises absolute power over the petroleum industry in Nigeria through four government institutions: and the ongoing Petroleum Industry Bill seem to have strengthened these powers and perhaps inadvertently makes the governance structure less institutionalized than in prior years. Somehow, the PIB 2012 deviates from the original transparency and accountability objective by inserting discretionary block allocation explicitly in the Bill and tend to prefer to set rentals, royalty and other fees by regulation rather than through legislation. I just do not see how this provision will grow reserves with the political uncertainty with all its risk exposures and the anticompetitive implications on resource allocation. Concluding Remarks

25. Niger Delta Community:A version of the petroleum industry bill creates a host community dividends provision. Another provision surrenders 10% of royalty to the community. There are provisions for abandonment fund and environmental remediation fund that are auditable. Data and information confidentially are not allowed anymore in the reform bill. However, there are exceptions the rule in order to protect intellectual property rights. It is argued that undue confidentially can lead to illegality in data distribution for money. Henceforth, public disclosures of PSC and Joint venture funding and owners and beneficiaries of petroleum blocks should be mandatory. Concluding Remarks

26. Growing Oil Reserves in Nigeria: Is PIB 2012 Pragmatic in Its Provisions? Thank you for your attention!