1 OIL AND GAS IN AFRICA: STRATEGIC IMPORTANCE AND LEGAL CHALLENGES ABA Section of International Law 2009 Spring Meeting, Washington DC Friday, April 17 Gbenga Oyebode, MFR Managing Partner Aluko & Oyebode

2 AFRICA’S OIL Africa has deep reserves of oil and gas and international investment in these areas has grown steadily over the last two decades. Africa is becoming an increasingly important factor in global energy markets as demonstrated below: Africa is one of the world’s most unexplored regions with one third of the new oil discoveries since 2000 taking place in Africa. It has been projected that 20 percent of the world's new oil production capacity would come from Africa between 2005 and Africa currently contributes about 12 percent of the world's liquid hydrocarbon production; that is about 85 million barrels per day. Africa continues to witness investments as evidenced by the increase in the number of licenses held by various national oil companies in Africa The West African sub-region currently provides nearly 20 percent of the supply of energy to the United States of America which percentage is expected to rise to 25 percent by 2015 Discovery of new oil fields in Mauritania, Democratic Republic of Congo and Algeria. Fields currently being explored or at various stages of production in Madagascar, Gabon, Cameroon and Nigeria.

INCREASING IMPORTANCE OF AFRICAN OIL AND GAS (I) In recent times, the focus has been on Africa’s oil and gas for a number of reasons such as: Increasing political instability in the Middle East Spiraling demand for oil by the United States of America, China, India and Korea amongst others Decline in oil output in mature production areas Africa’s huge reserves of oil and gas (for example, Nigeria alone has an estimated 185 to 189 trillion cubic feet of proven gas reserves, reported to be the largest gas resource in Africa) Easy Access/Transport advantage as much of Africa’s oil lies offshore beneath the Atlantic or near the West African coast, which makes it simpler to transport than oil from the Persian Gulf or the Caspian Sea. 3

INCREASING IMPORTANCE OF AFRICAN OIL AND GAS (II) Absence of restrictions resulting from OPEC Membership as most Oil producing African states do not belong to the Organisation of Petroleum Exporting Countries (“OPEC”). This means that a large proportion of Africa’s production is not constrained by cartel quotas Libya’s integration into the world economy has opened its substantial reserves in the Sirte Basin to international investors Favourable contractual environment as there is no monopoly on the exploration, production and distribution of petroleum products in most African countries Africa has working LNG plants in Algeria, Libya, Egypt and Nigeria, with a total capacity of around 50 million tonnes per year most of which finds outlets in Europe and the United States of America

5 NIGERIA AS A CASE STUDY Nigeria features prominently in the African region as the energy exporting giant of Africa with proven oil reserves of discovered fields currently estimated to be about 40 billion barrels. Nigeria accounts for over 60% of the region’s energy resources and is the eleventh largest oil producer in the world. Nigeria’s oil is in high demand, for example, the United States buys about 46% of Nigeria’s daily output, Europe about 20% and South America about 7%. Nigeria has the largest natural gas reserves in Africa, estimated at approximately 185 to 189 trillion cubic feet (tcf) with a combined total of proven and possible reserves of 300 tcf. Nigeria’s oil has low-sulfur content which fetches a premium for gasoline production and is highly desirable for environmental reasons.

6 NIGERIA’S PECULIAR CHALLENGES (I) In spite of the huge potentials for oil and gas investment, exploration and exploitation in Nigeria, the following challenges threaten growth in the region: Lack of clearly defined legal and regulatory environment (for example, the dual role of the Nigerian National Petroleum Corporation (“NNPC”) the state owned oil company, as a regulator and participator in the Nigerian oil and gas sector) Lack of efficient management of the petroleum industry and the need for institutional reform in the NNPC Inadequate security for onshore and offshore oil fields Huge capital outlays involved in developing oil fields and high transaction costs due to lack of infrastructure Unpredictable market prices/fall in crude oil prices as a result of the global economic crisis (from a high of US$ in July 2008 to about US$50.46 in early April 2009)

7 NIGERIA’S PECULIAR CHALLENGES (II) Non-enforcement and implementation of government policies Piracy and conflict in the Niger Delta region which has affected the productivity on onshore and offshore oil fields and led to declining oil production The Federal Government’s inability to meet funding requirements under various exploration contracts Reliance on petro-state model with the Federal Government retaining control of oil and gas resources Envisaged decline in oil demand due to shift in focus to alternative energy sources (for example the United States of America, Nigeria’s biggest oil customer is embarking on a comprehensive drive to reduce fossil fuel energy consumption with the objective of ending the United States’ dependence on foreign oil) Environmental/climate change concerns dwelling largely on the need to cut down on fossil fuels in favour of bio-fuels and alternative renewable sources of energy

LEGAL CHALLENGES Lack of clearly written and well enforced land and mineral rights Uncertainty resulting in different policies adopted by successive governments Inadequate legal/regulatory framework governing the oil and gas sector Poor enforcement of laws and regulations 8

9 THE NIGERIAN SOLUTION: THE DRAFT PETROLEUM INDUSTRY BILL Currently under debate is a Petroleum Industry Bill that seeks amongst other things to: Unbundle and privatise the NNPC to ensure greater efficiency Make the NNPC an entity that is independent of government finance and run as an efficient business entity Provide an environment that is conducive to the Federal Government of Nigeria meeting its cash obligations under its oil exploration arrangements Provide incentives, a level playing field and an enabling environment for private sector investment in the Nigerian oil and gas sector Encourage private sector participation in the processing of crude oil in Nigeria by investing in the refineries Tackle the problem of pricing and availability Build capacity and create key institutions that will manage the oil and gas industry Address the issue of transparency in public procurement procedures in line with the Nigerian Extractive Industries Transparency Initiative, good governance, corporate social responsibility, sustainable environmental practices and community development

NIGERIAN OIL TODAY…. The challenges that plague the Nigerian oil and gas industry are real and present; despite these challenges, Nigeria’s oil and gas sector remains attractive to international investors. This is evidenced, amongst other things, by continued investment in the Nigerian oil and gas sector by the United States of America, China, India and Korea amongst others. The United States of America also remains interested in ensuring the security of energy supplies from Nigeria as evidenced by the establishment and continued presence of a unified and separate African Command (“AFRICOM”), a new U.S. military headquarters devoted solely to Africa spearheaded by American energy security concerns and the Global War On Terrorism (“GWOT”). 10