…paid $3.5 billion in production entitlements, royalties, fees, and taxes

Nigeria’s natural resources offer attractive investment opportunities and significant potential for Nigerians to boost their economy

Rashidat Olushola Okunlade Writes

Shell Companies in Nigeria have been contributing to economic growth in Nigeria by generating revenue for the government through taxes, creating employment opportunities, and contributing to the development of local businesses.

In 2021, Shell Companies in Nigeria directly employed 2,500 people, 97% of whom were Nigerian nationals. More than 8,500 contractors supported our operations during the year.

Shell Companies in Nigeria awarded contracts worth $800 million (the same as in 2020) to Nigerian-registered companies, of which 92% were to companies where the Nigerian ownership was at least 51%.

The latest country-by-country tax data available is for 2020 and can be found in the Shell Tax
Contribution Report. In 2020, Shell’s business in Nigeria collected and paid a total of $3.5 billion in production entitlements, royalties, fees, and taxes. Some tax numbers are available for 2021: SPDC paid $424 million and SNEPCo paid $562 million in corporate tax and payments to the government.

Shell Companies in Nigeria are investing in expanding offshore oil and gas production and developing infrastructure for domestic and export gas. These projects and assets will continue to bring employment and contract opportunities to Nigerians and their businesses.

Security Challenges Onshore Production: Shell Companies in Nigeria have a track record of strong production. But in 2021, the combined production from the SPDC JV and SNEPCo (Bonga) fell to 493,000 barrels of oil equivalent per day from 614,000 in 2020.

The SPDC JV produced 383,000 barrels of oil equivalent in 2021, compared with 497,000 barrels of oil equivalent in 2020. The fall in output was largely a result of curtailed oil production because of heightened security issues, such as crude oil theft and illegal oil refining. Production numbers were also down as a result of divestment action, including the sale of SPDC’s 30% interest in OML 17 for $533 million.

In the last quarter of 2021, crude oil theft from pipelines across the region increased ostensibly as a result of rising oil prices, which made the activity more profitable. Security risks have heightened and production in some areas has been put on hold. The situation is impacting operators across the Niger Delta. The Nigerian National Petroleum Corporation (NNPC) has reported that crude thefts in 2021 reached 200,000 barrels per day-a quarter of onshore production.

The SPDC JV declared a force majeure on its Bonny export program with effect from March 3, 2022. The declaration of force majeure was on account of significantly lower deliveries of crude oil to the Bonny Terminal because of theft from illegal connections to pipelines.

Offshore in the deep waters of the Gulf of Guinea, production at SNEPCo’s Bonga field continued steadily but not without its own challenges. Production fell to 110,000 barrels of oil equivalent per day from 117,000 barrels in 2020. This was because of repairs on two production lines in 2021.

The five-year average production for SPDC and SNEPCo is 606,000 barrels of oil equivalent per day.

Shell Companies in Nigeria stated its intention to reduce its involvement in onshore oil and gas production in Nigeria and to focus future investment on our deep-water and gas positions. This aligns with Shell’s Powering Progress strategy. We are in discussion with the Nigerian government and other stakeholders on how this can be best achieved.

Focus on Safety and Security: Shell Companies in Nigeria aim to consistently apply international safety standards. We work closely with communities, civil society, local businesses, joint- and co-venture partners, as well as federal and state government agencies, to promote a secure and safe environment. Shell Companies in Nigeria aim to achieve no harm to people and no leaks across operations.

Shell Companies in Nigeria also contribute to the safety of communities around their facilities by responding to third-party emergencies in these communities. These incidents include fires near our facilities. In 2021, Shell Companies in Nigeria responded to 32 third-party emergencies.

Tragically, six people working for a contractor company were killed in 2021 when gunmen attacked a convoy of buses traveling to the Assa North/Ohaji South gas development project site. A government security agent was also killed in the incident and seven other people were injured. This was a truly horrendous event.

SPDC, in its capacity as operator of the SPDC JV, and its employees, feel these losses deeply and, together with government security agencies, learn from such incidents to help prevent them from happening again. SPDC immediately stopped work on the site. Work will resume when we are satisfied that security has been restored around the project site. SPDC has supported the contractor during the emergency response and follow-on investigations.

Developing Gas Opportunities: Nigeria has around 200 trillion cubic feet of proven gas reserves and about 600 trillion cubic feet of unproven reserves. However, a lack of adequate power grid infrastructure results in unreliable power supply from the electricity grid and power shortages in urban and rural areas. The development of energy infrastructure is a priority for the country.

Nigeria has declared 2021-2030 the “Decade of Gas Development for Nigeria” and is determined to develop the gas sector to transform the country into an industrialised nation. Gas has enormous potential to diversify and lift the Nigerian economy.

Shell is investing in a gas portfolio that will increase supply for Nigeria’s growing industrial and commercial sectors, as well as international customers via an expanding network of plants, pipelines and export terminals. Shell has interests in two gas supply operations in Nigeria: NLNG and SNG. Both are supplied with gas by the SPDC JV and SNEPCo.

However, Nigeria needs to create an enabling environment to continue to foster investments in the gas sector.

According to Ed Ubong, SNG Managing Director and President of the Nigeria Gas Association, an enabling environment rests on the development of infrastructure across the gas value chain and a predictable regulatory, commercial and legal framework. He also states that all stakeholders need to uphold contracts and that resolving the security challenges in the Niger Delta is critical if Nigeria is to benefit from the “decade of gas”.

Shell Energy Nigeria To Grow SNG’s Customer Base Further: Nigeria has a population of more than 200 million and this is expected to double by 20505, so there is enormous potential to expand businesses within the domestic gas market. In 2021, on the back of the successes of SNG, Shell launched the Shell Energy Nigeria (SEN) business line. SEN aims to grow Shell’s natural gas marketing and sales business in Nigeria.

In 2021, SNG supplied more than 400 megawatts (MW) equivalent of gas-generated power in Nigeria. SEN’s goal is to distribute 1 billion cubic feet of gas in the domestic market by 2030.

SNG has a distribution network of 150 kilometers and is the only gas distribution company in Nigeria certified according to the ISO14001 international standard for an effective environmental management system. In 2021, it provided gas to more than 130 commercial and industrial customers.

In 2021, SNG signed a 20-year agreement for the domestic distribution of gas to industrial customers and manufacturing plants in Lagos and Ogun States. The new deal with the Nigerian Gas Marketing Company (NGMC) will also enable SNG to extend its distribution network to Badagry to serve a new market in the community that borders the Republic of Benin.

By the end of 2021, SNG had agreements in place with 165 customers across six states: Ogun, Abia, Rivers, Bayelsa, Oyo, and Lagos. The agreements will enable the supply of reliable, lower-carbon energy that drives industrialisation, provides employment for both the skilled and unskilled local population, as well as directly improve internally generated revenues in these states. Infrastructure is being built to supply gas to new customers where necessary as SNG was actually providing gas to around 130 customers at the time of writing this report.

Gas Partnership with Government: The SPDC JV has long produced oil in the Niger Delta but it also supplies about 10% of Nigeria’s domestic natural gas. Today, it aims to produce more natural gas and is working with the government and NNPC on developing four of the government’s seven designated critical gas supply projects. These are the Assa North/Ohaji South field; the four unitised gas fields – Samabri-Biseni, Akri-Oguta, Ubie-Oshi, and Afuo-Ogbainbri; Gas Supply to Brass Fertilizer Company; and Okpokunou/Tuomo West field cluster.

Construction of the Assa North/Ohaji South gas development project in Imo state started in 2019. However, the project was put on hold in August after the security incident described above. Prior to the suspension of the project, Assa North/Ohaji South was expected to be completed in 2023 with a potential capacity of 300 million standard cubic feet of gas per day, one of the largest domestic gas projects in Nigeria.

The other three projects are in the early stages and investment decisions have not yet been taken.

In 2021, the SPDC JV-operated AFAM VI power plant in the Oyigbo local government area of Rivers State supplied 7% of Nigeria’s grid-connected electricity. AFAM VI has a nameplate capacity of 650 megawatts (MW) but in 2021 operated between 250MW and 350MW depending on grid allocations. The SPDC JV’s Gbaran-Ubie gas plant achieved peak production in 2021 with about 182,000 barrels of oil equivalent per day.

Ending Routine Flaring: Shell Companies in Nigeria are working towards their goal of ending the routine flaring of associated gas from their oil production operations. They have made a series of investments and partnerships over the last 20 years to capture and supply associated gas for domestic and export markets.

In 2019, the Southern Swamp Associated Gas Solutions project was commissioned, and the SPDC JV is planning to reduce associated gas flaring further through its Forcados Yokri gas-gathering project, of which large parts are set to be completed in 2022.

Despite such efforts to reduce continuous flaring, unfortunately flaring intensity (the amount of gas flared for every tonne of oil and gas produced) at both SPDC- and SNEPCo-operated facilities increased in 2021 owing to short-term operational issues.

Flaring from SPDC-operated facilities increased by around 5% in 2021 compared with 2020.
The increase was primarily because of the extended outage of the gas compression system in SPDC’s shallow-water operations. The system was restored and became operational in January 2022.

Flaring at SNEPCo-operated facilities rose by around 160% in 2021 compared with 2020. This was mainly because of an increase in flaring on the Bonga floating production, storage, and offloading (FPSO) vessel. Repairs to a flex-joint on the Bonga FPSO’s gas export riser in the second quarter took longer than expected, in part because of weather conditions. While repairs were underway, the FPSO continued to produce oil, and therefore flaring was necessary for safety reasons. The repairs were safely concluded in July 2021.

Although flaring intensity levels rose in 2021, SPDC and SNEPCo over the last 10 years have almost halved the combined amount of hydrocarbons they flare from 1.5 million tonnes in 2012 to 0.8 million tonnes in 2021. This reduction is the result of a strict flaring reduction management process and both SPDC and SNEPCo will continue to work in close collaboration with joint-venture partners and the government to make progress toward ending routine
flaring of associated gas.

Nigeria LNG Expansion Underway: Global demand for LNG continues to grow as the world increasingly seeks reliable supplies of lower-carbon energy. Shell’s investment in Nigeria’s gas infrastructure for export is expected to help. This is according to data provided by global research and consultancy business Wood Mackenzie. the country benefits further from revenues. Shell Gas B.V. and its partners took a final investment decision in 2020 on a new LNG processing unit-known as Train 7 at NLNG.

The expansion is expected to create around 12,000 jobs for Nigerians during construction and stimulate the growth of the local oil and gas service sector, with 55% of engineering and procurement of goods and services being sourced in-country. Train 7 is expected to ensure Nigeria’s continued place as a global player in a lower-carbon energy source.

Once operational, Train 7 will add around 8 million tonnes per annum of capacity to the Bonny Island LNG facility, taking the total production to around 30 million tonnes per annum.

In 2021, NLNG began awarding procurement and construction contracts. Early works started at the site. The first phase of the worker village is expected to be ready for occupancy in 2022 and the new material offloading facility ready for use by the end of 2022. NLNG’s Train 7 is expected to come on stream in the middle of the 2020s.

Key Licence Renewed for Deep-Water: SNEPCo has interests in four deep-water blocks in the Gulf of Guinea, two of which it operates. Today, nearly one-third of Nigeria’s deep-water oil and gas production comes from the Bonga and the non-operated Erha fields.

Since production began in 2005, Bonga alone has produced more than 950 million barrels of oil with the 2021 average oil production per day at 105,000 barrels. The Bonga FPSO vessel has a total production capacity of 225,000 barrels of oil per day and 150 standard cubic feet of gas exported per day. In 2021, the availability of the FPSO vessel increased to 80% from 70% in 2020.

In addition to Bonga, SNEPCo’s exploration activities have led to several significant discoveries of oil and gas over the last two decades, including the Bolia and Doro fields (Shell interest 55%).

In the right investment climate, SNEPCo believes that there are opportunities to expand. In 2021 the OML 118 (Bonga) production-sharing contract was renewed and the lease was extended for 20 years. Bonga North and Bonga South West Aparo (BSWA) oil fields are two such potential opportunities. Bonga North is a proposed tie-back project to the existing Bonga FPSO with Phase 1 comprising 14 wells. BSWA is a development of a new FPSO with Phase 1 comprising 23 wells.

Supporting Renewable Energy Startups: Millions of Nigerians are excluded from the country’s power grid and Shell Companies in Nigeria have established and provided substantial funding for a not-for-profit, an impact-investing company called All On. Operating as an independent company, All On works to bring reliable electricity – often from renewable energy sources — to off-grid urban and rural customers. This support aims to build a solid pipeline of viable businesses that can create the scale required to address Nigeria’s access to energy gap.

In December 2019, SPDC and SNEPCo made a significant additional 10-year financing commitment of $160 million in All On, bringing the total commitment to $200 million. By the end of 2021, All On had provided investment capital to over 40 renewable energy start-ups in its portfolio – an increase of more than 30% from 2020. One such company is Infibranches Technologies Limited, to which All On has committed $2 million, which is expected to enable the indigenous technology company to expand sales of solar home systems via its more than 13,000 agent banking partners across Nigeria.

With the support of the Rockefeller Foundation, the All On Hub was established in 2020 to provide nonfinancial support and build the capabilities of off-grid energy entrepreneurs. In 2021, the hub supported 81 ventures – nearly double the 41 supported in 2020.

Also in 2021, All On, Odyssey Energy Solutions, and the Global Energy Alliance for People and Planet launched a $10 million equipment financing facility as part of the DART pilot program in Nigeria. DART will combine demand pooling, aggregated purchasing of solar equipment, and access to affordable finance to unlock economies of scale for solar companies, achieve cost savings for end-users, and accelerate the growth of the renewable energy sector in Nigeria and beyond.

Developing Local Content and Skills: Shell Companies in Nigeria contribute to the growth of Nigerian businesses that can provide technical and support services to the industry. This includes the manufacture of tools and technical kits, the operation of helicopter flights in the Niger Delta, and strategic partnerships between foreign and local companies to stimulate technology transfer and capacity development.

While there are government-required programmes in some areas, such as the Nigerian and Community Content Strategy embedded in the Assa North/Ohaji South gas development project, Shell Companies in Nigeria deliberately seeks to contract local businesses
wherever possible.

In 2021, Shell Companies in Nigeria awarded $800 million worth of contracts to Nigerian registered companies. Of these, 92% were companies with at least 51% Nigerian ownership.

SNEPCo has awarded major engineering and construction contracts to companies that are indigenous, have local staff, or possess domestic capabilities in the country. At present, the manufacture and rebuild of hydraulic flying leads7 (HFLs) are being carried out in-country by wholly indigenous companies. Pressure Controls Systems Nigeria Limited, another Nigerian company, continues to refurbish old subsea trees.

Sometimes, a lack of access to capital hinders Nigerian companies from competing for and executing contracts effectively. Shell Companies in Nigeria have provided access to nearly $1.6 billion in loans to 901 Nigerian vendors under the Shell Contractor Support Fund since 2012. These loans help improve their tendering opportunities.