Kolmani Oil Discovery: What it means

Ahmed Adamu, PhD

Some Nigerians had some euphoria as the game-changing oil and gas discovery in Kolmani, a Northern Nigerian area, was announced. It is the first Northern Nigerian proven petroleum reserve, sixty-six years after petroleum discovery in southern Nigeria. "What does this discovery mean to us as Nigerians and northerners," someone from the north called and asked me.

An estimated proven reserve of 1 billion barrels of crude oil and 500 billion cubic feet of natural gas were found in an oil field that straddles Bauchi and Gombe states, known as the Kolmani oil field. The commercial quantity of the oil reserve in this area could increase in the future.

Anywhere oil is found in Nigeria belongs to the federation. The only benefits to the host community are the 3% of the oil operating cost in the area from the preceding year and the constitutional 13% derivation funds to the state government. The new oil-rich states will benefit from these two sources.

The 3% is only for the oil-bearing communities; other non-oil-bearing communities will not benefit from it. At the same time, 13% of all the revenue generated from the oil produced in the state will go to the state government. Oil-producing states and their host communities could get more than N100 billion in a year from these two sources alone.

Other extended benefits to the new oil-rich states could be direct jobs for high, medium, and small-skilled labor. Already some Indian oil companies have shown interest in becoming partners in developing the onshore Kolmani oil fields.

Onshore oil production in Nigeria, like the Kolmani field, is not attractive to major oil-producing companies. The five major oil companies operating in Nigeria are divesting from onshore and shallow water oil fields despite the recent reduction in taxes and royalties in the PIA. Oil companies prefer deep water oil production to avoid hostilities from restiveness, vandalism, and insecurity associated with the onshore oil production areas.

Because of what is stated in the PIA relating to the 3% for host communities, the Kolmani oil production should not experience restiveness and vandalism. The PIA said, "In any year where an act of vandalism, sabotage or other civil unrest occurs which causes damage to petroleum and designated facilities or disrupts production activities within the host communities, the community will forfeit its entitlement to the extent of the cost of repairs". Host communities' benefits are now tied to the smooth running of the oil production in their area.

NNPC limited will be the Kolmani oil and gas concessionaire and will lift Nigeria's profit oil and gas from the oil field and transfer the proceeds to the Nigerian Petroleum Upstream commission after deducting its service cost. However, the profit oil could only be derived after cost recovery by the developers of the field, known as contractors.

The New Nigeria Development Company (NNDC) is the lease owner for petroleum mining on the field. But, could NNDC be able to develop this new oil field? No. NNDC may not have the technical and financial readiness to develop the Kolmani field yet. Therefore, oil companies must be contracted to spend millions of dollars and provide technical expertise to develop the area.

There will not be a profit oil and gas from the field until after some years of production to allow the contractors to recover their cost, but this depends on the oil price and contract agreements. Mainly the cost incurred by the contractor in developing the field is amortized and may take up to the first five years of production, and then the profit sharing will start. This is to allow the operators to recover their costs of development. The government will transfer the exploration costs to the operator, which will add to the total cost of oil.

The only money that will be accruing to the federation account in the early years of production will be the royalty crude and hydrocarbon taxes (only if there is a profit), which are 15% and 30% of the crude oil produced, respectively. It could take between five to ten years to develop the field. So, any financial benefits will be after developing the area.

Would the focus be on developing crude oil only or both crude oil and gas? Natural gas has far-reaching economic benefits, but developing it is more expensive. With the ongoing gas pipeline projects, there could be more gas supply from this field which will help industrial growth in the country.

Now, some states will begin to suspect their possible oil and gas reserves. We can now conclude that every part of Nigeria has a possible oil and gas reserve. With the first oil discovery in the north and with the creation of the Frontier Exploration Funds, more exploration will be undertaken in the north. The Frontier Exploration Fund is funded by 30% of the NNPC Limited profit oil and gas and 10% of all rents on petroleum licenses and leases.

Many states are facing debt and development issues and might wish to have more control and access to the natural resources in their states to fix their problems. More oil, gas, and other natural resources could be harnessed when state governments are given the right to control those resources. States will maximize their potential resources to outcompete each other.

In the event of states' resource control, people ask, how could border states handle shared oil and gas fields that cross their borders? Just like the Kolmani oil and gas field, which straddles across Gombe and Bauchi states. Any state that produces more at the border areas may draw more oil from the neighboring state. So, who drills first captures the oil.

 To avoid over-production and damage to the environment at the border areas, the neighboring states should unify the oil field, appoint a single operator, and share the profit based on where the field lies in relation to the boundary. State governments in a geo-political zone could undertake this kind of unification.

Even after states' resource control, further oil explorations will continue to search for more oil and gas reserves in the states that do not confirm their petroleum deposits yet. So, non-oil-producing states could become oil producers eventually.

With oil fading away and growing restrictions on the use of fossil fuels, we can maximize the utilization of our endowed petroleum resources to build infrastructure and the economy and fund alternative energy sources and consumption.

Finally, more oil reserves without growing and functioning refineries will not make any difference. The focus should be on functioning and adequate refineries locally to stop importing refined petroleum. Imported refined petroleum is the biggest bill in our import basket. Having local refineries will help restore the value of our exchange rates. Government refineries must be privatized as soon as possible, and modular refineries should be encouraged to grow their efficiencies and capacities. So, the discovery of oil and gas in the Kolmani area is not a given benefit; it is a potential benefit, so celebrate not yet.

Ahmed Adamu, PhD

Petroleum Economist

ahmadadamu1@gmail.com