The concept of indigenisation is not new to Nigeria’s oil and gas industry. There have been various attempts to deepen local ownership, capacity and delivery since the early 1990s.  While successful in part, one of the deepest frustrations of this process has been the failure of the indigenous sector to achieve its desired potential.

The reasons for the failure of the sector to deliver have been explained many times. Whether lack of technical capacity, access to finance, or the quality of the assets allocated, it is clear that while attempts to inject momentum into the growth of indigenous ownership and production have had isolated successes, the sector has not achieved the scale required to domicile the desired value in Nigeria.

As of February 2012, indigenous companies produced 203,498 barrels of oil per day (bopd) of the 2,040,000 bopd1 produced by Nigeria. That’s just 9.9% of Nigeria’s production in the hands of Nigerian investors. A relatively poor return for 20 years of work, however, 2012 may have been the birth of true indigenous participation at scale.

In 2010, the SPDC Joint Venture Company made a decision to divest from a number of non-core onshore assets, the first transaction (SEPLAT’s acquisition of OML’s 4, 38 and 41) was completed in late 2010 and was followed by First Hyrdocarbon Nigeria’s acquisition of OML 26 in 2011 before Shoreline, Neconde, Elcrest and Niger Delta Western completed their acquisitions of a further 4 assets in 2012 and 2013. These acquisitions are important for a number of reasons.

Minister of Trade & Investment, Olusegun Aganga

Firstly, they injected new impetus into the ambition of indigenous firms to achieve scale. Just the act of completing these acquisitions added over 44,000 bopd to Nigeria’s indigenous production.

Secondly, they enabled the development of more sophisticated upstream oil and gas financing from the local banking sector, with First Hyrdrocarbon Nigeria’s completion of a US$230 million reserves based lending facility led by FCMB and Stanbic IBTC the spark for similar structures from UBA, Access Bank, First Bank, Skye Bank etc. Over $1.5billion was raised by local financial institutions to fund the acquisition, and perhaps more importantly, the development of these assets.

Thirdly, they have placed already producing assets, with significant net proven and probable reserves of over 750mmbl firmly in the hands of indigenous companies. Not only was there an instant boost to production, but the development potential of each asset, which is largely already funded through new local financing capacity is significant. Within 5 years assets acquired by indigenous companies from Shell are projected to be producing a total of over 330,000 bopd of which almost 150,000 is owned by indigenous companies.

Fourthly, the government made an important strategic decision during the Shell divestment process to domicile the NNPC 55% ownership of the acquired assets into the National Oil Company, the Nigerian Petroleum Development Company (NPDC).  That means the full 330,000 bopd of new production envisaged over the next 5 years is owned by a combination of Nigerian companies and the emerging National Oil Company, a true revolution in the indigenous sector. NPDC’s strong strategic decision to enter into Strategic Alliance Agreements with Atlantic Energy and Seven Energy have provided it with the technical and financial capacity required for rapid expansion and the role that Atlantic and Seven are playing is fundamental to the success of the wider process.

Finally, the precedent set by Shell is not an isolated event. The emergence of strong, well-financed, credible and ambitious indigenous companies has broken down the barriers to further divestment from Shell and other multinationals. Already we have seen Conocco Phillips divest from its Nigerian assets (a process within which my company, Lekoil participated, as we did in the Shell divestment process), with Oando acquiring assets producing an average of 43,000 bopd for over US$1.79 billion. Further divestment by multinationals onshore Niger Delta presents significant additional growth opportunities.

If we assume that a number of other multinationals are considering divesting from their onshore assets and that a long awaited marginal field bid round, made up of quality assets, will be held in 2013 the outlook for indigenous production is extremely strong.

Lekoil was established with just this opportunity set in mind and, with a strong board, experienced technical team and deep industry relationships, plans to become a significant player on the African energy scene, exploiting overlooked opportunities in new and existing basins to create a balanced portfolio of exploration, appraisal and production assets.

So what might the Nigerian oil and gas sector look like in 5 years’ time and how much indigenous production is realistically achievable? To determine this, we have to start by making a few assumptions about how to categorise or predict production, these have been determined as follows:

? Nigerian production will be between 3.5 million and 4 million bopd in 2018.

? Each of the indigenous companies that acquired assets from Shell will achieve their stated production targets by 2018, as will Oando following their Conocco Phillips acquisition.

? NPDC will achieve its 250,000 bopd production target by 2018 at the latest.

Based on these assumptions, we can confidently predict indigenous owned production of almost 700,000 bopd in 2018, or between 17.5% and 20% of total production. In fact, these estimates might be conservative given the on-going programme of divestment and the likelihood of further marginal field rounds for indigenous companies, as well as NPDC’s rate of progress.