Nigeria’s energy sector is struggling to attract investment due to problems in its upstream and downstream operations. Subsidy scams, regulatory issues and short-sighted policies are just some of the setbacks swaying investor confidence. Shannon Manders reports.
The past couple of years have not been good for Nigerian oil: a string of catastrophes including oil spills, severe floods, fires and shutdowns have battered the sector, shrinking its GDP contribution to 14.7% in 2011 from 15% the year before, and over 20% in 2005.
The country’s erratic energy policy has been called into question. Nigeria’s government has been blamed for holding up investment channels and incentives the energy sector needs to expand. Non-passage of the Petroleum Industry Bill (PIB) has led investors to look at other producing countries in Africa and further afield and a disputed loan for the state-owned oil company is creating further apprehension.
Investors the world over are standing by, waiting to see if production stabilises, if the country will clean up its oil exportation and whether a new year will bring new hope and opportunities to invest.
At the end of last year, Nigeria’s state oil firm NNPC secured a US$1.5bn syndicated loan arranged by Standard Chartered to help it pay debts to international traders. But the likelihood of this deal going ahead is being heavily debated, and the inability by NNPC to refinance its debt is a cause for concern for all international institutions lending money to Nigeria.
“This is not the first attempt at trying to raise medium-term financing for NNPC because their exposure to international traders has been building up,” says a local banker.
While the transaction has reportedly been signed, another Nigerian banker tells GTR that the mandate might as well be “thrown away” as it was signed without the express approval of parliament.
“Although the deal is there, it’s now been flung into the courts in Nigeria: NNPC is not legally allowed to borrow because it’s not part of their constitution, and they didn’t get the government’s permission. It will be debated for the next six to nine weeks at least,” GTR’s source adds.
According to United Bank for Africa (UBA) however, there’s nothing stopping the deal from being drawn down – and the bank expects this to happen by as soon as March.
Although details had not yet been resolved by the time GTR went to press, Razak Shittu, head of UBA’s oil and gas department, says that the bank is “fairly optimistic” that the deal will go ahead.
UBA has taken the role of host structuring bank and lender on the deal, and according to Shittu, while the loan has received approval from “the highest level of government”, there are still “one or two more approvals within NNPC” outstanding.
“I do not agree with those that insinuate that it wasn’t approved,” declares Shittu.
“A number of Nigerian banks also have exposures on NNPC debt, and most Nigerian banks will want to see an end to this. It is in the interest of the country for us to make sure that the traders are paid, so as not to upset or affect the sovereign rating of the country,” he adds.
NNPC reportedly owes major commodity trading houses, including Glencore and Mercuria, approximately US$3.15bn in unpaid fuel supply bills. Should the company default on these loans, it could restrict future borrower capacity and put the country’s credit ratings at risk.
But NNPC’s woes do not end there: the firm has been accused of violating procedures in the country’s fuel subsidy programme and auditors have claimed that it owes the government as much as US$8.3bn.
“There are varying opinions about how much exposure the government has to NNPC. It’s a big unreconciled quantity,” says GTR’s anonymous source.
“This exposure is not covered by any instrument and is not publicly acknowledged. NNPC has been shouldering that financing gap, which is the cause of the problem,” he adds.
This dilemma has intensified over the past few years. Previously, private firms imported nearly three quarters of the country’s oil requirements, but when the banking crisis hit and they were unable to secure financing, progressively NNPC’s portion of the import requirement began to grow, and the government’s exposure to NNPC in turn increased.
But it is not only NNPC that has been accused of claiming oil subsidies illegally. Early last year the Nigerian government opened up a detailed investigation into the subsidy scam and many private companies were brought before the senate.
During these investigations the government slowed down the payment of subsidies, which consequently forced many oil companies to reduce their imports. After a few months when most marketers had halted their imports and there was scarcity in the market, the government was forced to start making payments.
To combat losses incurred in subsidy payments, the government is now gearing towards upgrading its existing refineries in the hope of producing its own refined petroleum products.
Many industry players argue that the existing refineries – if they were properly managed and maintained – could produce enough to meet the demand of the country, and that the only reason they are unable to do so is because they are managed by government entities.
Plans to privatise the existing refineries appear to have been scrapped, yet the government is still seeking the investment that it needs to get the refineries working again.
“The government needs to deregulate. Once it does so, it will create investment opportunities. Twenty-odd companies in Nigeria have licences to set up refineries, but I’m not sure any of them have come onstream in the last couple of years,” says UBA’s Shittu.
“We need to have very strong regulators on the ground to allow a level playing field. As long as we do not deregulate, we don’t expect any kind of investment in that downstream sector,” he adds.
Nigeria’s energy dilemmas are not limited to its downstream operations, and the major predicament affecting the upstream side is uncertainty from a regulatory perspective.
The long-awaited Petroleum Industry Bill (PIB) is a piece of legislation that seeks to establish a legal and regulatory framework for the petroleum industry, and to implement guidelines for the operation of the upstream and downstream sectors. It is widely believed that the bill has the ability to transform the sector significantly, and secure future investment.
A committee was called in August last year to review the most recent draft of the PIB, but a formal meeting has not yet been held. The bill was first presented to the national assembly in 2008.
“We eagerly await the passing of the PIB into law. Companies need to be able to plan in advance; and know how these regulatory changes – if and when they do happen – are going to affect business,” says Ngozi Okonkwo, chief legal officer at Oando.
Indigenous oil marketers are concerned that the current draft of the PIB does not contain the financial incentives expected for indigenous companies as included in previous versions. “We expect to see fiscal incentives; indigenous companies are still growing,” says Okonkwo. “What we have done internally is create a position paper highlighting these concerns,” she explains.
The PIB’s delay is a problem for international oil companies (IOCs) too, and until the legislation is made law, subsequently creating a transparent, level playing field for foreign investors, it is unlikely that international marketers will be keen to develop any of the deep offshore – or even onshore – assets.
“They’re sitting there collecting cobwebs until there is clarity – and quite rightly so,” says Charles Weller, head of Deutsche Bank in Nigeria. “It’s hardly a sound business decision to jump into an investment in an onshore or offshore oil asset when you’ve got the guillotine of the PIB swaying there and you don’t know which way it’s going to fall.”
The postponement of the bill is causing delays to numerous oil and gas projects in the country, including the much-anticipated trans-Sahara gas pipeline project, which plans to transport natural gas from Nigeria to Europe through Algeria. Russian firm Gazprom announced last year that it was holding preliminary talks with Nigeria about participating in the project, but talks have not progressed since then.
Weller believes that the government’s indecision on the PIB is staying investment because of the lack of clarity and transparency.
“The longer it’s delayed, the more questions are being raised,” he adds.
It is believed that approximately US$28bn-worth of investment has been lost or deferred since 2010 as a result of the non-passage of the PIB.
As a result, many international companies are scaling back their investment and choosing to develop in Ghana, elsewhere on the West African coast, or even further afield, as opposed to growing their business in Nigeria.
At the end of last year, Oil giant ConocoPhillips announced plans to exit the country and sell its onshore and offshore operations in Nigeria to Oando for approximately US$1.79bn. It is hoped that the acquisition will be finalised in the first half of this year.
Moreover, in January Exxon Mobil decided to bypass Nigeria in its investment decisions when it chose to develop a US$14bn underwater oil field in Canada.
“IOCs are tired of the community issues such as oil bunkering and vandalism – especially relating to their onshore assets. Most of them are divesting from their onshore assets and focusing on the deep offshore. It’s higher capex, but it’s a lot more difficult for the militants to find their oil. So that creates opportunities for indigenous companies,” says Okonkwo.
Because of the country’s local content act, indigenous companies are given first consideration, so are not in competition with other IOCs for these assets.
The local content act was signed into law by President Goodluck Jonathan in 2010 and seeks to encourage local participation and job opportunities in the oil and gas industry. In January it was announced that the act had increased the level of Nigerian participation in the sector’s contracts to 87% of total industry contacts.
The act was designed to address the issue that much of the activity that goes on in Nigeria’s upstream industry does not benefit the economy directly. “The activity is happening here, but all the financing and economic activity is happening offshore. The economy only benefits from the proceeds that the government receives,” says the Nigerian banker.
But some market participants are wary of the implications the act may bring.
“Local content is impacting expatriate jobs. By this time next year, Exxon will have approximately 30 expats in country, down from 160 a couple of years ago. It’s the same with other companies such as Total and Chevron,” says GTR’s source.
“These skills are not irreplaceable, but are being driven out without being developed in Nigeria beforehand,” he explains, adding that business will soon realise the need for this skill set and begin bringing in expats again as temporary workers on Nigerian contracts.
“The oil sector is just the start. This will come into other areas as well: manufacturing and possibly the financial sector too,” he says.
Political constraints notwithstanding, there is concern that the country’s competitiveness in the energy sector will be impacted by discoveries of oil and gas elsewhere in the world.
The US has announced plans to be self-sufficient in energy by 2035. With nearly 40% of Nigeria’s oil being shipped off there, the country will need to find new markets for its exports.
“We were concerned about the shale discoveries. We know that demand will reduce – President Obama talks about it all the time,” says Oando’s Okonkwo.
But Nigeria does have an advantage all the same: its Bonny Light crude is very attractive because of its high quality and low sulphur content. Not many countries are able to produce crude of that class.
What’s more, the country is looking at other markets for its crude exports. “What we might see is a shift in the trade routes,” says Weller at Deutsche Bank. “We’ll see Nigeria start to export more into Africa than internationally.”