New oil law paves way for Nigeria to attract private capital

The new Petroleum Industry Act, which commercialises the operations of the Nigerian National Petroleum Corporation (NNPC), could provide an easier path to unlocking private capital for the state-owned firm that would help finance not only its projects but also bigger national ventures.

The transition of the NNPC into a limited liability company in six months will expand the corporation’s ability to enter into new deals, raise capital from financial institutions to fund projects and tackle funding shortfalls with joint ventures.

“The PIB will unlock Nigeria’s crude oil reserves which have stalled as a result of government delay in providing cash to the international oil companies for cash calls,” says Joe Nwakwue, chairman, Society of Petroleum Engineers (SPE).

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“The reform would speed up delayed drilling programmes, unlock major expansion programmes and attract fresh investments to docile oil fields,” he adds.

Some stakeholders say the commercialisation of NNPC is expected to not only put the company on a bigger international stage, especially if the valuation is high, the move would also fund Nigeria’s diversification plans and raise significant cash that could fund Nigeria’s decade of gas initiative.

The move will also allow Nigeria properly utilise its huge gas reserves estimated at 206.53 trillion cubic feet (TCF), fund big-ticket gas projects that are expected to create thousands of new jobs, spur domestic gas demand, generate electricity and turn Nigeria into a dominant geopolitical player in Africa, using its gas resources, just like Australia, Russia and Qatar.

While the Federal Government still owns all shares held by the ministries of finance and petroleum resources on its behalf after incorporation, the new NNPC will run as a commercial entity with annual audits by independent auditors.

In its 2019 financial statement, auditors had expressed concern over the NNPC’s sustainability plan, given a compounded N4.4 trillion (about $11bn) liability margin over its assets.

In the new oil law, NNPC shares cannot be sold unless approved by the government and the National Economic Council, but its peers like Saudi Aramco, Equinor and Petrobras that are listed on the stock market will have more options for financing.

Raising funds on the stock market has helped the three companies cushion the effect of low oil prices and they are now reforming their oil sector to attract foreign investment.

For instance, the world’s biggest energy company, Saudi Aramco, made net profit of $25.5 billion in the second quarter, the highest level since the end of 2018.

Free cash flow rose to $22.6 billion, above the state-controlled firm’s quarterly dividend of $18.8 billion for the first time since the start of the coronavirus pandemic.

Aramco’s annual dividend of $75 billion, the world’s largest, is a crucial source of funding for Saudi Arabia. The government, which owns 98 percent of the company, is trying to narrow a budget deficit that ballooned last year as energy prices tanked with the spread of the virus.

The results “reflect a strong rebound in worldwide energy demand and we are heading into the second half of 2021 more resilient and more flexible, as the global recovery gains momentum,” Aramco’s CEO Amin Nasser said in a statement. “I remain extremely positive about the second half of 2021 and beyond.”

Norway’s Equinor, a country with similar oil production as Nigeria, posted a sharp increase in the second quarter of 2021, as adjusted earnings before tax rose to $4.64 billion from $350 million in the pandemic-hit year-earlier period.

The company also says it would begin the first phase of a long-planned share buyback, and aims to spend $300 million on the programme by September 28 2021.

“Strict capital discipline and a net cash flow of more than $4.5 billion reduced our net debt ratio to 16.4 percent and made us robust for volatility in commodity prices going forward,” Equnior’s CEO Anders Opedal said in a statement.

Brazil’s state-controlled oil company saw its earnings surge to a record for the second quarter, providing relief to investors who were rattled by a messy management change earlier this year.

Petrobras’s net income of $8.25 billion for the second quarter of 2021 compared with a loss of $521.3 million in the year-ago period. The company’s net revenue surged by 117 percent to $21.29 billion from $9.8 billion in the second quarter of 2020.

The company also slashed what was once the biggest debt load of any publicly-traded oil company, which stood at $63.7 billion at the end of the second quarter.