‘To create an economy of the future, Nigeria needs to focus on other value-creating industries’
ADEBOYE FAJEMISIN is the Executive Director, Cynthian Consulting Limited, an African focused consultancy supporting the rise in Africa-owned infrastructure in this interview, he speaks on the marginal oil fields licensing rounds and how financial Institutions and Investors can unlock the challenges of investment in Oil and Gas Industry.EXCERPT:
In 2010, an act was enacted to encourage local content in the Nigerian oil and gas industry, what’s the impact of the act so far?
The essence of the Local Content Act was the advancement of Nigerian owned entities and their increased participation in the Nigerian Oil and Gas Industry. The Act is aimed at not only ensuring Nigerians own major stakes across the oil and gas value chain, but also to contribute significantly to the Nigerian economy by creating avenues for technology transfer, jobs for Nigerians in Nigeria, and reducing capital flight.
Since 2010, we have seen an increased participation of Nigerian entities across the value chain from Indigenous E&P to tier 2 Service providers, however, we are yet to realise the full potential of the Act. The Nigerian Content Development and Monitoring Board (NCDMB) have actively pursued local participation in major projects across the industry, and that is evident in the completion of recent mega projects like Total’s 200,000 barrels per day Egina FPSO, where its six (6) topside modules were fabricated and integrated in Nigeria. We have also seen the rise in local operatorship with the likes of Seplat and AMNI Petroleum, which has encouraged the continued enthusiasm in the Marginal Field Licensing structure.
While we still have quite some grounds to cover in terms of technology and resources, I think the Local Content Act is helping the Nigerian Oil and Gas industry travel in the right direction to self-sufficiency and sustainability if we follow through the process and support same with transparency and forward-looking government policies.
How would you describe its effect on the economy of Nigeria?
As I mentioned earlier, the effect is enormous on the Nigerian Economy. Increase local participation in the Oil and Gas industry would create more jobs for Nigerians, reduce capital flight which in turn reduces the pressure on Nigeria’s FX revenue and creates an entire value chain that is robust enough to attract Investments from local and foreign investors and financial institutions.
That said, there is a huge role and a direct link between local value creation and the economy. If you look at countries like Norway, local value creation has resulted in the birth of tier1 service providers and large E&P companies that can compete on a global scale with the likes of the Shell, Exxon Mobil, and Schlumberger of this world. It is only through local value creation that Nigeria can fully realise and enjoy its Oil and Gas resource potential.
In what ways have the financial institutions assisted local investors and what should be the roles of financial institutions?
Financial Institutions play an indispensable role in the economic development of a Nation and they equally have a huge role to play in local value creation. Beyond providing finance across the Oil and Gas value chain, they have also successfully acted as aggregators of resources and have provided a gateway for local and foreign investor to establish confidence in the Indigenous oil and gas operators and Asset owners in Nigeria. A number of Commercial banks in Nigeria today are known to be big players within the Oil and Gas space and they continue to be innovative with various financial structures to ensure Local Operators and Service providers can access the required financing be it operational or project related. We also have a number of multilateral agencies like the African Finance Corporation (AFC), Africa Export Import Bank (AFREXIM) etc. who are committed to the development of Africa owned infrastructure.
Are they playing their roles effectively?
The Oil and Gas Industry is a capital-intensive industry with very little or zero room for mistakes. While sometimes the reward is commensurate with the risk, in other cases, if not done right, the risk outweighs the reward, hence the attitude of a number of financial institutions, especially commercial banks towards funding Oil and Gas projects.
As we began to navigate the era of increased local participation in the industry, the need for local financing becomes even more important than ever. While I would say the financial institutions are playing to their strength and doing what they can to encourage local value creation, there is room for improvement in their approach to ensure maximum value-add for themselves and the Oil and Gas Industry.
At Cynthian Consulting for instance, our role has become inevitable in the last few years in helping Financial stakeholders understand the technical intricacies of oil and gas investment, identifying risks and mitigation, and supervising the successful execution of resulting projects to ensure all parties i.e. the Financial stakeholders and operators derive the most benefit from the lending or investment relationship.
Are there policies, interventions which the governments need to come up with so as to create an ease of doing business for these local investors?
Absolutely. Economic policies are a major factor to consider for both local and foreign investors. The reality is that the Nigerian Government are continually working on improving investor confidence in Nigeria as a whole, and the Ministry of Petroleum Resources assisted by the various agencies and associations within the Oil and Gas industry continues to play a huge role in identifying what policies are required to ensure Nigeria’s Energy Security.
Key areas for the government remain the tax regimes looking at incentives for new entrants with projected huge CAPEX outlay, Infrastructure spending, Trade policies etc. The overall objective is to be able to mobilise local and foreign investment that support economic growth and sustainable development. Furthermore, the Government needs to be more decisive and deliberate in its actions without giving off indications that stares up the level of uncertainties for a long time. An example of this is manifested in the much debated and anticipated Petroleum Industry Bill, which is expected to reshape the oil and gas industry, however, Government’s lack of ingenuity in synchronising the timing of the development and its implementation has caused a lot of uncertainties, which is a huge turn-off for investors.
How would you describe the 2020 marginal oil field licensing rounds coordinated by the Department of Petroleum Resources?
This is a welcomed development and if done properly, it is expected to help achieve some of the objectives of the local content act by increasing local participation and increasing the contributions of Indigenous operators to Nigeria’s production profile. As an organisation, we have taken time to analyse all the fields available for the licensing rounds, study the process and requirements to qualify and we can conclude that the intentions are right, and it is expected to further embolden and create a new frontier in the indigenous oil and gas ownership and operatorship space.
The reality is that some of the fields we call marginal here in Nigeria are major developments elsewhere. For instance, in the United Kingdom, some major independents don’t enjoy the kind of daily production volumes that our Indigenous operators enjoy, and the UK has managed to put Aberdeen on the map as the Oil and Gas capital of Europe where the rest of the world look to for innovations and operational excellence. With the Marginal Field rounds, we can do the same with Warri and Port Harcourt.
What are the areas or things our local oil producing companies need to do or know to thrive in the Oil and Gas business?
Corporate Governance remains a big deterrent to inflow of capital into many Nigerian owned businesses. The Oil and Gas industry is capital intensive, and many times the local Banks are not able to support the various stages of development especially exploration in a debt capacity. To be able to attract the required capital, these businesses need to tidy their processes, ensure there is a clear separation between the Business’s money and personal wealth, and engage competent hands in running the overall operations.
One of the things we do at Cynthian Consulting for instance is to help viable opportunities become even more attractive to investors and lenders by ensuring all potential risks are evaluated and possible mitigations identified, thereby creating a win-win environment for all operating, non-operating and financial stakeholders.
Another major challenge is technical competence and technology. One way to overcome this challenge is to not shy away from spending on trainings, both local and international. As for technology, there is always a place for collaborations across the sector for resource sharing and idea pool.
There are speculations that the inventions of Electric Vehicles and other machines will have diverse impact on Nigeria’s economy, what’s your take?
We live in a world today where it is a given that we protect the environment from degradation and unfortunately, fossil fuel has been largely identified as a major culprit. Globally, there is a shift from Oil to cleaner source of energy like Renewables. While Europe plans to be Carbon-neutral by 2050, A number of Countries within Europe have even more ambitious plans for reaching Net-Zero quicker, and the United Kingdom recently announced plans to ban Petrol and Diesel engine cars by 2035. The European Investment Bank announced in 2019 that it will no longer support Oil and Gas Investment and Black Rock, one of the World’s largest investment powerhouse with over $7Tn in Asset have decided to go green with its investments. There is no doubt this has gathered momentum and has seen a number of automakers led by Tesla shifting their focus into Electric Vehicle manufacturing (EV). So indeed, the end is near for Oil and Gas and you begin to wonder what would happen to countries like Nigeria that practically survives on Oil and Gas revenue.
That said, Oil and Gas is expected to continue to contribute a sizable portion of the global energy mix for in the medium to long-term. Also, there is the talk about Energy Transition, which considers Gas as a cleaner form of fossil fuel thereby leading the road to greener energy sources. Since Nigeria is largely considered as a country with abundance of Gas resources, coupled with the immense domestic demand, Nigeria needs to shift its priority to satisfying local consumption from its Oil resources for as long as it is feasible, while there is commensurate investment in the Gas infrastructure to aid the development and utilisation of its Gas resources.
To create an economy of the future, Nigeria needs to also focus on other value creating industries like Services, Agriculture and Technology, there is a need for investment in diversifying the economy’s revenue stream. Nigeria’s heavy reliant on imports has necessitated its high drive for FX revenue, which Oil and Gas seems to provide in the region of 95%, however, this is no longer sustainable.