Fueling accelerated growth for oil, gas industry through enabling environment
Over the years, the Nigerian oil and gas industry has been impacted by a myriad of familiar problems ranging from sloppy regulation to corruption, thus creating uncertainties and investor apathy. From industry experts to players, there appears to be a consensus that the Nigerian government needs to do more to reform and make the oil and gas industry more attractive and profitable to investors.
“The outlook for Nigeria’s oil industry is great. The only thing that is beclouding it is the uncertainty in the legal and fiscal framework. Government needs to wake up and put things in place”, said Wumi Iledare, Professor of Energy Economics at Centre of Petroleum Institute, University of Port Harcourt.
In every nation, the private sector is the catalyst for economic development, but it is the governments’ responsibility to support and back them up with proper regulation and legislation to ensure they survive and thrive.
Recurrent problems in the industry include poor infrastructure – inadequate power supply and lack of good roads, an unhealthy dependence on oil revenue for survival, non-passage of the Petroleum Industry Bill (PIB), insecurity especially in the Niger Delta region where the oil companies operate, pipeline vandalism and other violent acts within the region and weak supervision of the Nigerian Content Act.
In its 2016 review of Africa’s oil and gas industry, PricewaterhouseCoopers, a multinational professional services firm that focuses on audit and assurance, tax and consulting services said government’s failure to most importantly pass the PIB will continue to cause uncertainties in the industry. The PIB was first proposed in 2008 but it is yet to be passed into law by the National Assembly. Government needs to clear these bottlenecks to ensure the industry makes headway.
“The current law and regulatory framework is not responsive enough. The sector is being governed by outdated legal and regulatory framework. We have to re-examine the continued relevance of existing framework”, said an energy analyst.
Energy experts believe the government should be more firm and decisive with regard to decision making to ensure the oil and gas industry receives the priority attention it deserves.
Borrowing a page from Telecoms
There is no need to re-invent the wheel. The oil and gas industry can borrow a page from the telecommunications industry. The total liberalization of the telecommunications sector according to experts has expanded the sector, making it more attractive and competitive to investors.
The Telecommunications Act of 2003 which was passed by the National Assembly encouraged more new entrants into the sector and eventually strengthened the role of its regulator – the Nigerian Communications Commission (NCC). Today, the telecoms sector has become the country’s benchmark and poster face when it comes to the success of deregulation.
The Owowo oil field example
The recent accomplishments by some operators in the oil and gas industry is a demonstration of the opportunities that abound if the operating environment is made more encouraging.
In October 2016, US oil giant, ExxonMobil announced the discovery of Owowo oil field offshore Nigeria. The field is projected to contain as much as one billion barrels of crude oil reserves.
“One billion barrels of oil reserve is about 3 percent of Nigeria’s current reserve and if the potential is realized, that will give Nigeria an extra 100,000 to 200,000 barrels of oil per day”, said Iledare.
At an average price of US$50 per barrel, the new field is worth US$50 billion in potential revenues for the Nigerian oil and gas industry over the next few years, with a potential to rise higher if the international prices of crude oil rise.
The Owowo oil field discovery by ExxonMobil represents a major investment and confidence in the growth potential of the country especially at a time new investments in upstream operations are shrinking.
“It’s a significant morale booster for the industry especially as Nigeria’s reserve replacement ratio has been going down”, said Rolake Akinkugbe Head of Energy & Natural Resources for FBN Quest.
Oil and gas industry analysts say that Owowo oil field is a game changer for the Nigerian oil and gas industry because it demonstrates the untapped potential especially in deep water.
Abiodun Adebayo, a Geologist, said that for several years, operators in the oil and gas industry have continued to agitate for more transparent regulatory framework and investment incentive by the government to encourage more investment in the industry. He described Owowo oil field discovery as remarkable considering that the feat was achieved in spite of the numerous challenges facing the industry coupled with drop in price of crude oil.
“If a company such as ExxonMobil could achieve this feat with all the teething problems facing the sector, one can imagine what would happen if issues such as vandalism, PIB and JV cash calls are resolved. The industry will experience acceleration which is unprecedented”, Adebayo said.
Government’s role
The Nigerian government has a big role to play in creating an enabling environment for oil and gas companies operating in the country not just to survive but to thrive. The recent decision by the federal government to exit Joint Venture JV cash calls is a welcome development as it would give the oil companies opportunity to grow outside of the previous constraints of government’s inability to fulfill its financial obligations.
Ibe Kachikwu, Minister of State for Petroleum, while announcing the decision last December said the Federal government was exiting the JV cash calls with a $5.1 billion debt to IOCs which he said would be paid within five years.
He said the business template is part of new measures and strategies aimed at eliminating the burden of JV cash call arrears and securing future funding for the upstream petroleum sector, as this will restore investors’ confidence and achieve accelerated production growth in the joint ventures.
“It is important to note that this will not be a cash burden on the Federal Government as payments will be made via incremental production from each JVC”, Kachikwu said.
But government can do more. Oil and gas industry experts say there is need for government to provide an enabling environment and political stability within the polity to attract private sector participation and assure increased investment.
Over the years, government’s inability or sometimes unwillingness to fulfill its JV obligations to IOCs has put a strain on new investments in the oil and gas sector. With the exit of the JV cash call, government has a duty now to collaborate with the oil and gas industry to pass the petroleum industry law. This will establish an appropriate, well defined regulatory and fiscal regime to attract private sector investments as well as develop domestic gas infrastructure to ensure effective gas utilization.
The issues of oil theft, vandalism and violence are still rife in the industry especially in the Niger Delta region. Addressing these issues sincerely could drastically reduce the incidence of vandalism or even permanently solve them.
Considering Nigeria’s current economic challenges which were caused by drop in crude oil price and dwindling production from the Niger Delta, the Owowo oil field discovery demonstrates the untapped potential of Nigeria’s oil and gas industry and why the government needs to do more to provide the right environment for increased investment for the benefit of Nigerians and operators.
FRANK UZUEGBUNAM