‘Lack of clarity around fiscal policies coupled with upcoming elections makes it a difficult climate for M&A in oil, gas sector’

SARAH SHAW is a corporate partner at Hogan Lovells in London. Her responsibilities includes public and private mergers and acquisitions, joint venture and equity capital market operations and company restructuring with particular focus on Africa’s energy sector; upstream, midstream and downstream oil and gas. In this interview with FRANK UZUEGBUNAM, editor, West Africa Energy Intelligence, Sarah talks about emerging trends in the oil and gas sector amongst other issues. Excerpts:

Let us start by knowing you and what your job entails

Iam a corporate partner at Hogan Lovells in London. My practice includes public and private mergers and acquisitions, joint venture and equity capital market operations and company restructuring. I focus on the energy sector including upstream, midstream and downstream oil and gas. I have a particular focus on Africa where my experience includes acting for Shell when they sold their downstream assets across 19 different countries in Africa, as well as for a number of DFIs such as CDC on their portfolio acquisitions and joint ventures in the power infrastructure space, for example the acquisition of the Globleq power portfolio from Actis. Most recently, I advised Harith Partners and Africa Finance Corporation on the merger of their power and renewable asset project portfolios including some of the largest energy projects across Africa.

Looking at the emerging trends in the oil and gas sector, could you please give a brief overview of the happenings in this sector within the last four months?

On a global level, we have seen a return of interest in the oil and gas sector in the last few months principally due to the increase in the oil price, reaching its highest level in recent weeks since the collapse of 2014.  There have been a number of significant strategic deals such as Total’s recent acquisition of Maersk Oil. We also have seen a lot of consolidation in the oil field servicing industry – the sector probably hit hardest by the oil price crash – and we are seeing some new players emerge in the upstream sector. In the North Sea, for example, we have seen the emergence of financial investors such as Chrysaor, Siccar Point and Neptune.

In Nigeria, there have been a number of downstream transactions such as Helios and Vitol buying assets from Oando. On the upstream side, there is currently a lot of uncertainty due to the Petroleum Industry Bill (PIB) – this is promising in the medium term as it should create greater regulatory certainty and transparency which will help to facilitate investment, but there is still a lack of clarity around fiscal policies in particular. When coupled with the upcoming elections, this makes it a difficult climate for M&A in the country. However looking beyond these uncertainties, we have cause to be more optimistic in Nigeria – it will be very interesting to see how the regulation develops especially after the elections – it has the potential to create the transparency and certainty the country needs to attract international investment.

Do you see oil prices increasing to $100 per barrel?

An interesting question given Trump’s recent decision on Iran. We currently have the highest levels since 2014. There are a number of global political and economic factors interplaying here which makes it very difficult to predict but I think it is unlikely we will return to $100 in the near term.

Is there a possibility that with the nuclear deal and US imposing sanctions on Iran and with OPEC bringing in more member countries that the prices will go up?

It is certainly possible and these factors are having a positive impact on the market, but again it is difficult to predict with any degree of certainty and our clients certainly remain cautious in this regard when it comes to pricing their deals.

You have spoken a lot about mergers and acquisitions in the downstream sector. Why were there no such mergers in the upstream sector in Nigeria? Do you think the PIB is a factor?

The PIB and the uncertainty that the new bill brings is certainly a factor, though once the PIB is enacted, and once there is clarity on the fiscal regime, it may create a more stable framework that could facilitate M&A.

IOCs have been looking to diversify in recent years and that is partly because of the regulatory uncertainty. Again, due to the global factors that we talked about earlier and the vandalism in Niger delta, which has not been helpful, this market is perceived as high risk for international players.

The lower oil price in recent years has pushed international oil and gas companies to focus on more stable economies. However, with oil prices now in the $ 70 – $ 80 range, we would expect Nigeria and other African countries with under developed resources to come back into play. This will especially in Nigeria be the case if international players perceive there to be greater stability around the economy with favorable regulatory dynamics as well as a reduced risk of violence.

Do you see more mergers and acquisitions emerging in the next few years across Africa?

We have not seen a lot of activity in the oil and gas sector in Africa recently and I think that has been largely due to the continued pressures since the oil price crash. With today’s higher prices we would expect Nigeria and other countries with under developed resources in Africa, such as Ghana and Angola, come back into focus.

Apart from the uncertainty with the PIB, what do companies tell you is their fear in the Nigerian oil and gas sector?

It is the lack of regulatory certainty and stability as well as the unpredictable nature of the environment – companies are concerned about the lack of a clear and well defined process to ministerial consent to transfer of an asset or shares in a company that holds an asset, as well as absence of transparency and the fear that processes may be clogged with bottlenecks and bureaucracies that delay or prevent transactions from happening.  With the elections looming, this adds to the general levels of uncertainty. IOCs have of course also suffered from security issues in the Niger delta region which, together with the global downturn in the oil price and the movement towards the local content requirements in the oil and gas sector in Nigeria, has pushed them to look to exit the country.