Uncertainty still pervades Nigeria’s oil, gas industry
The snail pace of reforms in Nigeria’s oil and gas industry could further the inertia that pervaded the sector over the past decade.
“Regulation is not negotiable. Take the issue of the Petroleum Industry Bill (PIB) as an example. It is time we had a Petroleum Industry Act (PIA) and no longer a Petroleum Industry Bill (PIB). Once the Bill becomes an Act of the parliament, it would send a signal of stability”, Dapo Ayoola, Chief Executive Officer of the Sub-Saharan African Oil and Gas Conference and Exhibition said in an exclusive interview with Businessday.
While it is understood that government has put forward the draft National Petroleum Fiscal Policy which is aimed at resolving some of these uncertainties, there are signs it is still a long shot. Reviewing the draft National Petroleum Fiscal Policy for West Africa Energy, ACAS-Law firm pointed areas that need to be resolved.
“While the Fiscal Policy proposes incentives to encourage the development of small fields, it does not define what areas will be considered as “small fields”. This uncertainty should be resolved either by clarifying whether the term “small fields” is used in the Fiscal Policy in reference to marginal fields and marginal fields alone, or by providing a conclusive definition of the term “small fields”, the oil and gas-focused firm stated.
Financing gap not making it any easier
The oil and gas industry has faced huge challenges finding financing solutions in an era of recession with massive cut in CAPEX giving rise to projects either being delayed or suspended.
Dolapo Oni, Energy Research Analyst at Ecobank identified three key areas where gaps exists in financing oil and gas projects in Nigeria.
“First, is proper understanding of the risks in oil and gas – banks should not be financing acquisition as a stand-alone project without financing for field development and production.
Second, hedging is not only a pre-condition to completing the deal, it is the financier’s protection. A lot of deals were done with no hedging last two years.
Third, not enough pure equity in deals. I think the traditional 30/70 or 20/80 mix of equity/debt is not good enough in this climes. We need to push the divide towards 50/50 or 60/40 or lower. Place more emphasis on corporate governance structures in companies and also disqualify equity composed of personal loans taken by company promoters”, Oni said.
There is, however, a growing call for creative financing models for the oil industry. According to Oni, “the thing about financing oil and gas projects is that it is never really based on the season. You can still finance projects with a mixture of debt and equity now as in any other season but at times like this, you tend to want more equity in the financing pool than debt.
For Nigerian independents, many are likely to be in the market for cheap refinancing of their existing loans to give them some breathing space on interest expense commitments. Most actually need to consider diluting ownership and bringing in more equity so they can continue investing in appraisals, field development”.
Nigeria averse to risk management
Nigeria seem to be averse to risk management techniques. The country, according to analysts, may have lost over $18 billion in the last 2 years due to lack of knowledge in adequate risk management techniques in the oil industry.
The loss which occurred as a result of steep slide in oil prices, could have been averted if government had put in place proactive risk management structure like hedging while the prices were high.
“A loss of $60 per barrel for over 1.8million barrels per day approximates close to an average of $100m per day.
But since the Federal Government only owns about 52 percent of the Joint Ventures, they may never really have hedged more than 50 percent of that. So in that instance, government’s loss would be roughly about $25 million per day. A loss of $25 million per day comes to over $18 billion in 2 years ”, Zeal Akaraiwe, CEO, Graeme Blaque Advisory told BusinessDay on the sidelines of the recent Energy Finance Forum organized by Centre for Petroleum Information (CPI) in Lagos recently.
“In addition to the loss in revenue from the fall in unhedged oil price, there were huge losses in opportunity cost as well as the corresponding slump in both support and ancillary businesses, all of which would be very difficult to quantify but certainly at least equal to the loss in oil revenues”, Akaraiwe added.
Experts identify massive knowledge gaps and lack of knowledge in adequate risk management techniques in the oil industry as major hindrance to financing oil and gas projects. According to Akaiwe, “there is still sub-optimal knowledge and even less appreciation for the relevant risk mitigating tools when it comes to managing oil price risk.
The oil markets have proven to be extremely volatile and oil producers are natural risk takers but their risk appetite is more honed on production and technical risk. The financiers are those that should have a keen sense of and appreciation for price risk and therefore the onus is on them to ensure that adequate measures are taken to mitigate oil price risk to the extent that the project’s viability is not compromised”.
FRANK UZUEGBUNAM