Crude oil is unarguably the lifeline of the Nigerian economy and it is expected to witness the frequent invasion of investment to keep the sector buoyant. These investments can be in the form of multinational corporations, refinery set up, financing capital projects, capacity, and human development, and others.
Capital importation to the oil and gas sector was US$10.09 million in Q1 2020, which was lower US$20.62 million in Q4 2019, US$17.22 million in Q1 2019, and US$327.30 in Q4 2016. There are a couple of factors attributing to the debased growth in investment. On the surface is dwindling oil demand intersecting with unstable oil prices. The fall out of dwindling oil price is low revenue and investors will typically record low returns in this instance.
Exchange rate depreciation also disincentivizes investors with an interest in the oil and gas space. Imagine an investor putting in US$1 million when the exchange rate was 340; repatriating his capital when the exchange rate is 400 means his US$1 million is worth US$850,000. He loses US$150,000 of his principal. There is also the concern of being unable to convert the investor’s naira back to dollars because of poor liquidity in the market.
Besides, there is a big wedge created by regulation in the sector, coupled with low reforms. At the heart of this is the Petroleum Industry Bill (PIB) which is supposed to harmonize legislation in the sector, support good governance, foster transparency, and project more of gas in Nigeria’s production portfolio. Just like other brilliant regulations, the PIB is in a stalemate. It has experienced back and forth in the passage between the national assembly and the presidency. A lot of investors have attributed their dissuasion to the sector due to the non-passage of the bill.
Infrastructures in the oil and gas sector in Nigeria is at low ebb. Most of the big infrastructure in the upstream sector are owned by international oil companies. The refineries in Nigeria are good as non-existent since crude oil must be exported for refining. Shockingly, an oil-producing country has no efficient refinery in its production value chain. Investors are discouraged with this trend; having to export raw crude instead of refined products and in other cases, waiting a long time to get their refined crude for export and domestic sale
Emerging technological trends like artificial intelligence, big data analytics, electronic monitoring, 3D virtual modeling, and drone technology, which are applicable in the oil and gas sector are a mirage in Nigeria. The 21st-century investor is keen on technology and this explains why investment in the banking and telecommunication sector is encouraging. In these sectors in Nigeria, technological adoption is high, and participants can compete with global peers.
Research has also shown that oil and gas investors in Africa are more interested in Liquefied Natural Gas and Liquefied Petroleum Gas rather than liquid crude. The interest is logical – the future of energy is renewable energy and gas because they are sustainable. Nigeria with a proven gas reserve of 187 trillion cubic feet is still biased to crude oil when more focus should be on gas, and perhaps petrochemicals
Against the backdrop of these burdens hanging over the sector, virile measures need to be introduced to project the oil and gas sector in a good light to investors. Using oil futures will be a good way to hedge the risk of unstable oil prices. Prospecting for new oil buyers is important, but this requires offering attractive pricing.
A private-public-partnership (PPP) in the ownership and operation of Nigeria decrepit refineries is an urgent concern to renew investors’ interest. However, the full-blown corruption and red tape in Nigeria refineries will make this difficult. Harmonizing the various exchange rate market is a first step to resolving the exchange rate burden. Technological adoption will source the biggest gain to the sector, but this is a long-term solution. Irrespective of the time frame, regulators can compel some level of minimum technological adoption in oil and gas companies, especially in the downstream sector.
Written and edited by Michael Ogunremi