Sterling Partnership speaks with James Wilson about key Nigerian oil and gas trends in 2013, the opportunities open to investors in petroleum refining in the light of Dangote’s landmark oil refinery project and in the gas sector, the current status of the Petroleum Industry Bill (PIB), power sector deregulation and the future of the country’s legal market.
What in your view have been the significant trends of 2013 in the Nigerian oil and gas sector?
The Nigerian oil and gas sector over the last couple of years has witnessed the growth of small–medium sized operators and the emergence of an indigenous block of operators. The divestment exercises by the oil majors, as well as the marginal field policy of the Nigerian government, have been largely responsible for these developments. In the case of the marginal field policy, it may be argued that it is in fact not entirely new. Why (if at all) is it making any impact now? The simple response is that Nigeria and the awardees obviously went through a long and windy learning curve that has lasted over ten years now. However, only about eight out of the initial 24 licenses awarded to 31 odd companies have come to production. On the other hand, the inability to pass the Petroleum Industry Bill (PIB) into law has led to the slowdown of oil and gas activities and the pull-out of major international oil companies (IOCs) from some petroleum activities and projects.
Overall, the participation of the IOCs and large foreign independents has stunted or, in fact, dwindled in the Nigerian oil and gas space. Existing operators have gone into maintenance mode and are hardly making new investments or adding to the reserves. For the first time in the history of exploration and production in Nigeria, the country’s reserves are dwindling. This unfortunate trend has more or less nullified the gains of the marginal field policy as well as the growth of the small-medium players as their production presently accounts for only a paltry less than 3% of the gross production numbers. Another significant but unfortunately negative trend in the Nigerian oil and gas space in the course of last year has been the apparent escalation of theft of crude oil and natural gas liquids. Official sources put the loss of revenue to Nigeria from these thefts at over $1.3 billion in 2013 alone. Almost parallel with this is the escalation of illegal bunkering and piracy along the Gulf of Guinea. This negative trend has led to incessant shut downs by the IOCs (particularly those with a heavy onshore footprint) and significant loss of revenue to the joint-ventures they operate. The above are not by any means exhaustive but they have strategic importance to the oil and gas industry in Nigeria.
Has there been a particular impact of these trends on the upstream, downstream and midstream sectors of the industry?
The cumulative effect of the trends discussed above is deferment in crude lifting and constrained gas production, particularly for the growing domestic market. The fall in gas production is hampering efforts to restore the power sector and grow generating capacity. It is important to note also that part of Nigeria’s medium term development plan (Vision 20:20) envisages the development of gas to underpin industrialisation. Unfortunately, the lack of clarity and certainty of the fiscal terms of petroleum operations in Nigeria have led to the decline in gas production in the near to medium term.
What stage is the Petroleum Industry Bill (PIB) today?
The PIB, which was first introduced to the legislative process in 2008, has been at the committee stage since March 2013. Nigerians (and indeed the world) eagerly await the report of the Committee of the House of Assembly on the PIB. In the meantime, as stated earlier, the uncertainties surrounding the passage of the bill has led to a slowdown of activities especially by the foreign oil and gas companies. Many of the IOCs have paused fresh investments and have chosen to divest a couple of their assets.
Given the Local Content Act of 2010, how should international investors approach the oil and gas sector and what opportunities are open to them?
The Nigeria Local Content Act is focused on giving indigenous companies more opportunities to participate in the development of the Nigerian oil and gas sector and build capacity. There are various companies that are able to cater to the needs of the oil and gas industry operators and service providers. Nigerian Petroleum Exchange (NIPEX) and other such credible databases for Nigerian contractors in the oil and gas sector exist and international investors are encouraged to partner with these companies for the provision of various services. Investors also have the opportunity to establish Nigerian companies and train Nigerian staff to meet international standards.
The (now former) Central Bank Governor Sanusi Lamido recently submitted a report to parliament detailing mismanagement in the oil sector – what should the market be taking from this?
Nigeria is a signatory to the Extractive Industry Transparency International (EITI) Protocol, which it has in fact domesticated as the Nigeria Extractive Industries Transparency Initiative NEITI Act. Furthermore, Nigeria has the Freedom of Information (FoI) Act that compels public officials to furnish information on matters of public interest at the request of a member of the public. In addition to the above, Nigeria has the Economic and Financial Crime Commission Act, the Independent Corrupt Practices Commission (ICPC) Act, the Money Laundering (Prohibition) Act and other anti-corruption legislations. I must admit that it would help to see faster application of these rules to address cases of alleged mismanagement and corruption. It suffices to say that the framework for governing the industry in accordance with best transparency standards already exists.
What impact do security considerations have on investments?
The ‘triple package’ of a good investment climate are a stable legal/fiscal framework, stable political environment and an orderly and secure geopolitical environment where the rule of law prevails. Generally, security considerations are a major factor in making investment decisions. Understandably, security considerations affect some sectors more than others. For example, the extractive industry has notoriously managed to thrive even in environments with high security risks. However, a stable legal/fiscal framework and a stable political environment are perhaps more critical to investment. Incidentally, Nigeria is not doing very well on all three indices at the moment. The combination of the failure to pass the PIB and the security concerns around the 2015 elections pose serious concerns to both local and international investors.
How are disputes resolved if they arise and what are the best channels open to investors?
All the traditional dispute resolution channels (litigation, arbitration and mediation) are available in Nigeria. The proven disposition of Nigerian courts is to give effect to the agreement of parties to a contract as literally as possible. However, because of the slow and tedious nature of the court system, it is not a popular option to many investors. It is worthy of note that the High Court of Lagos State has recently upped the ante in terms of speedier hearing for commercial disputes under the Fast Track rules. There is also the concern around neutrality of the courts in especially disputes involving government institutions or agencies. In my experience this is more perception than reality as Nigerian courts (especially the upper echelons) are renowned for their courage and integrity. Notwithstanding the above, we usually recommend arbitration at a neutral venue to contracting parties as the option that best meets the expectations of the stakeholders, especially their shareholders.
Have there been any other legislative / policy changes over the past year that clients should be aware of?
In the oil and gas space, the PIB is proposed as a compendium of all legal, fiscal and regulatory framework of the industry. My advice is that any prospective investor should have a PIB scenario as safeguard to any change in law or policy that may occur from the passage of the PIB.
What opportunities, if any, are available for investments in petroleum refining?
The refining capacity of the NNPC is considered to be very low and cannot satisfy local consumption of petroleum products. Nigeria has in the main continued to rely on the importation of petroleum products. The need for investment in petroleum refining is therefore critical. We await with excitement the much anticipated 400,000 barrels per day Dangote petroleum refinery project. There is definitely demand to meet supply in Nigeria and we recommend to the international business community that investments in petroleum refining in Nigeria will very well prove worth their while. Other businesses have benefitted from the very favourable fiscal regime to be enjoyed by investors in such pioneer industries. Serious thought must, therefore, be given to petroleum refining for those seeking to invest in Nigeria.
How have the recent electricity reforms impacted on opportunities in the petroleum industry?
Another notable development in the energy sector is the recent privatisation and sale of government power generating plants and power distribution hubs to private operators pursuant to the privatisation policy of government, underpinned by the Electric Power Sector Reform Act. Though the privatisation policy has taken so long to get to implementation, the significance of the sale of these assets cannot be overemphasised. Effectively, the Nigerian power sector has been handed over to private operators. Electricity tariffs are yet to be fully deregulated but we believe that it is only a matter of time before the Multi-Year-Tariff-Order (MYTO), which is already in implementation, culminates in a fully deregulated pricing regime for the power sector. Ultimately, we expect that the privatisation of the power sector would have a far greater impact on the Nigerian economy than the success we witnessed in the telecommunications sector.
Nigeria’s current power production level is about 4105.90MW (April 29 2014) with a development plan of 40000 MW generation capacity by the year 2020. The integrated value chain investment required to get this industry from its current position to the target is projected to cost circa $100 billion at an average annual spending of $10 billion. This provides opportunities for investment in the economy for both local and foreign investors. On the heels of the electricity sector reforms in Nigeria, there is now a local market for gas that was hitherto flared to power the generating plants. The electricity companies would in time prove reliable purchasers of the gas since they are now private sector players as against the former government agency toga with which the government monopoly electricity company was clothed. We foresee, therefore, that lots of investors will be attracted to Nigeria’s gas industry.
Have there been significant changes and developments in Nigeria’s legal sector?
The pressure to open its legal market pursuant to the General Agreement for Trade in Services (GATS) is perhaps the single topical issue in Nigeria for the past ten years. As it were, Nigeria is yet to make any commitments as to the implementation timeline.
There has been a drive recently by international law firms to formalise and better advertise their presence in Africa, how has this impacted the Nigeria legal market?
The world has become a fast-paced global village. The Nigerian market has always been open to partnering with other international law firms and continues to do so to provide the best solutions to clients. The presence of international law firms should not be viewed as a threat but as an opportunity for sustainable global partnerships. Nigerian laws like the Local Content Act for example are clear on sourcing of legal firms within the oil and gas industry and eligibility to practice law in Nigeria, hence international law firms planning to set up in Nigeria should be aware of this and understand that partnership and collaboration is the way to go. Only lawyers who have been called to the Nigerian Bar are allowed to practice in Nigeria. For the time being, legal networks and best friend relationships are some of the ways that foreign law firms can interact with legal services in Nigeria on behalf of their clients without violating the rules of professional practice.
Can you see international firms setting up offices in Nigeria or merging with local firms in the future?
The only constant in life is change. I foresee a day, when some form of regulated presence would be allowed similar to what happened in several Asian countries when their economies started opening up to the rest of the world.
￼Israel is partner at Sterling Partnership, co-chair of its energy desk and faculty member of the International Law Institute-African Centre of Excellence (ILI-ACLE). He is also an accredited mediator, Centre for Effective Dispute Resolution UK (CEDR) and a member (MCIArb) of the Chartered Institute of Arbitrators, UK, (Nigerian Chapter).
In addition to his roles at Sterling Partnership, he is a director at the Aspen Energy Nigeria (Energy Services and Consulting) Group. He is featured in Global Who is Who Legal as a specialist in the natural resources, energy, oil and gas sector.
Chigozie is a managing associate and a key member of the firm’s energy group. She has experience in commercial as well as oil and gas transactions and provides legal advice and support on numerous transactions to local and international corporations on asset acquisitions. She has drafted, reviewed and updated gas sales and purchase agreements, power purchase agreements and other relevant agreements along the gas value chain.