08 November 2015, Sweetcrude, Abuja – The dynamics of Foreign Direct Investment (FDI) in Africa has been recently altered, adding more complexity to an already tough oil and gas financing matrix in Africa. Because FDI typically trickles down to the lowest levels of the oil and gas value chain, business owners and employees have a good reason to worry if their country cannot compete. How will Nigeria compete in a fierce battle for limited capital? How will businesses and the entire sector be affected?
African operators, governments and investors may have limited insight into the degree of disruption caused by low oil prices. Why the shock was felt by all stakeholders the pattern and extent of the disruption will only emerge in the wake of rising oil prices. Many stakeholders hoping to simply rise again [when prices rise] will discover how much of enterprise foundation has been eroded, strategies rendered invalid, people-networks severed, new competitions berthed and crucial talents lost. Many oil and gas firms, business development strategies, investment philosophies and lending policy [in financial institutions], may not rise with a rising price – due to changed economics and near-permanent enterprise deformations – unless they are reworked.
Hydrocarbon economies such as Nigeria and its businesses may be worse off – if the anticipated elements of post price compression period are not well understood and the right strategies adopted. Nigeria is currently reforming its oil and gas sector, however, that’s a piece of the full orange needed to stay competitive in a continent [Africa] with increasing struggle for limited global capital flows. Nigeria’s inability to position itself well and compete favorably might make a mess of her reforms. Reforms in themselves are good but reaching the desired goal of fostering optimal investments and revenue growth for the government requires additional fulcrums.
Continent-wide reforms and emergent competition
About a decade ago “if it’s oil and gas FDI in Africa, then it’s West Africa! Prior to the emergence of the frontier markets in Africa’s oil and gas horizon (Tanzania, Uganda, Kenya, Mozambique, Ghana and even Somalia) investment discourse in Houston, London, Singapore and other hubs were primarily focused on a handful of markets; mainly West African Market. While West Africa remains a top destination, the new frontier markets in East Africa are redefining the landscape. They may have competitive advantages as late arrivers; learning from all the failure and successes of more mature markets such as, Angola and Nigeria; all to their advantage.
As Nigeria moves to revive its gas fields, the reality of the gas market shifting away from Europe to South-East Asia and the Middle East and the proximity of these gas sources in East Africa to the new gas markets, makes them better partners to “parler”. Even beyond Africa is the new bride Iran, swiftly moving to garner the best of capital flows it can in the wake of sanctions removal. As Nigeria still plans to commit funds for LNG train 7 at NLNG; [its gas brand] the gas market, according to pwc, is predicted to remain a buyers’ market up until 2020. The same period that Angola’s Soyo LNG (2016), Mozambique LNG (2020), Tanzania (2025) Australia and Papua New Guinea are expected to come on stream, thereby increasing supply from both the African and Global market. In view of the ready or near-ready state of other markets in Africa. Nigeria’s reforms risks becoming less advantageous, if it lacks two important features, Speed and Clarity.
The regulatory reform kettle boiling in Africa
Without speed and clarity Nigeria may miss out in the bounty. There is a frenzy of regulatory reforms throughout Africa’s Oil and Gas markets. Mature markets such as Nigeria, Angola and South Africa are reforming to stay competitive and to revive/rework regulations that may be considered obsolete. A recent pwc report highlighted the extent of regulatory changes going on in these markets. In Tanzania for example, the new (July 2015) Petroleum Bill that mandates producers to pay 12.5% royalty for onshore and continental shelf operations and 7.5 royalties for offshore was highly disputed. However, the rule is clear and investors may then make their decision based on this law which may only be reviewed downward (if agitators succeed!).
Other economies where the horizon cannot be easily mapped such as Nigeria will surely be less attractive to investors, especially if the changes go on for too long. Kenya is currently reviewing its Petroleum Act of 1986 to modify laws around revenues sharing ad transparency. Democratic Republic of Congo (DRC) recently became EITI (Extractive Industry Transparency Initiative) compliant; buttressing efforts to institute systems that will encourage new investments. In South Africa, the Mineral and Petroleum Development Act (MPRDA) is being reviewed to add new terms and favorable conditions too, while the Gas Utilization Master Plan
(GUMP) is awaited.
While regulatory uncertainty seems to be an element of both mature and new markets, nations that reform right – with speed and clarity – will ultimately attract the best investments. The race to become the top destination for FDI into Africa is gaining traction and will become fierce too.
Clarity and Speed
Nigeria will need to strategically promote the new shape of its oil and gas sector to the world. Investors cannot rely on pockets of media buzz and tacit press release from NNPC to make multibillion dollar decisions. Many years of limited activity and even chaos, which arose from the non-passage of the Petroleum Industry Bill (PIB), has had diverse impacts on the nation’s investment enthusiast; from total apathy to limited interest and outright market exit. Even as the reforms are ongoing, the strategic direction of the sector must be communicated to the global community of observers [desperately seeking clarity] in very clear terms. A long term picture of what is being reformed or “will be reformed” will guide today’s business decision, offering needed insights into what the industry may look like in 2019 and in decades to come. Part of this clarity is a template that specifies what specific policy areas the administration is looking to change within the next 2 to 4 to 10 years. (Even as Nigeria’s notorious PIB is to be presented in chunks)
Reforms in itself if implemented for too long, becomes an element of investment risk; introducing the unpleasant uncertainty that many businesses are very scared of and serving the very opposite of its purpose. Given the state of the economy and other challenges [Power and Infrastructure] Nigeria will have to work hard for its Phoenix to rise again.
*Chijioke Mama is a Senior Research Analyst and the founder of “Africa’s Barrel Equations” (Energy investment and policy advisory initiative) Chijioke.firstname.lastname@example.org +2347061013333