If we are serious about fixing long-term financing in these markets, we have to think about tapping into long-term sources of funding.

Victor NDUKAUBA Deputy Managing Director AFRINVEST WEST AFRICA

A long-term approach in Nigeria

June 27, 2018

Victor Ndukauba, the deputy managing director of Afrinvest West Africa, talks to TOGY about the challenges companies face with funding, the impact of shale production on the oil and gas market and the long-term future of the oil industry. Afrinvest West Africa is a financial services firm based in Lagos.

• On market shifts: “The introduction of shale altered the market dynamics significantly and irreversibly. It balanced supply and demand. Whereas the US used to be a net importer, today it is a net exporter and is pushing the same sorts of volumes you find from Saudi Arabia or Iraq.”

• On forex: “If you are thinking long-term financing in forex to create assets that are yielding in naira, the currency mismatch could create very negative impacts on operations.”

• On lending: “A common refrain among Nigerian entrepreneurs is that funding is a key concern. If you look at our economic structure, you find that lending has not seen a lot of robust growth over the last two to three years.”

• On funding: “If we are serious about fixing long-term financing in these markets, we have to think about tapping into long-term sources of funding, such as pensions.”

 

Most TOGY interviews are published exclusively on our business intelligence platform TOGYiN, but you can find an abridged version of our interview with Victor Ndukauba below.

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What is your view on the oil and gas industry outlook?
There have been very fundamental shifts in what is effectively the hydrocarbon market. The introduction of shale altered the market dynamics significantly and irreversibly. It balanced supply and demand. Whereas the US used to be a net importer, today it is a net exporter and is pushing the same sorts of volumes you find from Saudi Arabia or Iraq. This has changed the market. America used to account for 30% of our export volumes. Today it is 0. When we see that over the long term, we are not as bullish. What has happened with shale is one key concern.
While we are not very bullish, what it takes to lower the breakeven cost in shale is essentially the refinement of technology. It is not so much a question of whether you are doing horizontal or directional drilling anymore. It is not a question of what kind of model you are using or whether you are drilling in new offshore location that have never been tapped before and therefore you can push that volume into the market. If you push too much volume into the market, you crash the price. The market has changed irreversibly. Having said that, 95% of the demand in the market is still for fossil fuels to power vehicles around the world. For the foreseeable future, there will still be demand for oil and its products. There are concerns around the advent of electric vehicles (EVs) and the very deliberate attempt made to advance those technologies and lower the cost of delivering those technologies to people. Europe is making efforts to make EVs become the norm, with several countries already making announcements about making plans to phase out fossil fuel cars. Germany has been very vocal, as has Norway. You find even China and India have made deliberate and bold forecasts as to when they expect to shut down. It does not look good for oil-producing nations in the long term.

How important is gas as an growth opportunity for Nigeria?
Gas is where the real opportunities lie. Manufacturing capacity is constrained by power. However, the ways to bridge it could be, as we have tried in the fairly recent past, to privatise power, getting people to build power plants driven by gas. When you look at Nigeria’s gas reserves and how significant they are despite nearly five decades of constant flaring, it is a no-brainer.
We should leverage those resources. Some of the reforms the government has tried to push were to create an environment that makes it attractive for private capital to invest in gas infrastructure, laying pipelines and building gas-processing facilities. Maybe not so much gas storage or export terminals, but essentially focusing on promoting domestic usage of gas.

What are the main challenges to stimulate investment in the gas industry?
The investment dollars required to drive it come in foreign currency; however, business operations are in local currency. Given the currency shocks we saw in 2015, which did not get resolved until early last year, it essentially had very devastating effects on any businesses that had made such a play. Infrastructure is a long-term play. If you are thinking long-term financing in forex to create assets that are yielding in naira, the currency mismatch could create very negative impacts on operations.
Central Bank action has improved the situation nowadays. We saw nearly USD 12.5 billion coming in the second half of 2017 alone. In aggregate, including the Central Bank’s intervention, we saw nearly USD 27 billion of inflows. However, while we think that gas is critical and gas requires quite a bit of investment; the flip side of that argument comes down to the policy framework itself, the fiscal rules.

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