A need for change in Nigeria’s investor environmentFebruary 24, 2021
Gbolahan Elias, a partner at G. Elias & Co., talks to The Energy Year about recent reforms in Nigeria’s energy industry, factors driving downstream advances and weaknesses in the new Petroleum Industry Bill (PIB). G. Elias & Co. is a Nigerian business law firm whose energy-related services cover areas such as finance, M&As, dispute resolution, tax and issues around privatisation.
What reforms have been implemented and what asymmetries are found within the Nigerian energy industry?
We have witnessed a half-hearted wave of deregulation in the downstream sector. Surprisingly the labour organisations have not put up much resistance, which suggests that the government had been preparing the ground before rolling out this scheme. Beyond that, the government has not backed down from its decision; yet many believe that the entire shift should be more reflective of the market, and overall more coherent.
The federal government has again reduced the retail price of gasoline. When it comes to the power sector, the federal government also approved the much-anticipated electricity tariff increase, which is an important step moving forward.
Nigeria has different regulators for power and hydrocarbons, which is fairly irrational as these should be under the same umbrella. What we need is a coherent roadmap ensuring that the two key components of our energy mix are moving in the same direction.
For now, there are no symmetries, which in turn holds back the potential progress of Nigeria’s energy industry. For example, a few years back, the then-minister of petroleum resources, Diezani Alison-Madueke, wanted higher prices for gas producers while the then-minister of power, Bartholomew Nnaji, wanted cheaper power. These sectors seem to have never agreed on the same point of view.
What factors are driving the advancement of the downstream sector?
It is easy to assume that there are few margins to be made in this segment of the industry – and more so when prices are state-controlled. The key to unlocking the true value and potential of the downstream sector appears to be technology as it can achieve efficiencies that are not yet prevalent in the industry. These efficiencies refer to managing inventory, ensuring that the supplied product is monitored and that there are no financial theft issues in retail operations. At the end of the day, technology can guarantee profitability.
Even without technology, there are some basic structural changes that could be made. Some years ago, downstream players would buy the land to build a petrol station or they would take a long-term lease. These days, oil marketers are much more flexible, and lighter in fixed assets. Now it is all about oil marketers building a brand in a location while they enjoy guaranteed supplies and support. The downstream sector is changing rapidly. Traditional leaders have not yet embraced technology while smaller players are eagerly looking for a space in the market, driven by technology.
Another game-changing element is the scale the Dangote group is bringing to the sector. Yet it remains to be seen whether most of their production will be exported or sold locally. If the product were fed to the domestic market, plenty of changes would come about as no one in Nigeria is currently operating at that scale.
To what degree might the new PIB fail to address some of the issues holding back the oil and gas industry?
The document that is being touted as a far-reaching Petroleum Industry Bill is in fact largely cosmetic. One of the main issues is the actual organisation of the entities within the industry. On this note, what the industry really needs is a lower number of regulators with a unified vision for the entire energy sector. The PIB fails to address this adequately.
On the other hand, there are several fundamental matters to be addressed. The first one revolves around the degree of discretion in the hands of politicians. Whether it be the minister or the head of state, how much of it is going to be discretion and how much is going to be determined by technical considerations?
It is difficult to believe we will have a government willing to surrender its discretionary power, especially the power to grant licences and acreage. Power over the sector is one of the great spoils of victory in the elections, something that no government will give up lightly in the near future.
The second big challenge is found in the area of taxes. As long as the federal and state governments find themselves in debt and the host communities feel that they have been short-changed the temptation to keep taxes high is going to remain, and hence discourage foreign direct investment. For foreign investors it is a matter of arithmetic, as they have the world as their playground. If we are taxing them at a rate that is far higher than what is seen in Angola or Mozambique, they will have no business coming to Nigeria.
It makes more economic sense to invest in areas with more favourable tax regimes. The federal government, state governments and communities are clamouring for bigger shares from taxes and it seems that everyone wants to keep squeezing the orange until it is dry.
No matter the number of cosmetic changes made to the PIB, as long as the government keeps acting through discretion and keeps seeking revenue through taxation, the industry will keep having elemental flaws. This will not lead to a healthy rebound of the industry nor to more rigorous private-sector participation, which is very much needed.
What legal and taxation issues have been detrimental to the investor environment?
The average foreign investor is discouraged by the government’s track record on incentives. There is even talk about going back on stipulations that have already been granted. Particularly for the deep offshore, investments are not only large but long term – with some spanning more than 10 years – so the right conditions have to be in place. Uncertainty is nothing but discouraging. In this regard, the passing of the Deep Offshore and Inland Basin PSC (Amendment) Act in 2019 was a step in the right direction but I doubt it has restored confidence to a level which will attract new capital flows into the country.
Interestingly enough, these issues concern not only foreign investors, but local ones as well. The bottom line is that they both want less discretion and lower taxes but are not getting it. A large blow for Nigerian investors, for example, was the decision against allowing them pioneer status relief going forward. This scheme, developed in the 1970s, is an income holiday applied over the first five years, primarily for manufacturing. However, other sectors like upstream oil and gas “gate-crashed” the policy. The negation of pioneer status relief in this case has been a step backwards.
What type of services have you recently carried out within the energy industry?
G. Elias & Co. has been heavily involved in oil and gas financing. For example, we advised on a major financing project which concluded in July 2020, including Standard Chartered and an NNPC-Shell joint venture. The aim was to raise over USD 1 billion and it was a success, particularly in these difficult times. Other financing projects in the pipeline include some related to marginal fields and EPC contracts. Other areas such as M&As and dispute resolution, especially in the area of tax, have also been active.
In the area of electrical power, there has been less emphasis on financial work, but we have been greatly engaged with privatisation as we have been developing suites of standard-form contracts that the bulk electric power traders use. In addition, we focus on power purchasing contracts, as well as vesting contracts for both hydro and thermal power.
What needs and opportunities will surface with the development of marginal fields?
The winners of the bid round will follow a process involving the acquisition of acreage, gaining ministerial consent and negotiating the offtake contracts and in some cases some EPC contracts in order to reactivate dormant fields. It is here that work is likely to be for law firms such as ourselves. In terms of litigation, this can come from either other bidders or from communities.
Parallel to this, a number of marginal field operators have started realising they do not have the scale to operate efficiently so they are creating combinations to develop jointly owned facilities. For example, where there is a single marine terminal that is within 75 kilometres of three or four marginal field producers, to enhance efficiency and minimise cost, they have opted for jointly constructing a shared facility connected by pipelines. These projects will of course need financial guidance.
Lastly, in the downstream segment, the marginal fields will trigger the will to develop modular refineries to eventually refine the extracted crude in situ. In this regard, we are advising two developers of marginal fields in different parts of the Delta area.
What potential do you see in the area of electric power?
There is a fountain of opportunities in the electric power sector and gas sector combined as the largest buyers of gas tend to be power producers. Yet, the country continues to be very short on power. For example, the per capita consumption of electric power in South Africa is more than 20 times that of Nigeria. This means that the potential for growth in the sector is still tremendous – and more so when considering our vast population.
Along these lines, we are involved in two big power projects. The first one is the 55-MW CCETC-Ossiomo Independent Power Plant, recently completed in Edo State, which will drive industrial growth. The other project, located in North Central Nigeria, is still developing and is backed by the NNPC, with a projected capacity of 750 MW.
We are also involved in many smaller projects, especially solar ones. Solar projects are typically not very large, which means they do not make a big dent in the grid. Also, they tend to be located in remote locations that are not connected to the gas grid. You can import your solar equipment, truck it to your location and set it up. In a way, it is much more independent and self-sufficient. This being said, we see plenty of potential in solar projects in the coming decade.
What are the firm’s strategic growth directions for 2021?
First of all, we are focusing on scale so that we can reach and serve a broader range of clients. Secondly, we are solidifying our links with clients from the Far East who have either set up or are proposing to set up in Nigeria. This includes clients not only from China but also from Singapore and Indonesia. The volume of work we have been doing with them has been growing.
Lastly, we see a lot of potential for our services in the development of marginal fields. With 57 on offer, there are many opportunities not only with the players who are bidding but also with the established players who will be seeking to collaborate with them. The companies bidding are going to need a lot of help from many of our clients, so we could also indirectly come into the picture.