It is hard to imagine how many of the independent producers can sustain production if such price levels persist.

Hakeem ADEDEJI CEO HYDROCARBON ADVISORS

A push for reform in Nigeria

May 29, 2020

Hakeem Adedeji, CEO of Hydrocarbon Advisors, talks to The Energy Year about the sudden downturn in the country’s oil and gas industry, the need for reform to help unlock capital and the industry's potential for consolidation. Hydrocarbon Advisors provides strategic financing and structuring advice to energy companies and banks in West Africa.

How has the Nigerian oil and gas industry changed over the course of the Covid-19 crisis?
Similar to other economies, the suddenness and depth of the Covid-19 crisis has dimmed the prospect of the global oil industry, and Nigeria’s in particular. While the country’s average cost of production is well above the USD 30 mark, oil prices have stayed in the low USD 20s for the best part of March and April. It is hard to imagine how many of the independent producers can sustain production if such price levels persist.
A lot of independent Nigerian producers clearly have a heavy debt burden, which is causing distress and will have to be rescheduled. This equally puts a lot of pressure on banking industry balance sheets and, consequently, the financial system. Even if the global economy were to swiftly recover (i.e. a V-shaped scenario), this crisis has called into question the sustainability of the Nigerian industry to produce at unit costs above USD 20. In step with this, one then questions the ability of producers to raise the required capital in the long term in order to raise the country’s production above the sticky 2-million-barrel mark.
The silver lining in all of this is that there is no better time than now for Nigeria to review and reform its oil industry. For example, Covid-19 should force us to question our mode of regulation. Why do contracts take forever to be approved at the government level? When are the long outstanding segments of the petroleum industry laws going to be passed? How could we hope to start bringing down the quickly escalating cost of production that has characterised the industry and made operation much less profitable than it was a decade and a half ago?
Pre-pandemic, there had been general optimism in the industry about the renewed co-operation among the producers, the NOC and the industry regulators, which could potentially generate improved performance for Nigeria. Given the urgency that we have at the moment, it is our hope that a more progressive set of policies would emerge from the impact of Covid-19 that could result in more projects getting sanctioned. A good example is the recent progress on the Nigeria LNG Train 7
Investment banking firms such as Hydrocarbon Advisors have First-World know-how, are Nigeria-centric and are able to support the government in thinking through and raising the much-needed capital to execute a lot of these projects.

Do you expect to see the involvement of the private sector at the NOC level in Nigeria?
If you mean would the private sector invest in a privatised NNPC, I would say yes, subject to certain key conditional reforms. Many of these reforms, such as the PIB [Petroleum Industry Bill] have been in the pipeline for more than 10 years. This legislation needs to be passed and implemented rapidly once and for all.
The potential sell-down of government stakes in the NNPC-IOC joint ventures has been talked about for more than 25 years. Taking this major initiative post-Covid-19 means that the Nigerian state can raise the much-needed capital to deal with social projects such as health, education, infrastructure, etc. and permanently reduce the burden on the government to budget for projects that can be more efficiently funded in the capital markets.
Availability of capital is not the problem here. If we look at available data, more than USD 17 trillion of funding was said to have earned negative returns globally in 2019. If you were to attract a portion of that money to Nigeria with positive risk-adjusted returns, this could mean a remarkable improvement in our oil and gas growth story.
However, if we do not put the PIB and the right policies in place to protect investors, such funding opportunities will never materialise. Given the quandary which Covid-19 has put Nigerian in, I am optimistic that such initiatives would be completed by the government going forward.

 

How effective will the central bank’s incentive package be in easing the damage of Covid-19?
Any intervention money available today is only a fraction of what could have been unleashed to tackle the Covid-19 challenge if we as a country had maintained the initial discipline of the excess crude reserve account. However, even a moderate package by the Nigerian state could be effective, but only if such were well packaged and targeted to the right industries.

What would be an adequate pricing structure for Nigeria to carry on activities?
Given that the oil markets may remain volatile in the coming years, I believe that the consensus among analysts and industry practitioners is that costs would have to come down to USD 20 and below for the Nigerian oil industry to make money sustainably.

Do you expect to see consolidation across the industry in Nigeria?
Consolidation could potentially happen in many ways. Firstly, it could be as simple as companies within the same area of operation collaborating to eliminate infrastructure duplication and thereby save costs (i.e. flowlines, processing facilities, tank storage, etc.). I believe that the Department of Petroleum Resources has commenced this process and should aggressively pursue this.
On another level, and subject to often-stringent government rules for approving change of ownership and/or control of oil licences, consolidation could mean companies acquiring each other’s operations and oil mining licenses. Hydrocarbon Advisors played a major part in advising on the acquisition of Seven Energy by Savannah Energy in 2019.
At a much more complex level, consolidation could potentially occur because licence owners have defaulted on their loans and bonds and the creditors have taken decisive action to realise the security. However, for Nigerian banks to exercise such action, they would need the backing of the minister of petroleum – and usually the president – who has the sole authority to approve any change in ownership or control of an oil licence.
While such approvals could be onerous and expensive, it is our belief that this is critical to unlocking much-needed capital for the Nigerian oil and gas industry. There is a limit to how much Nigerian banks can raise for the industry. External capital providers will only come in if they know that loan defaults can be rectified by their ability to realise their security, which is usually the OML. It also goes without saying that such radical possibilities by Nigerian standards would need the institutional support of the Central Bank of Nigeria, the Asset Management Corporation of Nigeria and the Department of Petroleum Resources.

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