The rise of the Nigerian oil company

Nigeria

Wale Tinubu, group CEO of Oando, speaks to TOGY about the advantages of diversification, the growth of the gas and power sectors, and policy and financial challenges that domestic companies must overcome. Oando is a domestic integrated company with activities in the upstream, midstream, downstream, gas and power sectors of the Nigerian energy industry.

What are the advantages of diversification and integration in the energy value chain?

The integrated business model ensures that the company maintains diverse revenue streams, thereby buffering against sudden industry-wide shocks, which may affect performance. For example, the challenging downstream environment, bogged down by regulatory and subsidy issues, has been compensated for by having a solid midstream business and an enlarged upstream portfolio, which will significantly boost revenues and profitability.

Conversely, with global oil prices falling by more than 50 percent and now fluctuating between $50 and $60 per barrel, adding value further down the value chain can insulate a company further from price shocks in the commodity markets.

Additionally, the diversified model ensures that various businesses are able to leverage each other’s expertise, thereby providing invaluable economies of scale that enhance shareholder value. This holds true in relation to general operational standards and processes, human resource utilisation and corporate best practices.

What are the main challenges for leading Nigerian exploration and production companies in continuing to grow their production and assets?

For exploration and production companies in Nigeria to continue increasing capacity in their production and assets, the government must create an enabling environment where fiscal policy, bureaucracy and co-operative support are aligned with industry targets and the government’s ambitions. The most significant challenges exploration and production companies face in 2015 include government underfunding, oil theft and sabotage, and bureaucracy.

Government underfunding of joint ventures will need to be addressed by exploring and implementing alternative funding models in order to ensure adequate resourcing of exploration initiatives and increase funding in place for sector growth. The already-existing frameworks have proven to be an inhibitor to oil and gas activity and private sector investment.

Oil theft in Nigeria accounts for 10-20 percent of gross crude production, resulting in significant amounts of shut-in production at onshore and shallow offshore fields, forcing companies to frequently declare force majeure on production. There is the need for the implementation of the crude oil security act and promotion of community involvement as a critical component to the overall solution. This could significantly mitigate losses and create capacity for growth by reducing the perceived risk of investment by the investing community.

Another main challenge is the unregulated and inefficient tender and approval processes and bureaucracy in general, which remains a constraint on the growth of local upstream players and needs to be benchmarked against global standard.

How can the government help domestic exploration and production companies?

Industry dynamics have favoured domestic participation since the mid-2000s with production from local operators now accounting for around 10 percent of the industry’s output. Prior to the last 10 years, local oil producing companies had concentrated on developing marginal fields, which were uneconomical for international oil companies. The divestment of onshore assets by international oil companies explains why the contribution by local players to total output has risen.

For the most part, the central purpose of licensing rounds has been to realise the federal government’s reserves and production ambitions. Therefore, it is crucial for government to encourage growth in local exploration and production companies, as it will ultimately drive overall sector growth.

While the Nigerian oil and gas industry possesses enormous potential, today’s risks present the most significant challenges since the 1970s. Political and regulatory risks are the two major obstacles for the industry; the passing of an appropriate petroleum industry bill is critical to the industry’s next growth phase. That said, one could also conclude that with renewed investor confidence, ambitious activities in the industry will increase.

Looking ahead, the production outlook for local players largely depends on access to funding, increased collaboration and technical capacity to drive ambitions. One example is the Nigeria 2020 vision where 40 percent of local content participation will lead to substantial growth for domestic exploration and production companies.

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