Local Participation In Nigeria Oil Sector Grows

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After six decades of being dominated by multinational and state?owned corporations, Nigeria’s petroleum industry is seeing increasing participation by the domestic private sector. According to official data, local companies now control over 30 per cent of the upstream sector, up from less than 10 per cent in 2010.

wpid-Aliko-Dangote0.jpgA planned 400,000-barrel/day oil refinery would make the Dangote Group the largest player in Nigeria’s currently state-controlled downstream sector. Yet expectations that local companies will be better placed to deal with the challenges facing the sector are overly optimistic.

The state-owned Nigerian National Petroleum Corporation (NNPC) attributes an increase in participation by indigenous companies in the hydrocarbons sector to local content initiatives that have been ongoing since 2000. These include the Marginal Fields Development Programme and the 2010 Nigerian Content Development and Monitoring Board Act, which specifies that Nigerian independent operators will be given “first consideration” in the award of upstream contracts and Nigerian service companies will be given “exclusive consideration” for contracts and services.

However, arguably a more important factor has been the recent divesting of interests by multinationals. Indigenous companies have purchased US$5bn worth of assets from firms such as Eni, Shell and Total in the past five years.

Oando’s US$1.79bn purchase of ConocoPhillips’ Nigerian interests, Brittania?U’s winning US$1.6bn bid in a recent auction for Chevron’s stake in three oil blocks and Shell’s announcement in October 2013 that it would be selling a further four blocks in the country will substantially raise this figure.

A larger role in a weaker sector

The eagerness of multinationals to reduce their holdings in Nigeria is a result both of the uncertainty surrounding the long-delayed petroleum industry bill?which proposes a more onerous fiscal regime?and of the prevalence of oil theft, which is estimated to cost the industry over US$1bn a month. Oil theft was the main factor behind oil production briefly falling below 2m barrels/day (b/d) earlier in 2013, its lowest level since 2009.

The belief expressed by some government officials and companies is that indigenous players will be better placed to deal with these challenges because of better relations with local communities and a willingness to develop marginal fields. Little evidence of the latter has been seen thus far: of the 24 fields awarded to 31 indigenous companies in 2003 under the Marginal Fields Development Programme, only eight are now in full production.

Of the 77 blocks issued between 2005 and 2007, of which indigenous companies claimed 65 per cent according to the Department of Petroleum Resources, only one is currently in production and less than 30 per cent are seeing active work.

That a local company will be better placed to address community concerns has some plausibility, but with historical tensions between many of Nigeria’s major ethnic groups this is very much context-dependent.

The belief that a sense of patriotic affiliation will reduce oil theft?a business that in its sophistication bears closer resemblance to the international drug trade than to the stereotypical image of impoverished communities trying to earn a living?is na?ve.

Meanwhile, although the small size of marginal fields makes them ideal candidates for local ownership, it also means they are typically less well served by Nigeria’s already inadequate infrastructure and so bringing them to production in a cost?effective manner is difficult.

Domestic operators face a number of other issues. Government policies have encouraged local employment by the multinationals and the involvement of indigenous companies, leading to a situation where both are competing for Nigeria’s limited pool of skilled labour. Studies show that local companies suffer from high employee turnover, as staff receive training and are subsequently poached by international oil companies. Financing is another challenge: although there has been an increase in project funding from Nigerian banks in recent years, indigenous oil and gas companies still complain of a preference by the banks for quick returns and high interest rates.

Downstream developments face uncertainty

The planned construction of a US$9bn refinery/petrochemical and fertiliser plant would make the Dangote Group, Nigeria’s largest industrial conglomerate, a major player in the downstream sector. Currently, Nigeria’s four NNPC-owned refineries operate at around 20% of their 445,000?b/d combined installed capacity. (A number of illegal small?scale refineries also exist.)

The Dangote investment comes despite state price controls that prevent operators from charging at cost?recovery levels and so have hindered downstream development. The government pays a subsidy to fuel importers to keep end?user prices down. This subsidy will cost Nigeria an estimated US$6bn in 2013, and the government’s attempt to remove it in 2012 sparked protests.

Dangote’s project has progressed well: a US$3.3bn syndicated loan was granted by Standard Chartered and a consortium of Nigerian and South African banks in September. This was helped by Dangote’s proven record in the difficult Nigerian market, as well as the US$3.5bn of its own equity the group is contributing.

There have been indications from Ngozi Okonjo?Iweala, Nigeria’s finance minister, that the refinery could be compensated for the difference between the subsidised price and the market price for refined petrol.

Yet success is not assured. Twelve refinery construction licences awarded between 2002 and 2004 were revoked in 2007 because of the licensees’ failure to use them, and a further nine refinery projects from both local and foreign companies have stalled.

Bureaucratic delays have been cited as one reason for these failures; the Dangote refinery, far more ambitious than any previously proposed, will face the same challenges. Powerful interests in the fuel?importing business, which stand to lose out from the project, could derail plans to compensate the refinery for the fuel?import subsidy.

Local participation is not a cure

By providing economic opportunity for a population that has largely been excluded from their country’s oil and gas wealth, healthy local participation in Nigeria’s petroleum industry does have the long?term potential to address some of the challenges facing the sector.

Yet the increased involvement of Nigerian companies in the upstream sector is currently more a symptom of the industry’s weakness than a strengthening in indigenous capability.

In the downstream sector Dangote’s success is uncertain and would be based on personal wealth and connections rather than an environment conducive to domestic participation. Despite well?intentioned local content legislation, this situation will not change unless the industry’s more fundamental problems are addressed. Until then, local companies are unlikely to experience any more success than foreign investors in solving the industry’s woes.

Source: The Economist Intelligence Unit

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