Nigeria: Panacea for Waning Oil, Gas Investment

The decline in investments in the Nigerian oil and gas industry, partly caused by lack of access to finance for critical exploration and production projects, has been a source of worry to the players and the government. This situation is now being worsened by the global energy transition that is seriously threatening fossil fuels. Amid these challenges, stakeholders in the industry are advocating for the creation of a national energy bank as solution.

Nigeria has not recorded many major oil and gas development projects for many years, owing to several factors, including funding challenges, lack of clarity in the investment climate, anti-market policies, among others.

With the advent of the Petroleum Industry Act (PIA), which is now in the implementation process, it is believed that the issue of uncertainty in the investment environment and some regulatory and administrative encumbrances are receiving attentions.

But one major challenge facing the industry is how to increase access to finance for exploration and production activities so that the country can ultimately optimise its oil and gas resources.

Although, there exist financial institutions in Nigeria that ought to make funds available to oil and gas producing firms for the development of critical projects, however, industry stakeholders say those banks are not disposed to providing the huge funds needed to carry out high profile, capital-intensive projects, aimed at optimising the nation’s yet untapped hydrocarbon resources.

They contend that even when such funds may be made available by the local banks, such loans come with short repayment period and with high interest rates. This, they believe, do not augur well for the sector and their business plans, as oil field development projects are mostly long term projects.

NEED for ENERGY BANK

To address the funding challenge stated above, some stakeholders in the industry have called for the federal government to consider establishing a national energy bank, which will be in the mold of Bank of Industry, Bank of Agriculture or the Export-Import bank.

This energy bank, they suggest, should solely be dedicated to providing funding to the investors to enable them accelerate investments into various value chains of the oil sector -from upstream, midstream and downstream, particularly in the upstream.

Most field development projects, whether for oil or for gas, take long time, and so require long term loan facility. This has forced operators to look outside the country for funds as an alternative.

But even the opportunity to access funds outside the country is now being limited by the energy transition campaign. Foreign lenders, mostly from the developed countries, are now joining the energy transition campaign, making it difficult for them to lend for oil and gas development projects.

They are now shifting their attention and financial commitment to renewable energy and business undertakings that support the global push to achieve net-zero carbon emission by 2050.

This is evidenced by the outcome of the just ended Climate Change Convention (COP26) in Glasgow, Scotland, where world leaders and climate change agents had converged for 14 days.

For instance, governments and private institutions in Europe, United States, and other developed nations, who are fronting the energy transition campaign, have agreed to commit series of funds, including $100 billion, to support climate change projects in developing countries.

The development is indeed, not quite good for Nigeria and the oil and gas industry, as such apparent anti-fossil fuels commitments have the potential to severely impact the industry, further exacerbating the bad state of the Nigerian economy.

Making a case for alternative funding mechanisms for the nation’s oil and gas industry, the Chairman of the Independent Petroleum Producers Group (IPPG), Mr. Abdulrazaq Isa, said government should create an energy bank dedicated solely to the industry with capacity to fund major oil and gas projects at lower and globally competitive interest rates.

He said exploring alternative funding mechanisms to address cash call challenges in the industry, such as the Financial and Technical Service Agreements (FTSA) was needed.

Isa added that access to funding was critical to the survival and optimal performance of assets in the Nigerian oil and gas industry.

“As funding opportunities become limited due to global industry concerns regarding the climate, it is imperative to explore creative ways of funding operations /projects industry funding.

“We can explore alternative funding mechanisms to address cash call challenges (example, Financial and Technical Service Agreements -FTSA); creation of an Energy Bank (energy bank dedicated solely to the industry with capacity to fund major oil & gas projects at lower/ globally competitive interest rates),” Isa said.

He stressed that the formulation of targeted policies to create an avenue for easier access to funding industry-wide, as in the energy bank establishment and alternative funding mechanisms for the industry was highly imperative.

The President of the Nigerian Association of Petroleum Explorationists (NAPE), Mrs Patricia Ochogbu, concurred that the normal traditional banks in the country may not be ideal for exploration activities, adding that “It is even difficult to get a 10-year mortgage in the local banks.”

According to her, field development, from exploration through development to production, takes some time, maintaining that oil and gas investments are capital intensive.

She said the exposure to these investments has proven to be a burden to the commercial banks in Nigeria, pointing out that the investments in prospecting for oil is capital intensive with high risk.

Having acknowledged the dwindling investment in exploration, Ochogbu noted that NAPE had at different times spoken on the need for something like an energy bank to be floated by the government.

She contended that the PIA had partly addressed the financial constraints in exploration through the 30 per cent exploration fund, but argued that the fund was not going to be available to the private explorers, hence the need to take care of private operators through the energy bank.

She said: “So, to take care of the private explorer, I would encourage the government to come up with an energy bank similar to what we have as bank of industry, similar to the export-import bank.

“And we can collaborate regionally, work with other African nations and even the European Union and World Bank, because you need funds that are at the long term and at good rates. Not the one they keep changing every time there is a change in the rate of exchange. So, the energy bank is the way to go.”

NEED FOR COLLABORATION

Responding to the funding challenge and the call by the operators for alternative funding mechanisms, the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) recently called for collaboration among the industry players for that to be achieved.

The Chief Executive Officer of NUPRC, Mr. Gbenga Komolafe, during his separate meetings with the IPPG penultimate week, charged them to come up with plans for alternative ways of getting funds to accelerate hydrocarbon exploration and production in the country.

Admitting that he understood the challenges faced by the indigenous operators, Komolafe noted that the industry generally, was facing a critical challenge including access to finance.

He said the world was now in energy transition, adding that the outcome of the ongoing discussions at COP26 in Glasgow, Scotland, would impact financing in oil and gas industry negatively, hence the need for the commission and the indigenous operators to think outside the box on funding.

He said despite the energy transition threats, Nigeria would not abandon its God-given hydrocarbon resources, urging the IPPG to work with the commission to pursue international financing groups that would commit to funding critical upstream projects in the industry.

Komolafe said: “We will not abandon hydrocarbon, our God-given resources, because of energy transition. We really need to think out of the box. And as you depart, I want us to come back to the table, let us see how we can actually get, maybe, international financing group to commit to financing critical projects in our upstream.

“So, I want us to look at this, because I understand that financing is a critical issue posed by the energy transition. But I know that if we sit down and think together, we will overcome.”

He said the PIA had not only made the commission a conventional technical regulator, but now a commercial regulator and business enabler.

The NUPRC chief executive said the commission would operate with a different regulatory culture as prescribed by the PIA, reiterating that the law has made the commission both a technical and commercial regulator.

In that wise, Komolafe said the commission would equally be concerned about how it facilitates financing for members of IPPG.

The NURPC boss said ideas coming out of such collaboration could lead to getting finance that would empower the indigenous firms to be able to leverage on the divestment of the international oil companies (IOCs) and enhance their capacity in the onshore and shallow water operations.

He added: “So, we are going to do this together. We are not going to do it in isolation of your members. So, Mr. Chairman (Isa), I’m placing this before you for your members to come up with ideas that can equally be facilitated by the regulator.

“If you could put in place an initiative, being triggered and spearheaded by the regulator in terms of attracting financing for your members, that will empower your members to be able to leverage on the divestment by the International Oil Companies (IOCs) for them to enhance their capacity in the onshore and shallow water aspect of the investment in the upstream.

“So, all these I urge your members to look at as a way that we can optimise the production in the upstream, and thereby enhancing the federation’s revenue.”

BADLY NEEDED FUNDING

Nigeria wants to grow its oil and gas reserves and ramp up production in order to remain relevant and influential at the global oil and gas market as a strong member of the Organisation of Petroleum Exporting Countries (OPEC).

Due partly to this funding challenge, Nigeria has not been doing well in the area of oil and gas reserve growth and daily production for years. So pathetic is the fact that the country has just been displaced from its position as Africa’s largest oil producer, by Libya.

Nigeria has 37 billion oil reserve, 206 trillion cubic feet (tcf) proven gas reserve, and over 600tcf unproven gas reserve. The country’s daily oil production has maintained a plummeting run and currently stands at 1.354 million barrel per day, as at October 2021, even at a time the oil price is on a bullish trajectory, trading above $80 per barrel.

Nigeria’s oil output fell to about 1.354 million barrels per day in October 2021, from about 1.399 million barrels in September while Libya’s oil production rose markedly.

Nigeria aspires to raise its oil reserve to 40 billion barrels, increase daily oil production to 4 million barrels, increase gas reserve, and raise gas production to 10 billion cubit feet (bcf) from 8bcf.

The government wants to ensure there is more discovery to raise the nation’s hydrocarbon resources, particularly gas, the declaration of 2021 to 2030 as the decade of gas.

Government hopes to industrialise the country by using gas as an enabler and wants to accelerate investments in the gas sector.

Also being pursued by the government is to ramp up the nation’s 40 million tonnes per annum Liquefied Natural Gas (LNG) supply to 40 million tonnes per annum through the Nigeria LNG Train 7 and Brass LNG.

According to industry experts, $150 billion is required to achieve the nation’s 10bcf per day gas production target, translating to 5 gigawatts power generation.

All these aspirations are realisable only when funding is available. Therefore, national energy bank, as being canvassed by industry stakeholders, is badly needed more than anytime ever, and the need for stakeholders to work together on exploring alternative financing mechanisms is necessary.