Afrinvest proposes three ways to attract badly needed oil sector investments

Afrinvest, a Lagos-based investment banking firm says reviewing Nigeria’s dated petroleum sector laws, restoring joint venture production to previous profitable levels through improved funding from mergers of local players and developing competitive fiscal terms are principal ways to attract investments into the sector.

In their Nigerian Oil and Gas Upstream Investment report released recently, the investment firm stressed that despite the implementation of 70.0% local content by contract value on upstream projects in 2010, there remains a strong dependence on the International Oil Companies (IOCs), particularly for deep water projects.

Nigeria has been unable to achieve technology transfer in deep water fields and worse still fiscal terms do not even favour the country. Nigeria’s Production Sharing Contracts (PSCs) is the only oil fiscal term in the world where the government gets nothing in royalty for drilling in deep offshore fields with depths of over 1,000km.

Many of these PSCs were signed in the 1990s when knowledge of deep offshore production was limited. They will expire over the next 5-10 years presenting an opportunity to review them.

However, to benefit, “investors need clarity soon before committing to major new deepwater investments,” says the report.

Adeoluwa Eweje, Afrinvest analyst who prepared the report suggested that Nigeria should undertake a holistic review of the Petroleum Industry Bills and pass it into law quickly to provide the competitive advantage required to attract FDI into the sector.

The report also said there is also a need for increased collaboration (mergers) among indigenous players operating on marginal fields so as to effectively use the oil resources available to them increase funding for JV venture operations.

This is because government’s partnered JV projects have experienced setbacks due to lack of funding especially from the government. A merger between local players will take advantage of waning pipeline sabotage as they have a proven ability to better manage host communities than the International Oil Companies (IOCs).

The report also said that to “attract investment in the gas sector, the development of comprehensive gas-friendly fiscals remain critical; hence, an increase in taxation for a sector requiring increased investment is not perceived as commercially attractive for investors.”

According to Afrinvest, pricing regimes which ought to be economic and market driven across the gas to power value chain have remained far below commercially attractive and sustainable levels for a long time.

While the provisions in the current draft of the proposed Nigerian Petroleum Industry Bill, (PIB) seeks to attract a significant level of infrastructure investment in the gas sector, an increase in tax and royalty on gas production will hinder the development new gas fields, the report said.

Analysts have at several times called on the government to think about foregoing short-term benefit of higher revenue to enact competitive fiscal terms that will drive investments into the sector from which it can earn big revenues in the long-term.

 

ISAAC ANYAOGU