The future for Nigeria’s nascent indigenous upstream oil and gas industry looked bright, almost dazzlingly so. International oil companies (IOCs) were pulling out, selling fields that still held abundant reserves.
Nigeria’s banks were flush with cash and keen to lend to scores of start-ups with the political connections to secure lucrative licences. Oil was selling for more than $100 a barrel, as much as twice the production costs in Nigeria’s trickiest deepwater fields and several multiples of those in its shallow water and onshore fields. What could possibly go wrong? The answer turned out to be almost everything.
Today, says Dolapo Oni, head of energy research at Ecobank Development Company, an investment bank, “the industry is in a panic”. The collapse of the oil price from mid-2014 revealed woeful weaknesses. Many businesses turned out to be little more than briefcase companies, headed by shadowy figures with the size of their egos inversely proportioned to their industry experience. Almost all are now behind on their loans, some disastrously so, putting immense strain on the banking industry.
The only thing preventing a wave of bankruptcies and consolidation is a refusal to face facts, some say. “In any normal environment, people would already have gone under,” says Ademola Adeyemi-Bero, managing director of First E&P, one of a small handful of indigenous companies spoken of with approval by analysts. “It is a very un-Nigerian thing to have a ‘$1bn asset’ that is worth $600m,” he adds.
“Reality has not sunk in. ”Despite the industry’s troubles, he says there is still a big opportunity for domestic companies. RSS. Epeak Daily Epeak Daily Popular videos Cees Uijlenhoed, First E&P’s commercial and financial director – who, like Mr Adeyemi-Bero, is a former executive at Shell International – says the opportunity was clear when the company was formed in 2011. Oil majors were already pulling out of Nigeria. The country’s appeal had been tarnished by security problems that have only worsened since.
Partially exhausted Nigerian fields were no longer the best way for IOCs to allocate their capital but were still “fantastic” prospects for indigenous companies, says Mr Oni at Ecobank. Mr Uijlenhoed argues that IOCs suffer from large overheads and bureaucracies that put them at a disadvantage to leaner, nimbler local rivals. “We saw that the majors were divesting and we saw that there were few properly functioning indigenous companies,” he adds. “First E&P has always prided itself on its sound technical understanding of the business and on its governance and professionalism.”
Mr Adeyemi-Bero adds: “If you can bank those two things, you are perceived in the market as credible and you have a better chance of attracting capital and securing assets.” Among other things, this means taking a clear stance against the corruption that pervades much of Nigeria. “We do not pay bribes and we do not facilitate them,” Mr Adeyemi-Bero says. “Upfront, you have to tell people your operating model and you have to live with the delays that come with it.” Hold-ups in receiving project approvals from the Nigerian National Petroleum Corporation, the industry regulator, already constitute the biggest challenge to First E&P’s business, says Mr Adeyemi-Bero.
They make the threat posed by the Niger Delta Avengers and other groups that attack pipelines pale by comparison. But sticking to good governance is worth it in the long run, he insists. “You get a list of 15 people you need to buy tickets for to go to a conference in Houston,” he says. “We say we will do two, the non-political ones, which is legitimate because our operating agreement says we will fund the development of our partner’s staff. But 15 is a jolly – and we can’t afford it.” Mr Uijlenhoed adds that the risks of corruption far outweigh any short-term gains. “If you behave like that, in a change of government your friend suddenly becomes your enemy.
It is not a sustainable way to do business,” he says. “This way, nobody can hold anything against us, and we sleep well at night.” After securing a loan from Sterling Bank, a mid-sized local lender, for its first project, a stake in an onshore field, First E&P has concentrated on developing shallow water offshore fields, along with a planned pipeline to deliver natural gas to markets along Nigeria’s coast. For one project, it secured a capital injection from Schlumberger, the oil services group; for two others, it has entered joint ventures with the Dangote group, Nigeria’s biggest private industrial conglomerate, and others. Mr Adeyemi-Bero predicts that, within two years, many indigenous companies will accept consolidation. By about 2020, based on a proven record of project development, he expects First E&P either to go public or look for a private equity investor. By that point, he predicts, there will be a handful of, maybe eight, strong local companies able to produce 100,000 barrels of oil a day.
Source: Jonathan Weathley for the Financial Times