Economic View

NG_17_EV_Dr Jadesimi_Ladol.png

Operating during a time of low oil prices

What impact have you seen from the drop in oil prices on offshore activity in Nigeria?

JADESIMI: On one hand, the drop in prices has slowed down activity in the country. On the other hand, it has had very significant long-term benefits because oil companies, our government and the local private sector have had to restructure. They have now created an environment in Nigeria that will be more profitable, more transparent and generally good for business. What they have done is create a stronger base from which to move forward. We believe we are going to see more investment in Nigeria because of this. One significant change is the huge reduction in costs for new deep offshore projects, which are now receiving their services from indigenous modern logistics bases in Lagos. This higher return on investment attracts more investment and benefits the Nigerian people in terms of job creation and an increase in the size of the local market. We are expecting to see between $20bn and $30bn worth of additional investment coming to Nigeria for the development of deep offshore acreages over the next five years, due to the structural changes that falling oil prices have triggered in the market.

With prices now stabilising – albeit still somewhat low – are you seeing activity pick up?

JADESIMI: Activity will pick up in terms of companies going ahead with the development of blocks that have been well established, such as the Bonga South West project. The stabilisation of prices is actually less important, if not insignificant, compared to the fact that these companies were able to cut costs. They have proven that a company can operate profitably in the Nigerian deep offshore market, even with low oil prices. This is also a reminder that it is better to develop new blocks when the oil price is low as it’s cheaper. The variation in the oil price in the short term cannot influence these sorts of developments, as they are 20- to 30-year projects. The most important thing is that when realising your vision on large projects such as the Bonga South West or Zabazaba, you need to look at what your cost base is. That is the main reason that this restructuring is so critical.

How effective has Nigeria’s local-content policy been in recent years?

JADESIMI: The local content policy has been essential in creating an environment in which qualified, transparent local private companies can participate in and add value to the market. In order for it to be effective, one needs more local infrastructure and human capital, which are developed by the local private sector. These can be both long-term investments and specialised investments. One of the things the Nigerian private sector has shown is that it is ready to make the necessary investments to make local content a success that will drive the economy. We need more support for the real private sector, and to help reduce the presence of vested interests that are only interested in maintaining a rent-seeking status quo that is dependent on work being done outside Nigeria. This has kept job creation low and costs high, which has given the false impression that local content does not work in Nigeria. Leading private sector companies have proven that the opposite is true, and that the profits gained from real implementation of local content are 10 times higher for all stakeholders than the short-term benefits of rent seeking.

What sort of changes in the pending Petroleum Industry Bill (PIB) are you most hopeful about?

JADESIMI: The most important thing is for the Nigerian National Petroleum Corporation (NNPC) to take steps to become much more focused on being an exploration and production firm. The regulatory function should be taken away from the NNPC so that it can concentrate on maximising returns from its assets and on managing equitable, transparent, mutually beneficial partnerships with international oil companies. The PIB is going to allow the local market and the private sector to professionalise and grow exponentially. We have seen what this looks like with Nigeria Liquefied Gas, which at one point was one of the most profitable companies in Africa. We have reasons to expect that if one did the same sort of restructuring for the NNPC in the PIB, one would then create several very successful companies and projects. In addition to passing the PIB, we also need the government to create a level playing field for all private and public sector companies. The recent executive orders issued by the presidency went a long way towards achieving this. Now the focus is on the implementation of the presidential directive and the laws already on the books, such as the Local Content Act. If we can stamp out monopolies and rent seekers, and ensure that tenders are concluded rapidly and transparently, Nigeria should attract a large portion of the $200bn that will be spent on the offshore market in West Africa.