There is a quiet revolution under way in Nigeria’s energy sector. As part of a broader push to boost local participation in the energy industry, a range of indigenous companies, such as Shoreline Energy, Frontier Oil and Transcorp, have emerged over the past decade, increasingly gaining access to a modest share of the upstream segment and expanding and diversifying in the downstream segment.
The benefits of this transformation are plentiful, ranging from higher rates of domestic profits and private sector growth to better exploitation of marginal fields and improved relations with local communities. Equally important, a number of the investment projects either planned or under way by indigenous firms are spawning complementary proposals by other firms, such as local industrial conglomerate Dangote Group’s refinery and petrochemical complex in Lekki. This project has triggered a number of complementary investment proposals that would further develop Nigeria’s budding domestic gas market.
Local participation is not new in the Nigerian energy sector. Domestic firms have long been playing a role in the industry and are relied on to import consumer fuels. Moreover, in previous decades upstream acreage would come to producers through local middlemen or companies, instead of via bidding rounds, as they have been in recent decades.
However, the shift toward greater local input in recent years started with government. In 2003 a bidding round for marginal fields was conducted, which put 24 smaller assets in local hands. This upstream acreage was in many instances held by international oil companies (IOCs) but sitting either undeveloped or fallow. They were relinquished to the Nigerian National Petroleum Corporation (NNPC) and subsequently redistributed through the bidding round.
In total there are now 31 marginal fields in the hands of local companies, which are defined as those with at least 60% Nigerian ownership. The local-content concept was reinforced again in 2010 with the Nigerian Oil and Gas Industry Content Development Act, which mandates increased local participation across the industry and aims to deliver an eventual future in which Nigerians gradually increase control of their resources, either through their own companies and contractors or by working for the IOCs themselves.
The state has also relaxed or ended monopolies over aspects of the upstream and downstream energy sectors. Use of the NNPC’s network of pipelines can also be sold or leased to private-sector operators. One example is Seven Energy, which operates a section of gas pipeline though a subsidiary called the East Horizon Gas Company, through which it distributes gas. Seven Energy bought the rights from local firm, Oando, in 2013. Furthermore, companies are able to propose new pipelines, which can be built through special-purpose vehicles established with the NNPC, or through build-operate-transfer or other similar arrangements.
The results have lead to a proliferation of opportunities for local firms, in many cases with one investment triggering complementary proposals. Dangote Group’s $14bn project in Lekki, which includes a refinery and petrochemicals project is currently being built, and has already provided an investment opportunity for others. First Exploration & Production (E&P) – a local company that has formed a joint venture with Dangote known as West African E&P Venture – is planning to build a pipeline to supply the complex with natural gas. As of April 2016 the plan called for twin pipes of 1.5bn standard cu feet in shallow water from the Niger Delta region to Lekki. The planned capacity is more than five times what Dangote’s expected demand at the complex will be, so First E&P anticipates selling to others as well, thus improving Lekki’s potential as an industrial cluster.
However, indigenous firms do have to deal with a number of challenges, the most pressing of which is the current low price of oil. The recent wave of indigenous companies who have acquired oil or gas fields typically did so just before the fall in prices since June 2014, so they paid based on a high price and are now generating revenue based on a much lower one. That could divert some revenue from capital expenditure to debt servicing. Coming up with new capital for investment, in particular from domestic sources, is expected to be more difficult. Nigerian banks had as of March 2016 extended 40% of outstanding loans to oil, gas or power projects, and concerns were mounting about defaults.
The other looming challenge is security. Though local firms are expected to have an easier time engaging with local impacted communities than foreign energy companies, this still remains largely conceptual and in recent years attacks on oil infrastructure have been on the rise, in part due to a lapse in the amnesty programme for Delta militants.
For local investors, expanding ownership of assets across the gas-to-power value chain also helps reduce project risk by improving efficiencies and exploiting connections in the supply chain.
The power sector offers another good example: downstream distributors can struggle to pay for power from generators, due to poor collection methods, inaccurate measurements and a high rate of non-payments, which in turn results in cash flow problems for generating companies, which in turn effects the energy firms who provide the feedstock to power plants. However, with more of these activities under one ownership group, the risks can be reduced. For example, Sahara Energy is a Nigerian company that owns majority stakes in multiple power plants, the rights to distribute electricity in the mainland areas of Lagos, as well as upstream acreage in Nigeria and nearby in Ghana and Côte d’Ivoire.
Another way local firms can mitigate risks is through multilateral institutions. Amaya Capital’s Azura-Edo independent power producer (IPP) is not only Nigeria’s first IPP but also the first project to receive a partial-risk guarantee (PRG) from the World Bank. The guarantee assures the World Bank will protect the plant’s investors from some of the risk of default. The PRG commits the World Bank to paying up to $125m to Azura in the event that the federal agency responsible, Nigerian Bulk Electricity Trading, does not. Should it happen, the World Bank can in turn attempt to collect what it paid out from Nigeria’s federal government, making this in essence a sovereign guarantee. Azura has helped pave the way for new PRGs by providing a template for the process.
The World Bank would like to provide more PRGs in the power sector, and in mid-2016 was considering a list of eligible power projects. The second PRG will cover similar risks for the Qua Ibo IPP (QIPP), which has been under development by the NNPC together with Exxon. The hope is that, once several IPPs are up and running, the process of investing in them will be clear enough that PRGs will no longer be necessary.