On the 24th of April 2018, Olaniwun Ajayi LP in conjunction with Hogan Lovells, hosted an executive round table to discuss emerging trends in the oil and gas industry, with select stakeholders of the industry. Discussants included Dr. A.B.C. Orjiakor (Chairman, Seplat Petroleum Development Company Plc.), Rolake Akinkugbe (Head, Energy and Natural Resources, FBN Merchant Bank), Hakeem Adedeji (C.E.O., Hydrocarbon Advisors Limited) Sarah Shaw (Partner, Hogan Lovells), and Tominiyi Owolabi (Partner, Olaniwun Ajayi LP). Key take-away points from the meeting include:
Oil Economics
- $75 is the new $100: With global oil prices at US$75 per barrel, the outlook for the industry remains optimistic, albeit a form of cautious optimism. Industry players appear more comfortable working with a more conservative floor of US$50 per barrel for planning and projections.
- $100 and over?: Despite the increase in global oil prices, many stakeholders take a dim view on the possibility of seeing global oil prices rise above US$100, considering the increased adoption of green energy technologies to meet global energy demands.
- Austerity policies viz-a-viz rising oil prices: Stakeholders at the meeting recognized the need to continue to adhere to the austerity policies and discipline of oil and gas companies formed during the period of low oil prices, to ensure continued efficiency in the industry, despite the rise in oil prices.
- Benchmarking of oil prices: It was recognized at the meeting that notwithstanding the global rise in oil prices, benchmarking of oil prices for Nigeria’s budgeting purposes should still be based on a conservative outlook on the global prices of oil.
M&A/Financing
- Increased investments in the gas sector: The need to channel further investments into Nigeria’s gas sector was underscored, particularly given the need to increase the utilization of gas to fuel the country’s agriculture, power, and chemical industries.
- Global divestment of oil assets by IOCs: Following a change in focus from non-renewable to renewable forms of energy, the trend has been for IOCs to lean towards green energy, with a number of IOCs divesting their oil interests and investing heavily in green energy.
- Increased participation from global oil traders: The previous year also saw an increase in the number global oil traders investing in the upstream and downstream subsectors of the industry. The year saw a number of financing of upstream operations by global oil traders, and equity investments in upstream and downstream companies by global oil traders.
- M&A activity: In Nigeria, M&A activity in the industry remains low, largely due to the uncertainty around the industry’s regulatory regime. Players however remain expectant of the new marginal field bid rounds. It is also expected that as the economics of global oil prices improve, more M&A activity would be seen in the Nigerian market.
- Effect of drop in oil prices on Nigeria’s banking sector: The drop in global oil prices saw a number of E&P companies in Nigeria defaulting on their loan facilities, thereby forcing restructuring conversations with lenders. These restructurings have however led to restructured facilities that appear to assume a character more akin to equity rather than debt.
- Capacity of local banks to lend to E&P companies: It was recognized that there still appears to be a gap in the capacity of Nigerian banks, as it pertains to their understanding of the industry. Whilst it was noted that lending by local banks to indigenous players is a relatively recent investment activity by Nigerian banks, it was emphasized that an intricate understanding of the sector by Nigerian banks was indispensable to successful partnerships between oil and gas players and their lenders.
Regulation
- Passage of the PIGB: Stakeholders expressed pessimistic views about the passage of the Petroleum Industry Bill (PIB), and the ability of the Petroleum Industry Governance Bill to bring about the much needed reform to the industry.
- Regulatory bottlenecks: Stakeholders identified the protracted delays in obtaining the consent of the Minister for the transfer of oil and gas interests, as being a major impediment to attracting further investments in the sector.