“They’ll want to raise the money,” says Steve Hanke, professor of applied economics at Johns Hopkins University in Baltimore. He points to the difficulty that even larger Nigerian companies are facing in obtaining foreign currency as evidence that the country’s FX reserves are lower than reported.
Nigeria has been forced into a series of currency devaluations this year. Its foreign-currency reserves held steady in September at $35.7bn. Hanke questions whether that figure is realistic. “They’re running out of FX,” he says. “They’re in a corner.”
Approval of Nigeria’s Petroleum Industry Bill would turn the NNPC into a limited liability corporation and open a new avenue for fund-raising by allowing the sale of a stake.
- President Muhammadu Buhari has sent the bill to the Senate, which, along with the House of Representatives, must give its approval.
- The bill, which has existed in various versions since 2008, also proposes the creation of separate regulatory authorities for upstream, midstream and downstream operations.
- It would reduce the royalty rate from 10% to 7.5% for offshore fields producing up to 15,000 barrels per day.
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An improved regulatory framework for upstream production is essential in a world which needs less oil. Multinationals with Nigerian petroleum projects which are still awaiting final investment decisions include Shell, Exxon, Chevron and Eni.
According to Hamish McArdle and Tom Edwards of the Baker Botts law firm in London, these projects would bring in $47.6bn of new investment and raise Nigeria’s current petroleum production by about 40%.
“Investors will not only be concerned with legacy but also ex post risks, including moral hazard, which can only be mitigated by putting proper structures and corporate governance in place,” says Deji Olatoye, a partner at The Lodt law firm in Lagos. A minor stake of about 5% would do little to address moral hazard, he adds. A “substantial shareholding” would be needed to give “a level of control over governance.”
The Nigerian market is not deep enough to take on that sort of deal, says Olatoye. Focusing on a foreign sale will require putting better structures in place, which will be “beneficial ultimately” to the institution and even local investors, he adds.
There are obstacles to the bill’s full implementation, says Khalil Woli, an energy analyst at CardinalStone in Lagos.
- These centre around the reluctance of exploration companies to shave off 10% of monthly net profit to the proposed Petroleum Host Community Fund (PHCF), says Woli.
- According to a previous draft of the bill, the fund will be designated for developing economic and social infrastructure of communities in petroleum-producing areas.
- The government’s continued control of the new NNPC “may raise concerns of a likely continuation of the old practices, particularly weak accountability,” says Woli.
- There are “vested interests in the Nigerian oil and gas industry that can hinder the implementation” of the legislation, says Moses Ojo, chief economist at PanAfrican Capital Holdings in Lagos. These include the NNPC’s bureaucratic structure and regional loyalties, he says.
- Still, Woli adds, the bill is likely to support a shift to free market setting of gasoline prices. Every downstream player including the NNPC will able to operate on “the same level playing field,” he says.
The long-term decline in Nigeria’s foreign currency reserves over the last decade has not been transparent, leading to questions over what became of some of the cash, says Hanke. He sees no sign of any institutional improvements to give confidence that the proceeds from a NNPC sale will be clearly accounted for. “The money might not even go into the central bank,” he says.
The only way to strengthen Nigeria’s institutions, Hanke argues, is for the currency to be pegged to the US dollar. That, he argues, would provide discipline as it would prevent the fiscal system from borrowing from the central bank.
“Real political will will be required to get the bill passed and to implement it,” says Olatoye. The current government will likely be approaching if not exceeding the first half of its maximum second term, and since the second half of the term in Nigeria is typically occupied by the politics of election and transition, this may affect implementation, he argues. “Only a new government with a fresh mandate will succeed in kick-starting implementation.”
Raising money through a NNPC stake sale will at best be a short-term fix unless Nigeria’s institutions are strengthened.
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