June 1, 2021
With the discovery of oil in commercial quantity in 1956, the Nigerian government began to place undue reliance and focus on the oil and gas sector to the detriment of other key sectors like mining, agriculture, services etc. Nevertheless, there has been a renewed emphasis on the need to diversify the economy in the recent past, and the Nigerian government has indeed taken some steps in this regard. However, the advent of the COVID-19 Pandemic and the attendant restrictions, brought setbacks to some of the economic diversification plans.
Furthermore, the COVID-19 Pandemic exposed the vulnerabilities of the Nigerian economy, as the country suffered significant foreign exchange losses arising from the slump in the global prices for crude oil products. Many operators within the sector began to evaluate available hedging strategies because of the persistent challenges in the sector.
In this article, we examine the prospects of Nigeria’s oil and gas deposits vis-à-vis the role of legislative reforms in unlocking the inherent value before it becomes lost to the dynamics of the industry.
The Case for Cleaner Energy Sources
More and more, operators in the oil and gas industry are beginning to appreciate the drop in focus on energy from fossil fuels. This is because of the overriding strategic plan to explore the huge potentials of renewable energy as it is fast approaching price points that may be competitive with energy from fossil fuels. Moreover, broad international consensus is emerging that fossil fuels are damaging to the environment, and that governments must help accelerate a transition to cleaner energy.
Although investors do not typically take knee-jerk reactions to trends, it is clear that they have started retreating from the oil and gas sector as the sector’s share of the S&P500 index has declined by about -4.57% over the last 10 years. The implication of this is that it has become a lot more difficult for operators to raise the capital needed to operate, and where the capital is available, operators must allocate some capital to position for the ongoing energy transition. As always, capital will pursue the best returns; thus, necessitating the need to evaluate the next steps regarding oil and gas development in an oil-rich nation like Nigeria given the various pointers towards diversification.
The Petroleum Industry Bill
One cannot overemphasize the role of legislative frameworks in the development of any economic sector such as the oil and gas sector because sanctity of contracts and consistency of regulatory and legal framework play a huge role in the decision making of investors. Some investors had considered the potential implications of the Nigerian Petroleum Industry Bill (PIB or “the Bill”) on their current operations and most importantly, on the huge investments being considered. However, the passage of the Bill has experienced various setbacks for over a decade.