Reform, Regulation in Focus at Nigeria Oil Meet

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Reform, Regulation in Focus at Nigeria Oil Meet

24th Feb.'09

Oil and gas investors are looking for clarity from Nigeria on long-awaited energy sector reforms and reassurance about its regulatory environment at a major industry conference starting in Abuja on Monday. The annual Nigeria Oil and Gas conference is billed as an opportunity for senior decision makers from industry and government to network and compare notes on the latest developments in Africa's biggest energy producer.

But beyond the bonhomie of the planned golf day, industry awards and networking dinners, the slump in global oil prices and reduced corporate appetite for risk mean Nigeria faces a tough challenge convincing investors to plough in more money. "For all commodities-rich countries, this year is tougher than last in terms of attracting investment, and Nigeria is no different," said Antony Goldman, head of PM Consulting, a London based risk analysis firm specialising in West African energy.

Nigeria's top oil officials will showcase their ambitious strategy to double the country's oil output by the end of next year, restructure its bloated and bureaucratic state oil firm NNPC and provide enough power to its 140 million residents. But industry executives have heard similar speeches before and want to see concrete evidence of progress.

"Investors are looking for some clarity about the proposed oil and gas reform. It has been under discussion since 2007 and it is not clear when or in exactly what form it will be passed by the National Assembly," Goldman said. Nigeria wants to restructure NNPC to create an independent, profit-driven state oil company that can raise cash on the capital markets, avoiding the chronic funding shortfalls that have hampered joint ventures with foreign firms.

Anglo-Dutch oil major Royal Dutch Shell (RDSa.L), U.S. firm Exxon Mobil and French energy group Total have all had to provide billions of dollars in bridge financing to NNPC to plug funding gaps in their joint venture projects. The cabinet approved legislation last August to restructure the oil and gas sector and the bill is before parliament. Oil Minister Rilwanu Lukman will address the conference on Tuesday about how the government plans to implement the restructuring plan, which he helped to develop.

The regulatory environment in Nigeria will also be at the forefront of investors' minds during the conference. The cancellation of exploration rights at two major offshore fields awarded to a South Korean consortium in 2005 has unnerved investors worried about President Umaru Yar'Adua's apparent readiness to review contracts approved by his predecessor. "There is a lot of uncertainty for investors and the government needs to convince them that it is able to provide more regulatory stability," Rolake Akinola, senior West Africa analyst with independent risk consultancy Control Risks, said.

Consortium members Daewoo Shipbuilding (042660.KS) and Korea Electric Power Corp (015760.KS) said last month they had been told their rights were being cancelled because they had failed to fully pay the investment originally promised. The consortium said all obligations had been met and that it could not understand why the issue was never raised by the previous administration. "The decision to revoke the blocks awarded to the Koreans continues to attract comment and controversy in Nigeria and further afield, at a time when transparency and governance are increasingly important for investors," Goldman said.

Foreign investment will be especially important for Nigeria this year as low oil prices, which have tumbled from a high of $147 a barrel last July to $40 on Monday, bite into government revenues, 80 percent of which come from the oil and gas sector. Yar'Adua has set his sights on boosting oil output to 4 million barrels per day (bpd) by 2010, but few outside Nigeria believe production will come anywhere near that level. It pumped an average of 1.95 million bpd last year, the lowest in six years, according to OPEC. Much of the shortfall was caused by violence in the Niger Delta.

Top government and NNPC officials are expected to speak at the conference on reforming the gas industry to help improve Nigeria's shambolic power sector, one of the biggest brakes on economic growth in sub-Saharan Africa's second biggest economy. Nigeria has estimated natural gas reserves of 180 trillion cubic feet, the seventh largest in the world. The country accounts for almost 10 percent of world liquefied natural gas supply, much of it to Europe and North America.

Foreign investors will be looking for more details on how to balance the government's priority of developing its domestic gas infrastructure with their ambition of generating export revenue. Russian gas giant Gazprom (GAZP.MM), one of dozens of sponsors of the conference, wants to invest at least $2.5 billion in the development and production of Nigeria's natural gas reserves, a company source told reporters this month. The source said 90 percent of the investment would be in developing domestic production, processing and transportation.