The investment opportunities in our oil and gas sector are huge, considering our crude oil reserves and the even bigger prospects in respect of our gas reserves.

Muda YUSUF Director General LAGOS CHAMBER OF COMMERCE AND INDUSTRY

Nigeria’s opportunity advocate

August 10, 2018

Muda Yusuf, the director-general of the Lagos Chamber of Commerce and Industry (LCCI), talks to TOGY about the weaknesses in the energy sector’s regulatory framework and how it could be improved, as well as the government’s steps towards reform. The LCCI works as a policy advocate and provides business development services.

• On the market: “The investment opportunities in our oil and gas sector are huge, considering our crude oil reserves and the even bigger prospects in respect of our gas reserves. We also have a population now estimated at close to 200 million people. That is a big domestic market for energy, presenting huge opportunities for the downstream investments. We thus have a strong competitive advantage in oil and gas, even better than agriculture.”

• On security: “There are security issues affecting oil exploration and production in the upstream segment, but this has abated in the last one year. It is an issue that has affected the perception of investors not just about the sector, but the country. Right now, the sector is only able to attract investors with high risk appetite. This is a significant disincentive to investors who would normally have brought in capital to boost growth in the sector.”

• On reform: “The governance bill is only a small aspect of the reform needed. It however offers hope that something is beginning to happen, but the real issues are about the fiscal terms. This is what will drive investment. The governance bill does not address that. This is what could change the story regarding the economics of investment in the sector.”

• On downstream: “The downstream oil sector has an appalling pricing policy which has created a state monopoly, crowding out private investors. Crude oil export is our biggest foreign exchange earner, but the biggest foreign exchange expenditure is also on the importation of petroleum products.”

Most TOGY interviews are published exclusively on our business intelligence platform TOGYiN, but you can find an abridged version of our interview with Muda Yusuf below.

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How has business sentiment evolved over the past few years?
The investment opportunities in our oil and gas sector are huge, considering our crude oil reserves and the even bigger prospects in respect of our gas reserves. We also have a population now estimated at close to 200 million people. That is a big domestic market for energy, presenting huge opportunities for the downstream investments. We thus have a strong competitive advantage in oil and gas, even better than agriculture.
The abundance of investment opportunities is not in dispute, but investors are constrained by the policy, governance and political environments. These have slowed down the pace of development in the sector. Nigeria has been in the business of oil for about 50 years, but we don’t have any private refineries as of now. This is a big issue. No oil producing country imports refined petroleum products on a scale that we do. It is inexcusable.
Pipelines are very critical infrastructure for refineries and for the sector, but the current ones are ageing and have deteriorated due to poor investment and maintenance. Again, this is because they are in the public sector space. The story of the petrochemicals and fertiliser plants are not different, although the latter has witnessed some measure of privatisation. The summary is that the dominance of the public sector in this space has significantly slowed down the progress and development of the oil and gas sector. The sector is so strategic that it could easily have provided the lever to accelerate the diversification of the Nigerian economy. The economic transformation of the oil producing countries of the Middle East could have been easily replicated in Nigeria. But that has not happened because of the stifling regulatory environment.
Additionally, there are security issues affecting oil exploration and production in the upstream segment, but this has abated in the last one year. It is an issue that has affected the perception of investors not just about the sector, but the country. Right now, the sector is only able to attract investors with high risk appetite. This is a significant disincentive to investors who would normally have brought in capital to boost growth in the sector.

What policy reforms are you advocating to make Nigeria more attractive for oil and gas investors?
Regulatory reform is the most fundamental. The stifling regulatory environment and the direct government involvement in the sector’s operations need to be reviewed urgently. This is essential to create a private sector-driven environment. The Petroleum Industry Bill [PIB] addresses these issues to a large extent. These are issues of transparency, competitiveness, security and political interference, which are the major impediments to growth in the sector. These are the reforms the LCCI has been advocating.
The downstream oil sector has an appalling pricing policy which has created a state monopoly, crowding out private investors. Crude oil export is our biggest foreign exchange earner, but the biggest foreign exchange expenditure is also on the importation of petroleum products. Increases in crude oil price benefits the Nigerian economy with regards to foreign exchange earnings but penalises the economy in terms of the huge foreign exchange commitment to importation of refined petroleum products and high energy cost.
The LCCI has severally engaged the government on the need to undertake these reforms urgently. This is perhaps one area in which reforms are most urgently needed in the Nigerian economy. The challenge is that there are strong entrenched interests in the status quo.

Will the recent passing of the Petroleum Industry Governance Bill bring some sort certainty to reform?
The governance bill is only a small aspect of the reform needed. It however offers hope that something is beginning to happen, but the real issues are about the fiscal terms. This is what will drive investment. The governance bill does not address that. This is what could change the story regarding the economics of investment in the sector.

What main challenges are Nigerian entrepreneurs facing when entering the oil and gas industry?
Basically, a lack of capacity, especially technical and financial. For instance, how do you fund an oil and gas investment with an interest rate of 25%? The structure of funds in the Nigerian financial system is such that almost 80-90% are short on funds, which can only be used for short-term investment. A major component of the portfolio of non-performing loans in the banking system are from the oil and gas sector. Many indigenous investors are yet to recover from the shock of the collapse of oil price few years ago.

How do you think the government can help bridge that gap?
The government is doing something. There is the National Content Development Board, whose mandate is to develop local capacity and opportunities for indigenous players in the sector. The National Content Act has specific funding provision to support indigenous operators and build their capacity. There is also the Petroleum Training and Development Fund which has the mandate to develop local skills for the oil and sector. There is also Petroleum Training Institute, which is now being upgraded to a university. What is important is for these government agencies to ensure that the desired outcomes are generated from these initiatives.

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