Facilitating investments in uncertain market conditions - 6th African Petroleum Congress and Exhibition (Cape VI) - 15 Apr 2016

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We never know for sure what the future holds. That's one of the truisms of life. However, there are lots of things that we can do to get a handle on what is around the corner or get a sense of how the future might unfold. Am I getting a bit philosophical? I will come back to this later.

Fear of the unknown

So I arrived at an airport somewhere in Africa at 5.30 in the morning. It was a short overnight flight so I did not get enough sleep. I was tired and disoriented. Based on my research on how to get a taxi to my hotel, I knew I could take one of the official taxis from just outside the airport. As I headed out into the early morning, I searched in vain for a sign that would tell me where to take an official taxi. No luck. I wandered around in the semi-darkness outside the terminal looking for the official taxi stand, whilst fending off various offers of a ride to my hotel. Still no luck.
    
In the end, I picked out the most benign looking driver, haggled on the price. He wanted USD50, I offered him USD20 and we settled on USD25. Before getting into the taxi, I fended off some other “youths” asking for money. I eventually got to my hotel safely. Again, I will come back to this later.

Cape VI

The 6th African Petroleum Congress and Exhibition (Cape VI) took place from 15-17 March, 2016 in Abuja. Organised by the African Petroleum Producers Association (APPA), the Nigerian Ministry of Petroleum Resources, and AME Trade Ltd, it had delegations from eighteen APPA petroleum-producing members. The idea was to collaborate and learn from each other against the backdrop of low oil prices.

I was privileged and honoured to have been invited to speak on a panel to discuss amongst other things, “How do you enhance attractiveness, good governance and transparency in the oil and gas sector?”

Of course there were plenty of conversations and discussions around the impact that low oil prices were having on African economies. I am no expert but the reality is that even the so-called “experts” don't know the answer. Nevertheless, everyone has a view.

Let me start by paraphrasing what Dambisa Moyo (the renowned Zambian economist) recently said. She said that the global economy has changed forever as things will never be the same again. According to Moyo, the days of $100 per barrel of oil are over and we are in a new world paradigm; we are in an era of low oil prices.

But why might this be the case? It is because the oil and gas industry is caught in a perfect storm of oversupply by oil producers (OPEC members are battling for market share both among themselves as well as with North American shale oil producers). There is a falling demand for oil as the global economy (led by China) contracts; Iranian oil is coming onto the global market as sanctions are lifted. There is also a global push for “going green” as more energy-efficient machinery, cars and homes are been built. Alternative renewable energy sources are also becoming more accessible and cheaper.

However, (as always), there is a contrary view. The alternative theory is that the current round of low prices is delaying investment. This in turn will result in reduced production in the future that will create a demand spike that will drive up oil prices.  Some talk of prices rising to double what they are today in the next three to five years. The reality is, no one really knows and only time will tell.

Certainty in regulation

A key point in my CAPE VI panel discussion was how governments can make the regulatory environment conducive to investment. The reality is that investors will follow the money and will invest in countries that they feel comfortable with and where the risk/reward ratio makes sense to them.

Regulatory uncertainty results not only in investor confusion but also in investment being curtailed or postponed. However, while market uncertainty cannot be controlled, regulatory uncertainty can. It is the responsibility of governments to put in place robust, investor-friendly laws and regulations and to operate them efficiently in accordance with the rule of law.

A client once told me that the best thing a government could do was to put in place the right laws and regulations but then let the private sector get on with the role of creating jobs, providing shareholder value and being the engine of economic growth. I suspect this is the view of businesses throughout the world.

Whilst legal and regulatory certainty is important, laws need also be flexible enough to cater for changing circumstances. Take Mozambique as an example – a country where Dentons has been advising on the gas sector for a number of years. (Mozambique's proven natural gas reserves are in excess of 100 trillion cubic feet. The country has the third-largest proven natural gas reserves in Africa, after Nigeria and Algeria and the 13th largest in the world).

As gas prices have plummeted, the Mozambique Government is planning to introduce a lower LNG-specific tax regime. This is because its newly updated petroleum tax regulations are likely to prove too tough for Mozambique's gas developers. This is a government that is adjusting to the times to facilitate the development of its gas industry. As one commentator said, the current tax regime, (devised while oil prices were near their peak), “may serve Mozambique less well right now in a period of low prices and greater competition for investment.”

Low oil prices are here to stay

The prescription at Cape VI was that African countries should assume that these low oil prices are here to stay. So what can oil producers do to make the best of a bad situation?
1.    Cut costs by becoming more efficient (look how the fracking industry brought down costs); and
2.    Adapt (and adopt) and then diversify.

Speaking at the closing ceremony of CAPE VI, Dr. Ibe Kachikwu (Nigerian Minister of State for Petroleum Resources), stated that only companies willing to embrace new technologies and adopt innovation would survive the difficult operating environment. He went on to say:

“I think anybody who wants to survive in this climate today would need to put on the hat for thinking. It is not business as usual, but people are going to survive. The nice thing about adversity is that you get to make huge successes also. Companies that are ready to embrace new technologies and strategies and new ways of doing things are going to survive.”

PIB in Nigeria

No oil and gas conference in Nigeria would be complete without a discussion of the Petroleum Industry Bill (PIB). If the Nigerian oil and gas industry is judged on the pillars of regulatory certainty and flexibility, then the delays in passing the PIB surely must mean that it is at the bottom of the class.

Dr. Kachickwu had explained to the Senate during his screening as minister in 2015, that the absence of the PIB has created a lot of uncertainty in the oil sector. He said:

“I can tell you that the average source of volumes in investments that we are losing on an annual basis because of the lack of PIB is in excess of $15 billion per year and the reason is simple: it would have been better that you didn't start at all than announce very flamboyantly that you are going to do PIB and step back from it.”

The message at Cape VI on this front was simple. The uncertainties around the PIB need to be eradicated quickly.

Recommendations from Cape VI

After the event I received a lovely thank you email from Emma Sayers of AME Trade (the conference organisers) who attached a letter that (helpfully for me) set out the key recommendations from the Cape VI:
?    Governments need to work harder for investments in the current circumstances.
?    Partnerships should focus on flexibility rather than contractual commitments.
?    Control and limit ineffective bureaucratic procedures including permits and consents.
?    Implement anti-corruption initiatives and ensure transparency.
?    Co-integrate upstream and downstream activities.
?    Embed and establish linkages to the rest of the economy to make it more resilient to shocks such as the current situation.
?    Strive towards joint collaboration between infrastructure developers.
?    Promote private sector investment incentives.
?    See petroleum as a source of energy and growth enabler instead of the emphasis on crude export.
?    Promote regional synergy and cross border investment in infrastructure.

Don't copy and paste

As part of my presentation at CAPE VI, I shared the following anecdote with the audience. A speaker during his after-dinner speech said: "The best days of my life were the days I spent with another man's wife." The audience were shocked and there was an awkward silence. He paused for dramatic effect then delivered the punch line. "The other man's wife was my mother." A big round of applause and laughter followed.

A gentleman who listened to this speech decided to crack this joke at home. After breakfast the next morning, he said to his wife: “The best days of my life were the days I spent with another man's wife.” He also paused for dramatic effect but then his memory failed him and he could not recall the punch line. The next thing he knew he woke up on a hospital bed, recovering from multiple burns from hot water poured on him by his wife.

The reason for my recounting this story was to illustrate the point that one should not copy if you can't paste intelligently. That is the case whether you are drafting laws and regulations, contracts, statements or articles. So my message at CAPE VI was for APPA producers to consider their individual circumstances in the context of the global economy and craft laws and regulations to match them. Not to blindly follow others.

Back to my airport story

So whilst the future may be uncertain, governments should evaluate, consider, consult and then put in place laws and regulations that encourage investment. However, they must constantly remain flexible and adaptable to the changing world and environment around us.

You may recall the story about my difficulties of getting a taxi on arrival at the airport. The analogy here is that, if I knew exactly where I could get a taxi safely when I landed and how much it would cost to get me to my hotel, I may be more inclined to visit again. The uncertainties I encountered may discourage me from visiting that city again and I might also warn others not to visit the city.  

It's the same with investors. If they are uncertain of the regulatory environment they are coming into, they are less likely to invest. Uncertainty not only has the potential to militate against investment by some but can also more generally create a negative image of investing in a country.

- See more at: https://www.financialnigeria.com/facilitating-investments-in-uncertain-market-conditions-blog-121.html#sthash.CqV86gmZ.dpuf