NIGERIA CAN BE THE NEW BENCHMARK

Oil and gas is a global business, and West Africa can’t be looked at in isolation. The industry has always been capital intensive, so in any given cycle there is generally more opportunity than capital available (even in Nigeria with break-even costs roughly at $30). All investors look to try and maximise their risk adjusted rate of return – the current cycle hasn’t changed that dynamic. What we are seeing with the current oil price is that capital is being squeezed more than ever, and this has made a lot of host governments in the region realise for the first time that there is real competition for investment. Interestingly, we were told at our Nigerian Members Social in May last year that this competition is not just between companies but also within companies and between governments.  

A startling realisation to some host governments in Africa is that investors don’t have to put their money into the oil and gas sector (or Boards don’t need to allocate capex into the region). That led to a wake up call in Nigeria - a country that generates 90% of its foreign exchange receipts from the sector. Even before the crash in prices, we witnessed a big retreat in capital outside North America, with poor returns being the major catalyst. Within Nigeria there are a number of successes that are very high profile such as Seplat and Lekoil but there are an awful lot of companies that have been going sideways or just burning shareholders money for a long time now.

Capital is mobile, and capital in the end will migrate to where it gets the best rate of return. Many investors we meet tell us that Nigeria falls down when you consider the risk adjusted bit of the return on capital, often referred to as “above ground risk”. It’s the risk of what the host government might do to you whether that’s instability in the fiscal regime or whether it’s the overall level of taxation. Most worryingly if you're an explorer, there is a long-track record of companies finding hydrocarbons being subjected to tax they simply weren’t aware of etc. Often this is where Nigeria has fallen down, but in recent times upheaval has been a little muted. In fact any ‘surprises’ have been surprisingly rare and almost mundane in comparison with previous years. 

Lots has been written about the Buhari Presidency, but encouragingly none of this has seemingly spooked investors.  It is clear that banks are still there for good projects, but their lending assumptions are ultra conservative. The message they are putting out is that high quality exploration acreage continues to find investment. Nigeria in many ways fits this criteria. Companies with good management teams and assets like First E&P and Shoreline are still able to access local and international capital.

If you look at the overall dynamics of Nigeria there are huge pockets of relatively low cost production, with four decades of de-risked geology. This is unusual for Africa where play opening levels of activity are usually what drive the market. There are a variety of options available for those investors who want to look at Africa in the current cost environment. For many, Nigeria is proven and more stable than many play opening provinces and this makes the country ready for timely investments.