Nigeria and Oilfield Sales
“But, it’s Nigeria”, was the feedback during a recent conversation with a client on the potential to expand oilfield sales to Nigeria. To be fair – it is likely many small to mid-tier international oilfield companies have said (or thought) something similar on the prospect of expanding oilfield sales in this part of the world.
So Why Expand Oilfield Sales to Nigeria?
Despite a slump in global oil prices, updated legislation and laws in Nigeria are poised to unleash interest and investment in Nigeria’s oil & gas sector. This, in turn, offers a unique opportunity for international companies to expand oilfield sales to Nigeria.
Petroleum Industry Bill
In a bid to update outdated petroleum laws, the Nigerian Senate recently passed the Petroleum Industry Governance Bill (PIGB) into law. The bill attempts to streamline the regulatory processes for launching businesses and attract investments. This element of the bill will be certainly welcomed by the international oilfield community.
Another facet of the PIGB is the promotion of Nigerian local content by, “utilizing indigenous companies and manpower and the use of locally produced goods and services”. In this case, international firms may view this as an obstacle as skilled-labor or specialty products may be in short-supply within Nigeria. On the contrary, it opens the door to lucrative and lower risk opportunities by allowing international firms to form joint ventures, partnerships or sub-contracting relationships with indigenous companies (see here for a 2013 list of Nigerian indigenous oil & gas firms).
Indigenous Advantage
As with minority or women-owned businesses, companies in Nigeria are given tax incentives to source products, goods or services from indigenous companies. There are thus two areas where international oil & gas firms can expand oilfield sales to Nigeria:
1. Indigenous Operators
Given their leaner cost-structure, Nigerian indigenous operators (over 20 in number) tend to favor under-developed marginal fields. In fact, the scale-backs by some major International Oil Companies (IOCs) and the subsequent moving in by local companies provide a high demand for international firms to service indigenous E&Ps in navigating through this new terrain. International firms would thus do well to provide technical consulting, technology or infrastructure enhancements to these E&Ps.
“It [Nigerian reforms] opens the door to lucrative and lower risk opportunities by allowing international firms to form joint ventures, partnerships or sub-contracting relationships with indigenous companies”
2. Indigenous Service Companies
There are over 100 indigenous oilfield companies who service major E&Ps via supply of exploration and production products or drilling and manufacturing equipment. To distinguish themselves, indigenous players have been courting western firms with strong track records in the oil & gas space. In the eyes of major operators, these ‘technical-partnerships’ between indigenous and international firms demonstrate: credibility, technical competence, product quality, safety and compliance. To a large extent, the analysis below applies to indigenous companies working with IOCs in Nigeria.
East vs. West
A common question is why indigenous companies want to partner with ‘western’ firms given their higher cost structures (of goods and services). This is a valid argument where service contracts are with indigenous operators with smaller margins. On the other hand, IOCs are willing to pay a premium for indigenous companies partnering with western firms. This is because IOCs need assurances on the product value-chain (e.g. trace-ability) and international standard compliance (e.g. API certification).
Risks
For international oil & gas companies looking to expand oilfield sales to Nigeria, there are of course risks which need to be accounted for.
1. Partner Credibility
International firms need to consider the indigenous firm’s track-record and if they have proper licenses and permits to operate. If indigenous companies wish to bid on IOC tenders, they need to be registered in the Nigerian Petroleum Exchange (NipeX) database. Further, depending on the project scope, local firms need to be approved by the Nigerian National Petroleum Corporation (NNPC) and/or Department of Petroleum Resources (DPR). That said, given the upcoming reforms, international firms need to also be aware of how these bodies will change.
2. Payment
As the Central Bank of Nigerian (CBN) controls the amount of foreign exchange (FOREX) leaving Nigeria, local firms may struggle to pay international partners in dollars, Sterling or Euros. International firms should thus consider partners with “domiciliary” accounts. These are accounts held in foreign currency and allow funds to be wired to a firm’s international bank account. In addition, international firms need to put in place clear payment terms. Examples of this include sizable down-payments, Letters of Credit (LOC) and milestone payments. Ideally, payment terms are a combination of all these factors.
3. Equipment and Product Import
For companies who wish to bring in essential equipment, products or technology into Nigeria, it is important to obtain a “form-M”. This is an official document wherein the nature of goods imported is properly documented. For certain products, additional clearances may be required from the Nigerian Customs Service (NCS) or Nigerian Food and Drug Administration (NAFDAC). To avoid hold-ups, international firms should solicit clearance agents who are well-versed in these requirements and can handle all goods as soon as they arrive in-country.
Downstream Too
According to an OPEC study, Nigeria only refines about 3% of its crude oil production. Furthermore, local demand is about seven times the total volume of its locally refined products. During OTC 2017 in Houston, there was a large delegation of Nigerian government representatives making several of the same arguments. A common-theme to their talks was thus the potential and need to enhance Nigeria’s refining capacity. This was in the forms of modular/micro refineries, refinery maintenance services and environmental & safety upgrades.
“IOCs are willing to pay a premium for indigenous companies partnering with western firms.”
The Slump as an Opportunity
For indigenous companies, the impending introduction of the PIGB has propelled them to seek out small to medium size partners hungry to expand oilfield sales to Nigeria. For international companies, this presents an ideal opportunity to build relationships with indigenous firms. In doing so, the technical partnership will be well-placed when the oil price stabilizes and activity picks up.
While the passing of the PIGB is no silver bullet for operating in Nigeria, it fosters opportunities for discerning foreign companies. The key, however, is to ensure the right entry strategy and known hurdles are accounted and planned for.
About EnergyFundz™
EnergyFundz™ mission is to find unique and lucrative deals in a challenging oil & gas market. We are able to assist US firms connect and do business with vetted and qualified oilfield companies in Nigeria. Our knowledge of Nigeria’s petroleum industry, financial regulations, Customs and Immigration laws have allowed us to bring international oilfield companies to Nigeria. Additionally, EnergyFundz™ can assist in Nigeria logistics planning in terms of rig acquisition, relocation and due-diligence. We have business relationships with vendors in major Nigerian cities, including Abuja, Kano, Lagos, Ibadan and Port Harcourt.
About Raya Guruswamy
Raya Guruswamy is EnergyFundz™ Founder and CEO. He has over 10 years of experience in the oil & gas industry in major construction projects and upstream exploration. Prior to EnergyFundz™, Raya worked in BP’s Rig Startup and Acquisition team and held roles in rig vetting, audit management, planning and commercial analysis. He holds a BS in Energy-Finance, MS in Systems Engineering and MBA. Raya grew-up in Nigeria and maintains strong family ties and business relationships in the country.