15 February 2012

Nigeria: Petroleum Industry Bill and the Nation's Capital Market


Goddy Egene writes that a quick passage of the Petroleum Industry Bill (PIB) will enhance efforts aimed at deepening the capital market

There is high optimism that the nation's capital market will witness a growth this year having closed last year on negative note.

Analysts from three leading investment bank and research firms, have already projected a positive 2012 for the market. Specifically, Meristem Securities Limited, FSDH Securities Limited and FBN Capital Limited have already projected a growth of between 13 and 14 per cent in the Nigerian Stock Exchange (NSE) All-share Index this year.

While FSDH and FBN Securities had made their forecast in January, MLS early this month, said the index would close 2012 at 23,532.91, representing 13.5 per cent over the 2011 close of 20,730.63.

MSL, was among the top 10 stockbroking firms that led equities transactions on the floors of the NSE in 2011, and noted their expectation was being driven by the bullish outlook on the financial service (majorly banks), Nigeria's stable foreign exchange market, expected downward trend in yield on fixed income instruments and anticipated positive macroeconomic performance.

"Our valuation suggests a robust 2012 return of 22.53 per cent for the NSE index, which we believe is justified by the attractive valuations of our coverage

companies (which represent 90 per cent of the entire market). However, we are inclined to adopt a conservative outlook.

This is informed by the outlook on global economy and the increased possibility that the Nigerian market might witness reduced foreign participation in 2012. We therefore discount our forecast by 40 per cent to arrive at an adjusted 23,532.91 index level," they said.

The analysts explained that their sectoral returns distribution showed their upside bias for the financial service sector particularly the banks, given their fundamentals, weight and volatility.

"We expect the sector to dictate and lead market performance in 2012. Our 22 per cent target return is 82 per cent overweight on the financial sector particularly the banks. We will however, subject our forecast and underlying assumptions to testing and review as events in both the economic and financial markets warrants.

Our understanding of market performance and returns distribution is that market returns are always skewed towards a short period of time, and this is expected this to play out in 2012. Though we remain watchful on the economic climate given the increasing level of uncertainties that overshadow 2012, we anticipate a fragile first quarter rally and a much stronger rally in the second half of 2012," they said.

Market operators said that while the Nigerian market is expected to bounce back, noted that there should be efforts to deepen the market so that investors would have enough securities to patronise.

According to them, getting more firms from critical sectors of the economy such as oil and gas and telecommunications to list their shares on the NSE is a good move in that direction.

They stressed that the passage of the PIB, particularly, would boost the capital market as it would encourage companies in that sector to access the market.

The PIB is an ambitious attempt to comprehensively reform the Nigerian oil and gas sector. It is intended to correct most of the defects in the oil and gas industry, introduce new fiscal regime and enhance transparency. The bill proposes to ensure that government increases its revenue from a growing number of deep-water developments; review royalties on gas production, increase revenue accruable from tax charges and change the way tax breaks are applied to new developments.

However, many operators in the industry said that the delayed passage of the bill had remained a big blow to the industry and that it was already taking a toll in terms of investment in the upstream.

Most international oil and gas companies refused to invest because of the uncertainty in the fiscal regime brought about the bill not having been passed into law.

The Controversial Issues

The first draft of the PIB was presented in 2008. Since then, the bill has passed through many amendments as government sought consensus among various stakeholder groups. Those amendments gave rise to opinions that different drafts of the PIB were in circulation. The 6th session of the National Assembly in its final days tried to speed up passage of the bill but did not succeed until the April 2011 general elections.

There are strong indications that one of the reasons International Oil Companies (IOCs) are opposing the PIB is the lack of guarantees to existing investors. Holders of existing joint-venture and Production Sharing Contracts (PSC) licenses and leases would be required to re-apply for their respective contracts within a year of the PIB's passage.

No guarantees of renewal is said to have been provided to the existing license holders. Analysts said that by imposing such terms on both the prospective and existing operations, the bill threatens contract sanctity and would increase the risk premium applied to future investment decisions.

This, along with stricter fiscal provisions, has put the IOCs, a critical stakeholder group, in opposition to the bill's passage.

The PIB plans to separate oil and natural gas licensing. Current legislation provides for combined rights for exploration and operation. By separating the contracting frameworks, the on-going development of associated fields would become more difficult, since the operator would be required to hold two licenses. The measure is intended to re-open the natural gas licensing field, but in practice, it would likely increase bureaucratic obstacles and the cost of the licensing process.

PIB and the Capital Market

In 2008 when the Federal Government asked the IOCs to get listed on the Nigerian Stock Exchange, operators cited non-passage of the PIB as major hindrance. One of the most important aspects of the PIB is the concept of the Incorporated Joint Ventures (IJVs).

Over the last 30 years, most of Nigeria's oil concessions have been held in Unincorporated Joint Ventures between the IOCs (Shell, Total, Mobil, Agip, Chevron, Mobil) and the Nigerian National Petroleum Corporation (NNPC).

But analysts contended that these unincorporated JVs, controlled by NNPC, always had their share of problems, principally because of the government's inability to meet funding obligations.

The IOCs always believed that if these JVs could be turned into normal companies - that is, incorporated - then the funding would become much easier, as capital could be raised from the capital market.

Hence, capital market operators said that listing NNPC and other IOCs would not only impact the capital market positively but would also change the way business was done in the oil and gas sector in Nigeria.

The Chinese Example

To better appreciate this, let's look at how the industry reform and capital market revolutionised the Chinese oil and gas sector.

In 1998, the Chinese oil and gas sector underwent comprehensive reorganisation. Under the reforms and re-organisations, the Chinese government directed the three major Chinese petroleum companies- China National Petroleum Corporation(CNPC), China Petroleum and Chemical Corporation (SIMOPEC) and China National Offshore Oil Corporation (CNOOC) to embark on increased structural reforms and pursue listings on overseas stock markets after successfully being listed on the domestic stock exchange.

By April 2000, CNPC listed PetroChina on the Hong Kong and New York stock markets. SINOPEC Corp. in October of the same year got listed the on the Hong Kong, New York and London stock markets.

CNOOC followed PetroChina's and Sinopec Corp.'s listings by being listed on the Hong Kong and London stock.

Through initial public offerings (IPO), the three Chinese oil firms raised vast funds totalling more than $7.8 billion.

Almost all of this was achieved through large-scale financing by the majors. The IPO financings, strategic tie-ups with major corporations led to various collaborations on projects.

In upstream exploration and development activities, CNOOC received IPO financing from Royal Dutch/Shell, and by making use of those funds and technological/management know-how from the European oil giant, the two are working together on upstream exploration and development activities.

In the same vein, SINOPEC made a strategic alliance with US oil major, ExxonMobil at the time of SINOPEC's IPO. The Chinese energy firm has made use of its partner's technology and funds to plan oil refinery expansions in the Guangdong Province in southern China.

Since China's three major oil companies were listed on overseas stock markets, they have recorded tremendous successes. The three firms' stock prices enjoyed price rallies after listing. The stocks of PetroChina, Sinopec and CNOOC Limited rose 88.2 per cent 103.4 per cent, 78.1 per cent respectively at some point.

Market Operators' Views

Capital market operators believe that a quick passage of the PIB will pave way for Nigeria's firm like NNPC and the IOCs to be listed on the Exchange.

"Getting these oil and gas firms on the capital market will not only rejuvenate the market but also impact greatly on the economy and the way the oil and gas sector operates," a stock dealer said.

The Chairman, Association of Stockbroking Houses of Nigeria, Mr. Emeka Madubuike, said since the PIB would lead to streamlining and better regulation of the industry, it would attract more investments that would in turn boost the economy.

"Since the capital market is part of the economy, it would benefit from the growth expected from that sector of the economy. The bill will open up the sector for more investments to come in because there would be a supervisory and regulatory body in the industry. Once it is opened up and more investors come in, the impact will be positive for the entire economy and the capital market will also benefit," Madubuike said.

Speaking in the same vein, the Managing Director/Chief Executive Officer of Investment Centre Limited, Mr. Ifeanyi Odunwa, said the PIB provided the legal frame work for the deregulation of the oil and gas industry.

He added that it also encouraged indigenous investors in the industry whose businesses were bound to rapidly grow and ultimately have multiplier effect on the Nigerian economy.

Apart from heralding a new era of due process and transparency in the conduct of business by companies and government agencies connected to with oil, the PIB is expected that our capital market will benefit from this bill as oil majors and several indigenous companies in the related business may raise funds from the market to fund their increased operations. With the implementation of PIB, I foresee the "new" NNPC listing its shares on the NSE and elsewhere abroad to raise huge funds for aggressive business expansion similar to its other counterparts like Petrobras(of Brazil) Petronas of Malaysia the Chinese national giants," he said.

According to Odunwa, the expected listing would deepen the market and raise the market capitalisation tremendously.

Apart from the expected passage of the PIB bill, some market operators last week renewed calls for the listing of leading telecommunications and multinational oil producing firms operating in the Nigerian economy.

The Chairman, House of Representatives Committee on Capital Market and Institutions, Herman Hembe, was already sponsoring a bill that would make it mandatory for the companies to be listed on the NSE.

And the President, Chartered Institute of Stockbrokers (CIS), Mr. Mike Itegboje, said the National Assembly should use the doctrine of necessity as the major reason for such legislation.

"It is in the mutual and collective interest of all stakeholders for this to be done. The local investors will ensure that their investments in the companies are protected since they will also share in the dividends and other benefits. The foreign stakeholders and shareholders will be at peace. The market capitalisation will increase in real terms. It will attract more international investors for equity and debt instruments to be issued by these companies. Now is the time," Itegboje declared

Also, a capital market analyst and investor, Mr. Abiodun Hakeem, said that getting the telecoms and oil and gas multinationals to list on the Exchange would boost liquidity that would transform the fortunes of the capital market and in turn restore the much needed investor confidence.

Hakeem cited instances of some African countries that had legislation in place mandating multinationals to list on the host countries' exchanges.

He said that in 2002, Kenya enacted the Foreign Investor Regulation, which compelled multinationals operating in the country to list in the capital market.

He added that similarly, Tanzania parliament in February 2010, passed a Communication Bill which made it mandatory for mobile telecommunications companies to be listed on the Dar es Salaam Stock Exchange.

"In Kenya for instance, the legislation provided for a minimum of 25 per cent reserve of the issued share capital for local investors while the balance of 75 per cent was left for other categories of investors. The legislation made it possible for Kenyan citizens to invest in companies like Nation Media, a regional media player; TPS East Africa, a tourism operator and Safaricom, a mobile telecommunication company amongst others," he said.

On his part, Odunwa noted that the telcos and oil firms do highly profitable businesses and repatriate the profits to their home countries.

"It is unfair that more than 40 years for oil majors and 10 years for telcos respectively, they remain unwilling to create wealth for local investors through the listing of their shares on the NSE," he said.

According to the stockbroker, the eventual listing of their shares will deepen the capital market as there would be a quantum leap in the market capital market and all-share index.

"Furthermore, the seeming apathy of the Nigeria of Nigerian investors in the market presently will suddenly disappear as everybody will confidently want to invest in shares due to their track record of profitability," Odunwa said.

He explained that the appreciation in share prices of these companies, dividend payment out among others would no doubt create wealth for investors.

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