COMPLETE SCHOOL PROJECT TOPICS & MATERIALS :
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ABSTRACT
This study was carried out on the legal issues in financing oil and gas projects in Nigeria. Since the discovery of crude oil in commercial quantity in Nigeria in 1956, the oil and gas industry has played a towering role in the economy of the country. The industry by its character and nature is capital intensive and require huge financing for harnessing the prospects available within the value chain of the industry. Attracting funds for oil and gas exploration, production and refining activities remains a daunting challenge even in contemporary times. It is to this effect, that this paper examines the legal and policy framework for the financing of oil and gas operational activities in the country with a view to identifying the issues, challenges and prospects and proffering alternatives that may be explored in addition to, or as a replacement to the existing traditional financing models and framework hitherto adopted in the country.
CHAPTER ONE
INTRODUCTION
1.1 Background of the study
The Nigerian Oil and gas sector is under exploited despite the fact that it is the predominant source of Nigeria’s revenue base.[1] Harnessing these resources in other to provide funds that will aid in nation building remains a concern of the Nigerian state,[2] however securing the finance to exploit these resources can be difficult as the oil and gas industry has its own peculiar volatility risks. This is especially so as oil and gas projects require huge capital and have a long gestation period.[3] An example of the capital intensive nature of the oil and gas industry can be gleaned from the development of the Egina field. Egina field [4]has been estimated to cost $16 billion[5] with a completion time frame of four years.[6]
Undoubtedly, one of the topical issues of our economic management experience is the apparent failure of the policy package to push the non-oil export sector in right direction.
To improve the situation, various decrees were promulgated-export incentives a package in incentives which may help the non-oil sector to earn reasonable foreign exchange for the country.
These decrees were designed to assist merchant banks and some other financial institution in providing finance for the stimulation of domestic production for export. It also gave legal backing for re-financing and rediscounting facilities crated by the Central Bank of Nigeria to provide pre-shipment and post finance in respect of non-oil export.
Financing of oil and gas projects has been a major challenge in Nigeria for the IIOCs. This can be attributed to inadequate legal and regulatory framework to effectively regulate and monitor the oil and gas sector. Other relevant factors include inability of local banks to finance long-term capital intensive projects, the difficult operating environment, inadequate technological expertise, perceived high risk of IIOCs by financial institutions, opacity and insufficient information on the petroleum sector and lack of credible institutions.[7] All these factors tend to deter indigenous participation, investment and the repatriation of profits from the sector in Nigeria.
In recent times however, there have been concerted efforts by the Nigerian government to encourage indigenous participation and consequently, the financing of oil and gas projects by the IIOCs. This can be seen in various measures undertaken comprising steps to support indigenous participation through the licensing of marginal fields to Nigerians, the enactment of the Nigerian Oil and Gas Industry Local Content Development Act in 2010, leasing of oil blocks to IIOCs and the drafting of the Petroleum Industry Bill (PIB). However, these efforts have not resulted in the expected considerable progress. To an extent, indigenous participation has improved but the challenge of financing of IIOCs still persists.
To achieve financing, different policies and legal frameworks have been put in place by past and present government As a result, it is necessary to interrogate and probe the existing legal framework of financing projects in the industry, with a view to identifying and proffering alternative financing framework for the oil and gas industry in Nigeria.
1.2 Statement of the problem
Financing of oil and gas projects can be achieved through project financing. Project financing according to the Black’s law dictionary can be defined a method of financing in which the lender looks primarily to the money generated by a single project as security for the loan.[8]
Nigeria Export Import Bank’s role include bank activities like trade finance, project finance, treasury operations, export advisory services, market information and market risk guarantee[9].
However, research has it that irrespective of all these efforts, the growth in non-oil export earnings has not been very significant, although there has been remarkable increase in export.
This situation is however being redress with the implementation of Structural Adjustment programme which has inspired the participation of many banks and other specialized institutions from private and public sector. At present this role is played by Government, banks and non-banking institutions. Practically, in order to restore stability to the nation’s economy the non-oil sector need to be activated through adequate funding or credit delivery. In this re-capitalization process, the role of financial institutions such as commercial banks development banks and most importantly the activities of the merchant banks cannot be over emphasized.
Unfortunately, the inadequate contributions of Merchant Banks Finance (loans and advances) to the non-oil export sector has hindered the increase in volume of non-oil export, similarly the limited availability of funds to Merchant Banks in financing non-oil export and the slow increase in volume of non-oil exports has resulted to a decline in the contribution of the sector to gross domestic product. Another identified problem is the inability to ascertain the proportion of total deposit mobilized by Merchant Banks that is granted as loans and advances to the non-oil sector. The neglect of this sector (non-oil export) has affected foreign exchange earning from the sector and even resulted to a slow growth and development of our economy.
1.3 Objectives of the study
The main objective of the study is to examine the legal issues in financing oil and gas projects in Nigeria. The following are the specific objectives of the study:
- To examine the issues and challenges in oil and gas financing in Nigeria
- To examine the statutory framework on oil and gas financing in Nigeria
- To examine the contractual arrangements on oil and gas financing
- To examine the corporate and project financing mechanism in Nigeria in Nigeria
- To examine the alternative financing framework in Nigeria
1.4 Research questions
- What are the issues and challenges in oil and gas financing in Nigeria?
- What is the statutory framework on oil and gas financing in Nigeria?
- What is the contractual arrangements on oil and gas financing in Nigeria?
- What is the corporate and project financing mechanism in Nigeria?
- What are the alternative financing frameworks available in Nigeria?
1.5 Significance of the study
It is hoped that this study would produce useful information for use by Government, Merchant banks in Nigeria and the academic institutions.
First, the knowledge will create awareness of the plight of the exporters of non-oil product in Nigeria. It would enlighten the merchant banks on the services required by these exporters of non-oil products. The data provided would be used by the government to sustain its efforts by increasing the share of non-oil export in her foreign exchange earnings. She will thus, formulate policies relating to export, based on such information.
The study is also considered significant in Banking/Finance in Nigeria. It will be of great value to practicing bankers, bank inspector, bank scholars and the general public. In all it will contribute to the stock of knowledge in finance in Nigeria.
[1] Although Nigeria is ranked as having the 2nd highest oil reserves in the African region and the 9th highest in the world, it does not have as many rigs as other oil producing countries in comparison to its resources. For instance, OPEC annual statistical bulletin shows that in 2016, Norway with 6,610 (mb) of proven reserves has 16 active rigs and Russia with 80,000 (mb) has 334 active rigs, while Nigeria has 9 active rigs despite having over 37,000 (mb) barrels of crude oil. Nigeria is also richly endowed with gas. She has 5,475.2 (bn s cu m) proven reserves of natural gas , thus making her the country with the 9th highest proven gas reserves in the world and the highest in Africa
[2] See S 16(1)(a) and Section 16(2)(b) of the constitution of the CFRN that states that harness the resources of the nation and promote national prosperity and an efficient, a dynamic and self-reliant economy; and the State shall direct its policy towards ensuring that the material resources of the nation are harnessed and distributed as best as possible to serve the common good;
[3] Despite this, the oil and gas industry promises a reasonably high return on investment when there exist stable national and international socio-political economic condition,
[4] Egina Field is under Oil Mining Lease (OML) 130 which is located 200km off the Nigerian coast
[5] Ajiofor E. ‘Total’s FPSO for $16bn Egina Field to Arrive Nigeria’ Thisday Newspaper (Lagos, 6th April, 2017).
<http://www.thisdaylive.com/index.php/2016/04/19/totals-fpso-for-16bn-egina-field-to-arrive-nigeria-april-2017> accessed 07 July, 2017
[6] This situation is not peculiar to Nigeria. For example the Libra Oil field development plan in Santos Basin, Brazil was initially approved in January 2014 and it was in November 2017 that it achieved its first oil from the early production system.
[7] Joseph E. Aigboduwa and Michael D. Oisamoje ‘Promoting Small and Medium Enterprises in the Nigerian Oil and Gas Industry’ European Scientific Journal January 2013 edition Vol 9, No.1.
[8] Bryan Garner Black’s Law Dictionary 9ed (2009) 707.
[9] Hoffman op cit (n31) 24.