Assessing the Impact of Declining Oil Prices on EM PE – The View from Nigeria

Cyril Odu, Executive Partner and Head of Energy, African Capital Alliance

Falling oil prices is a wakeup call that may accelerate some of the reforms that we are expecting in Nigeria. While it might signify bad news in the short term given the immediate implications for the economy, it could lead to positive developments such as the deregulation of the downstream oil sector. Today, there is hardly any government subsidy on refined petroleum products at current crude oil prices and it is a good time for the government to exit the downstream business by fully deregulating it. This will open up the market to private sector participation.

We also expect the fall in oil prices to lead to more reforms in the energy sector. Nigeria has the available resource base to produce three million barrels of oil a day and sufficient gas resources to power most of West Africa. However, government policies and involvement have created funding shortfalls, approval process delays, amongst other issues, which have hampered the country from attaining its full potential. As a result, the current daily production hovers around two million barrels per day and gas production remains relatively low.

Lower oil prices, in our view, should increase the odds of greater private sector participation in the Nigerian energy industry by encouraging the government to create an enabling environment for capable management teams to acquire quality assets, deploy capital and increase efficiency. Furthermore, a period of low oil prices presents significant investment opportunities to acquire and develop assets with attractive valuations, as operators look to divest assets and bridge cash shortfalls.

Overall, we believe that investments in the energy sector will actually be enhanced in the long term. The oil and gas industry in Nigeria benefits from relatively low technical costs, great geological potential and proximity to key markets. This means that in spite of some of the challenges facing the industry today, including lower oil prices, oil and gas investors can still produce profitably as long as acquisition costs are reasonable.


Read More  Views from the Field on Assessing the Impact of Declining Oil Prices on Emerging Markets Private Equity, including:

The LP View
Richard Rincon, Investment Officer, EM PE, UTIMCO

The Global View
Erik Bethel, Managing Director, Darby Private Equity

The View from Russia
Mike Calvey, Founder and Senior Partner, Baring Vostok Capital Partners

The View from Southeast Asia
Andrew Affleck, Managing Partner, Armstrong Asset Management

The View from Nigeria
Cyril Odu, Executive Partner and Head of Energy, African Capital Alliance

Two Views from MENA
Amjad Ahmad, Chief Executive Officer, NBK Capital Partners, and Nabil Triki, Co-Head of Private Equity, Swicorp