Positioning Nigerian capital market for gains of PIA

August 16, 2021, marked what has been described as an end to several years of uncertainty and stagnation in the petroleum industry. The Petroleum Industry Act (PIA) was signed into law by President Muhammadu Buhari.

Nigeria has been on this journey for 20 years but the recent signing of the PIA promises to reform and modernise the regulatory and operational framework. The PIA introduced several changes to the administration of the industry, its licensing regime and overall fiscal framework.

The U.S. energy information administration estimated that Nigeria lost over $15 billion annually due to the delay in the passage of the PIA. Despite the delay in signing the bill into law, the organised private sector (OPS) and capital market community believed that the development would galvanise growth in the oil and gas sector with a multiplier effect on the capital market.

At the just-concluded 25th yearly general Chartered Institute of the Stockbrokers (CIS) meeting held in Lagos, participants said the new law has the potential to put an end to decades of uncertainties concerning the future of oil and gas industry in Nigeria by providing a robust legal framework that would support reforms required to position the industry as an investment hub which could attract investors from across the globe.

They said the emergence of a more structured industry will offer a level playing ground that can attract massive Foreign Direct Investments (FDIs) into the country, promote competition that could bring about a more efficient system, product choices and lower prices in the long term.

According to them, the outcome of the repositioning was expected to trigger fundraising activities in the domestic market and stimulate the primary market segment of the exchange.

Partner, Energy & Natural Resources Tax KPMG Nigeria, Wale Ajayi affirmed that the PIA would present significant investment opportunities for both regional and international stakeholders, especially at a time when the global energy sector is particularly competitive for foreign capital.

Ajayi pointed out that this offers greater opportunities for the capital market as stakeholders in the oil and gas, who seek to optimise the gains from deregulation, are likely to approach the equities and fixed income market to raise funds.

He expressed optimism that the passage of the PIB would impact positively on the nation’s economy as well as the capital market by attracting both institutional and retail investors as well as local and foreign issuers into the capital market.

He said this would in turn provide the needed funding both on an interim (bridge financing) and long-term basis, thereby making the capital market a veritable part of the financial system that contributes to economic growth and development.

According to him, due to the issues of environmental, social and governance (ESG) agenda, it has become increasingly difficult for oil and gas players to raise funds for petroleum investment in the mature markets.

Environmental, Social and Governance (ESG) is a method of analysis and reporting on how a company serves all stakeholders, including workers, communities, customers, vendors, shareholders and the environment.

ESG is important for the oil and gas industry specifically as momentum continues to build to promote renewable energy, sustainability and the energy transition as investors, governments and individuals remain focused on issues such as climate change, labor standards, diversity and corporate governance.

Oil and gas companies have been implementing ESG strategies for years through reduced emissions, responsible water use and disposal, and research and development into renewable energy programs.

The current push to track and report ESG programmes is seen as an opportunity for oil and gas companies to promote, validate and expand upon these efforts.

Ajayi argued that local players that fail to meet up with this obligation are likely to turn to primary and secondary markets to expand their portfolio as they would find it extremely difficult to access capital in the international market.

Therefore, he stressed the need for the entire capital market ecosystem to be well-positioned and leverage opportunities in the petroleum industry act.

He said: “It has become extremely difficult to raise money because everyone will be asking you what is your ESG agenda so what we expect to see is that local players will have to expand their portfolio.

“We also know that the International Oil Companies (IOCs) in Nigeria are divesting from the onshore and shallow water and if they are divesting, the local player is independent and will have to make those acquisitions and the money is going to come in from the capital market,” he said.

He noted that while the expected improvements in the general macroeconomic situation of the country will enhance the environment in which the capital market operates, direct impacts will also come as a result of more companies in the oil and gas sector using the capital market to finance their activities.

Also speaking, the Head of Oil and Gas at Stanbic IBTC, Joyce Dimgba, said with the new petroleum Act, many institutions that would support pure gas projects, issue green bonds and invest heavily in infrastructure would emerge.

Therefore, she also urged the capital market community to identify some specific areas that could be used as a stimulus to unlock potential in the act and grow the economy.

Director-General of the Securities and Exchange Commission (SEC), Lamido Yuguda, said stockbrokers must create viable innovative financial products that would support businesses, boost market liquidity and breath if it must unlock potential in the PIA.

He argued that the capital market can channel assets into productive long-term investments such as critical infrastructure needed to unlock economic improvement and improve the living standards of our citizens.

Therefore, he urged the Chartered Institute of Stockers to ensure that its members continue to uphold high ethical standards in the discharge of their fiduciary duties as trusted agents of investors.

“We must, therefore, rise to the challenge to work hard and do all that we must to attract investors to the market and to engage in strategic discourse and advocacy with policymakers at all levels, to channel long-term funds into profitable cost-recovery based infrastructure.”

In February 2021 when the National Assembly assured speedy passage of the PIB, there was a slight uptick in the NGX index for oil and gas. By July 21, 2021, there was a dip because it was expected the PIB should be passed by then and because it did not happen, the index went down. In August 2021, the sector also recorded a sustained rally when the president assented to the bill.