Capital Flight of Multinational Companies: What Does This Mean for The Future of Energy in Nigeria?

‘Capital flight’ refers to a large-scale exodus of financial assets from a nation due to events such as political or economic instability, currency devaluation, or imposition of capital controls. The term is not restricted to money or asset repatriation, technical know-how is also included within the context of capital flight.

The link between capital flight and Nigeria’s oil sector is birthed from historical and present outcomes. For over 60 years, crude exploration profits formed the bulk of Nigeria’s revenue inevitably making the country a ‘rent-collecting mono economy’. Central to exploration are the asset-rich Multinational Oil Companies (‘MNCs’ or International Oil Companies ‘IOCs’) who contributed significant capital — machineries, labour, and cash — to oil ventures. By contrast, the government relied almost exclusively on receipts from royalties, Joint Venture earnings, and taxes as the basis of its profit from the sector.

Predictably, overreliance on oil rent made the country vulnerable to external oil price shocks which was accelerated by the COVID-19 energy crisis. Although, before Covid, there had been increased pressure on oil firms to shift towards green energy. For instance, investors, stakeholders, and activists in Europe found means to compel many MNCs to scale down crude exploration partly through litigation, partly through lobbying and protests.

The ‘green shift’ and corporate re-strategy prompted oil giants to reassess their investment priorities in many countries, Nigeria inclusive. Considering the fact that Nigeria has dragged its feet against oil reforms for many decades, the IOCs perceived the country to be anti-futuristic thereby expediting the conversation around a gradual exit from the nation’s crude exploration sector.

This background shows we could further conceptualize MNCs capital flight in two senses. There is the positive sense — by active repatriation of finance and assets, and the negative sense — by reducing the influx of new finance inputs into the oil sector.

The effect of the ‘flight’ is far reaching because Nigeria is yet to fully diversify its economy against the backdrop of stagnation, political crisis and insecurity challenges. More pertinent is that future entrants may view the country’s oil as unattractive for investment. For example, Nigeria was able to attract only $3 billion foreign investments in oil exploration out of the $70 billion committed on new projects in Africa between 2015 and 2019.

The causes of capital flights are not only influenced by global factors, but also by domestic gaps. There is the long held view that Nigeria attempts to solve industry problems not with innovation but with more regulations. Over regulation simply contributes to the cluster of administrative bottlenecks choking growth in the energy sector. This is in addition to numerous litigations between regulators and private investors, and between private investors inter se over oil assets. Owing to litigations, many IOCs are mulling the idea of leaving their onshore operations in Nigeria.

For emphasis, here are some of the companies currently 'plotting their exit' from Nigeria. First is Shell. The company has gradually sold its onshore assets for more than a decade as it seeks to avoid certain problems such as pollution caused by ruptured pipelines and the resulting legal battles with local communities. The issue became acute in 2020 after Shell pledged to transform itself into a clean energy giant and gradually wind down its oil and gas business to achieve net-zero carbon emissions by 2050.

The company has not taken the position that it would sell the remainder of its oil assets in the Niger Delta, however, a full retreat would be an obvious goal to achieve gradual divestment. Shell has significantly reduced its total number of onshore licenses in Nigeria by half over the past decade.

Next is Chevron. Chevron plans to sell several Nigerian oil fields as part of a global drive to reshape its portfolio and focus on growing its U.S. shale output. The company — Nigeria’s third largest oil producer — is looking for buyers for a number of its onshore and shallow offshore fields. The discussions are reportedly being held directly with potential buyers and Chevron is not planning to launch a tender process for the assets. In 2013, Chevron offered about 40% of its stake in selected assets in the country to “enhance capital efficiency” and offers the prospective buyers an “opportunity to grow their own assets.”

Notably, ExxonMobil divested from the Joint Venture shallow water project with NNPC, but still maintained its position of “continued investment in Nigeria.”

British Gas sold its Nigerian oil assets while Brazilian oil giant Petrobas notified Nigeria about auctioning its 8% stake of the Agbami block and 20% of the offshore Akpo project for 795 billion Naira. Total sold its 20% stake in the Usan field in the Niger Delta. ConocoPhillips also disposed its onshore assets and left Nigeria after completing the sale of $1.5 billion oil assets to Oando.

The MNCs reduced their stakes in the oil industry amidst political instability, the uncertain security situation in the Niger-Delta, the impasse on the (then) Petroleum Industry Bill (PIB), human and environmental right controversies, etc. The country suffered a major setback as the global price of oil nose-dived in 2014 and 2020 resulting in leaner profit margins for IOCs, and a steep drop in upstream spending.

At this point, we could say that given the situation, a new sheriff is poised to step into the place of the old one.

Indigenous Companies in the shifting market.

We prefaced the attitude of the IOCs towards long term investment in crude exploration and production, but we must understand that the sector cannot operate in a vacuum. The logical assumption is to expect Local Companies (LCs) to take over from where the MNCs left off, and to pivot the energy sector towards a sustainable future.

This assumption is well founded as LCs now have a growing influence in Nigeria’s energy space. A reference case being the landmark TNOG Oil & Gas Limited acquisition of 45% stake in OML 17 operated by Shell, Total and Eni. The field has a production capacity of 27,000 barrels of oil equivalent per day and estimated reserves of 1.2 billion barrels of oil equivalent. The transaction was worth approximately $1.1 billion in financing.

The move by IOCs to downscale their stakes in Nigeria’s oil and gas industry bodes well for indigenous businesses who have expanded their footprints in some strategic sectors — onshore and shallow offshore fields. For example, Aiteo acquired OML 29 in 2015 for $2.8 billion and has increased crude production from an average of 23,000 bpd to over 90,000 bpd; Seplat has emerged as Nigeria’s largest listed oil and gas firm by market value; Oando has consistently ramped up production; Nestoil has developed strong capabilities in Engineering, Procurement, Construction & Commissioning (EPCC) services.

From a macroeconomic standpoint, the implementation of indigenisation policies in the oil industry will ease capital repatriation pressure and its attendant impact on the local currency.

So, the capital flight may not entirely be bad news for Nigeria.

But the LCs have a difficult responsibility to keep the oil sector competitive and progressive in the meantime. This difficulty is accentuated primarily by lack of access to foreign exchange in financing acquisition transactions. Local lenders do not have ‘enough dollars’ to fund high value oil asset acquisitions owing to dollar crunch. In the same way, only few LCs can afford to satisfy security requirements of international lenders.

On the bright side, the LCs have an advantage. They know the domestic market and can easily navigate their way within the terrain. Also, with the infusion of greater local contents, the LCs could potentially increase job opportunities for Nigerians. The government should therefore create better implementation strategies to promote access to finance, more local contents, and ensure protection of the environment.

Indigenous companies require expertise in highly technical operations, so they must strike a balance between expatriate employment and transitioning with local technical labour.

While we continue to observe this market shift in Nigeria, a different shift is happening in the global energy market which could threaten the progress of Africa’s most populous nation, and even the budding local companies.

Future of the oil industry.

The future of oil hangs on a shaky balance. The global ‘green’ discourse focuses on shifting from combustible energy, thereby causing pushbacks on crude exploration. But as world economies face shortage of energy supply, and in spite of lower oil prices, crude extraction and exploration still remain profitable. Antithetically, and perhaps in recognition of a less buoyant future, oil firms have reduced their fossil investment.

To solve the energy dilemma, indigenous companies, and MNCs, should reevaluate investment plans and stay ahead of volatility. For one, investing in domestic refining capacity is critical. Building local refineries is a subject of divided opinions. Many believe the country should not invest in such risky project because it is not viable in the long term. However, increased refining capacity serves as an opportunity to expand and deepen access to the local market.

Protecting the environment is another action point companies must implement. This is important to show how committed the Nigerian players are to a sustainable climate future. For example, safe exploration practices and deploying technology could reduce gas flare and convert waste gases into commercial use. Admittedly, technology such as carbon capture technology is expensive and still at a nascent experimental phase, but it shows the possibility of reaching a middle ground.

Natural Gas and Renewables.

While the debate on the precarious fate of crude oil lingers, we believe operators have an opportunity to chart a good course with natural gas, and renewable energy. With a proven large reserve of natural gas, Nigeria — fortunately — is a leading nation in the gas race. Also, because natural gas has a lesser negative impact on the environment compared to crude, it is a worthwhile ‘clean’ investment. More significantly, the electricity value chain would benefit from improved gas feeds for powering generating stations.  

On the other hand, the prospect for renewable energy is not as compelling as natural gas. This is because Nigeria has not yet achieved the status of a ‘renewables hub’ in as much as it has abundant renewable sources. This is owed to a number of factors: inadequate legal framework, high cost of retail renewable products, low tech penetration, and project bankability problems. But renewables are part of a future of sustainable energy. We should not relegate the importance of renewable energy because long term prospecting shows that this source will gain momentum.

In conclusion, we can take two lessons from the Pandemic: first, how we consume energy will morph according to the need for sustainability thus balancing consumer needs with protecting environmental integrity. Second, and very significant, the era of rent collection from crude oil will have to give way to creative solutions from the government. This is important if Nigeria wants to survive the uncertain future of energy consumption. For half a century, oil was considered an untouchable behemoth of public revenue. However, this assumption is challenged by complex issues ranging from alternative energy use, dropping oil prices, rise of digital economy, and obviously MNCs’ capital flight.

Moving forward, Nigerian energy regulators must be nimble in policy and legislation making. A fast changing market should not crumble under the chokehold of stifling regulations, although we could admit that regulation is important for public policy and preventing anti-market, anti-competitive behaviours.

There is a great responsibility for domestic companies to step up and take a leading role to steer the sector towards a desirable economic future. Humans will, in any era, require energy for sustenance, so for Nigeria, there must be a means of keeping energy supply going regardless of market transition.