“Impact of Oil Price and Currency Adversities – Do we have Robust Industry Regulations?”

Presented by John Ukpaka

Adepetun Caxton-Martins Agbor & Segun15 May 2015

John Ukpaka- jukpaka@acas-law.com

INTRODUCTION

Management and stabilization of local currency - dealt with in the Nigerian financial sector.

From a strict regulatory perspective - currency fluctuations and consequent adversities fall withinregulatory jurisdiction of the Ministry of Finance and the Central Bank of Nigeria.

Certain policies and regulations in the oil and gas sector nevertheless impact Nigerian foreignearnings and by extension, its local currency position.

CRUDE OIL AND CURRENCY ADVERSITY

Nigeria has been unable to successfully diversify its economy and remains largely an oil exportbased economy.

Fall in the international price of crude has had multiplier effects on the Nigerian economy and byextension, its currency.

Currency adversities that arise in this regard include:

• the devaluation of the Nigerian Naira;

• loss of investment value to foreign and local investors; and

• adverse exposure of businesses with Naira receivables and foreign currency debt, etc

CRUDE OIL AND CURRENCY ADVERSITY

Nigeria – large consumer economy; an import dependent economy.

Consequently the decline in national income puts pressure on the exchange rate needed tosupport importation and local ‘dollarized’ expenditure.

THE NIGERIAN OIL AND GAS SECTOR REGULATIONS

Extensive use of the USD in the Nigerian O&G sector has had a multiplier effects in othersubsectors of the Nigerian economy - “Dollarization” of the economy.

Regulatory environment of the Nigerian O&G sector does not make or provide parallel regulatoryframework to control the nation’s currency.

Consequently, while the oil and gas sector almost unilaterally determines the nation’s financialand monetary position, it does not contain any robust regulatory framework for currencyadversities.

THE NIGERIAN OIL AND GAS SECTOR REGULATIONS

Regulations in the Nigerian O&G sector are generally geared towards attracting investment in thesector, increasing production and local participation, as well as preserving Nigeria's energyreserves.

Financial and monetary policy in Nigeria - regulated by the Ministry of Finance and the CBN andnot the Ministry of Petroleum and Natural resources.

Still, certain regulatory practices and instruments in the O&G sector impact the Nigeriancurrency position.

Select policy and regulatory provisions in the O&G sector which impact currency positions are asfollows:

Currency Split in Contracts: Currency split policy applied in contracts in the O&G sectorrequiring service providers to apply a naira portion to their contract receivables.

The “Spend” parameter in Nigerian Content: one of the parameters for determining theNigerian Content of a project is the “Spend” component of a project. Interpretation of“Spend” component is that it relates to the quantum of project spending expended inNigeria on Nigerian items/services.

EFFICACY OF OIL AND GAS REGULATIONS

The Retention Rule under Local Content Legislation: all operators, contractors andsubcontractors are required to maintain bank accounts in Nigeria and retain a minimum of 10% oftotal revenue accruing from its Nigerian operations in such account.

Localized Financial Services under Local Content Legislation: Companies in the O&G sector to useNigerian financial institutions only, save where impracticable.

EFFICACY OF OIL AND GAS REGULATIONS

The Excess Crude Account (“ECA”):

• The annual budget is based on a conservative international crude oil price benchmark withthe surplus funds saved in a special fund account;

• Creation of the ECA in 2004 to protect the planned national budget against shortfalls causedby volatile crude oil prices in the international market;

• The ECA is part of the Nigerian external reserves;

• The ECA operates as a short-term instrument designed to cushion the effect of shortfalls inoil revenue emanating from fall in crude oil price in the international market among otherfactors.

EFFICACY OF OIL AND GAS REGULATIONS

Other legal and regulatory issues flowing from the O&G sector

Petroleum Industry Bill: Passage of the PIB was expected to:

• Accelerate the deregulation of the O&G sector;

• Plug economic leakages prevalent in the sector;

• Increase overall government take;

• Bolster Nigerian Content in the sector;

• Remove fiscal uncertainties stalling upstream investments;

• Increase investments and production;

• Ultimately increase cash flow to the country; and

• Increase revenue domestication within the O&G sector with reduced capital and currencyflight.

EFFICACY OF OIL AND GAS REGULATIONS

This paper only considers currency stabilization policies from an O&G sector perspective; it doesnot imply that there are no regulatory measures built into the Nigerian economic system toprotect the Nigerian economy from fluctuations in crude oil prices in the financial sector.

The financial sector does contain stabilization regulatory instruments which can be found in theFiscal Responsibility Act and other subsidiary instruments which regulate the Nigerian monetarysystem.

However, with specific regard to the O&G sector, when considering the generality of the extantO&G sector regulations, it does not appear that they provide robust “shock absorbers” or controlmechanics for currency fluctuations in Nigeria; this is despite the fact that the country’s foreigncurrency earnings derive largely from O&G sector activities.

CONCLUSIONS

THANK YOU

THANK YOU

THANK YOU

John Ukpaka

Adepetun Caxton-Martins Agbor & Segun

Address: 9th Floor, St. Nicholas House

Catholic Mission Street

Lagos, Nigeria

Tel: + 234 4613142

Email: jukpaka@acas-law.com

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