nigeriaN oil industry
By: DeRonte Craig
The purpose of this report is to identify all categories pertaining to the Oil Industry, and how a new company could enter the industry in Nigeria. In this report we have selected Nigeria and discussed why we have selected it. To get a better understanding, we analyzed global and national business trends, and PESTLE (Political, Economic, Social, Technological, Leal and Economic) is used to highlight different conditions. Then we analyzed the cultural dimensions of the country using Hofstede's model. After that we chose the Oil Industry, discussed its many categories, and the reasons why we selected it. Finally, we analyzed the Oil Industry using Porter's Fiver Force Model.
Through this we gained an in-depth knowledge of Nigeria's business environment and the importance of oil sector.
Why did you choose this country?
The following are the reasons why we have selected Nigeria.
• Nigeria has a plethora of resources that have not been exploited completely such as: agriculture, human and mineral resources.
• Nigeria is a large market with a population of 186 million and 405.1 billion USD (2016)
• Nigeria has a stable political environment
• Robust private sector due to reduced government regulations, free market, free flow of international finance and unrestricted movement of investment capital
• Physical and industrial infrastructure in terms of transportation, communications, electricity and water supply is rapidly developing
International Business Environment of this Country
a) Global, National and Local Trends:
Nowadays, demographic shifts can be clearly seen in the world. The population of developed countries is aging while developed countries still have a lot young in the workforce. Secondly, the pace of innovation is increasing rapidly as new companies are developing new products. This is a threat to western industries. Thirdly, communication has become faster. Customers are now more aware and have increased access to information. Fourthly, as more businesses are entering international markets, Western companies are facing increased competition. Because companies based in developing markets have lower labor costs, the challenge for Western firms is to keep ahead with faster and more effective innovation as well as a high degree of automation. Finally, environmental factors were a major influence in developed countries and developing countries see this as an important factor as well. So, both types of countries are using clean and environment friendly technology.
• Foreign direct investment has increased, and many expatriates are returning to their home country for getting greater opportunities.
b) PESTLE Analysis:
For analyzing the market situation, we have used the PESTLE Analysis Model. PESTEL Analysis will give you a clue of how the business environment in Nigeria looks like.
Politically, Nigeria is stable except for the uprising of terrorists in the Northern part of the country. Also, another faction in the South-South agitating for their rights over the oil revenue may make the business in that area to be volatile. There has been series of oil pipes vandalization across the oil rich cities in Nigeria.
The government is seeking the supports of the international community in ensuring that looted funds deposited in foreign countries are repatriated. The government of the day seems to realize the need for Nigeria to diversify its economy. Therefore, agriculture is one of the sectors that is receiving much attention. Nigeria is blessed with fertile soil and several mineral resources.
Nigeria has been a mono-economy with total dependence on oil revenue. With the current glut in the oil market, the revenue coming to the country has decreased drastically, unfortunately, most States in Nigeria cannot boast off tangible internally generated revenue. Therefore, some of them are unable to pay workers' salaries leading to four to five-month salary arrears.
The resultant effect is the lack of disposable income for the citizenry. Therefore, this is not the time for the purchase of luxury items. People will like to spend their little available resources on basic needs, especially food items.
Youth unemployment rate is put at 21.5 %, this can increase crimes and social voices, on the other hand, this is an opportunity for the entrepreneurs and foreign business to make use of cheap labor.
Cost of borrowing is quite high in Nigeria. Although The Central Bank of Nigeria tried to peg interest rate at 12%, you still discover that borrowers may pay minimum of 15% when other costs such as management and procession fees are added to it. If you want to borrow to do business in Nigeria, you need to be sure that the margin will be able to cover the interest
Forex: The foreign exchange rate is quite high when measured against major currencies. The official rate stands at N199 to $1 as at the time of writing this article. To worsen the situation, Forex is not available for people who want to transact business in foreign currencies. Therefore, parallel market is the option left available. And this is as high as N360 to $1. This is not good for a country that imports almost everything. For few companies that export their products to foreign countries, this is a booming period for them.
Due to the high exchange rate, there has been steady rise in the prices of consumer goods thereby causing inflation rate to rise too. Inflation rate that was 9.6% in January 2016 has climbed to an all high 15.6% as of May 2016. With this level of inflation in Nigeria, individuals and businesses are beginning to cut down their budgets. You need to buy a sizable power generating set that will be able to carry your appliances. If you run a manufacturing company, the cost of fuel will be one of your major overheads. In most cases, you discover that imported goods are cheaper than locally made goods
Doing business in Nigeria requires that you understand the religion and cultural values of each group. Religion is very pronounced in Nigeria and it is a very sensitive issue. The two major religions in Nigeria are Christianity and Islamic. You are not forced to belong to any religion, but you need to respect individuals for the religion group they belong to.
An average Nigerian likes fashion. In some cases, many like spending on frivolous things. Average Nigerians will spend money on anything that appeals to his/her interest.
Unlike before, Nigerians are fast becoming computer savvy. Many Nigerian youths are computer literate. Although laptops and personal computers remain a luxury to some people, the use of Smartphones seems to be bridging this gap. With Smartphones, many people are now active users of internet with social media presence. We now have an estimated number of 86.22 million internet users giving a penetration of 46.10% of the population. Therefore, for anyone that wants to do business in Nigeria, online adverts are becoming a popular way of reaching targeted customers.
In Nigeria, the law stipulates eighteen thousand naira per month as the minimum wage. Tax laws: Nigeria operates progressive tax system for Personal Income Tax. The more a person earns, the more he is expected to pay as tax. On average, personal income taxes hover around 24%. Company Income Tax rate is 30% while Value Added Tax is 5%. With the dwindling oil revenue, government is now trying to block all the leakages in the revenue coming from taxation.
The Federal Government of Nigeria plays crucial role in protecting the ecology of the country. In addition, each State is empowered to formulate laws or policies that will ensure that the environment is clean to prevent the outbreak of diseases. Due to the lack of electricity, the level of noise and air pollution coming from power generating sets is high. This affects residential, commercial, and industrial areas respectively.
c) Hofstede's Cultural Dimension:
1. Power Distance
Nigeria scores high on this dimension (score of 80) which means that people accept a hierarchical order in which everybody has a place, and which needs no further justification. Hierarchy in an organization is reflecting inherent inequalities, centralization is popular, subordinates expect to be told what to do and the ideal boss is a benevolent autocrat
Nigeria, with a score of 30, is considered a collectivistic society. This is manifested in a close long-term commitment to the member ‘group', be that a family, extended family, or extended relationships. Loyalty in a collectivist culture is paramount, and over-rides most other societal rules and regulations.
The society fosters strong relationships where everyone takes responsibility for fellow members of their group. A collectivist society is a type of society where individuals place the overall good of the society over the good of the individual.
Nigeria scores 60 on this dimension and is thus a Masculine society. In Masculine countries people “live to work”, managers are expected to be decisive and assertive, the emphasis is on equity, competition and performance and conflicts are resolved by fighting them out.
4. Uncertainty Avoidance
Nigeria receives an intermediate score of 55 on this dimension, which does not show a clear preference.
5. Long-term Orientation
Nigeria scores very low (13) on this dimension, meaning that its culture is normative instead of pragmatic. People in such societies have a strong concern with establishing the absolute Truth; they are normative in their thinking. They exhibit great respect for traditions, a relatively small propensity to save for the future, and a focus on achieving quick results.
6. Restraint Indulgence
With a very high score of 84, Nigerian culture is said to be one of Indulgence. People in societies classified by a high score in Indulgence generally exhibit a willingness to realize their impulses and desires about enjoying life and having fun. They possess a positive attitude and have a tendency towards optimism. In addition, they place more importance on leisure time, act as they please and spend money as they wish.
Which Industry you want to focus and Why?
We have selected oil sector because it is one of the largest sector in Nigeria. Nigerian Oil and Gas Industry is the engine of the Nation's economy – an economy
that is supposed to be the BIGGEST in Africa and one of the biggest in the world,
It has been more than forty years since Nigeria found oil on its lands. Since then, the petroleum sector has become one of the primary sources of the country`s economy. Nigeria gets about 90% of its foreign exchange earnings thanks to oil and gas. According to the current estimates, at least 20% of GDP comes from petroleum. Therefore, it`s no wonder that petroleum industry is one of the most crucial in Nigeria. The rise of Nigeria in the world arena happened largely because of petroleum. This income source helped to build the country after the devastating civil war.
Categories in Oil Industry
There are three main categories in Oil Industry and further sub-categories in them:
a) Joint Venture
This is the standard agreement between the national oil company i.e. the Nigerian National Petroleum Corporation (NNPC) and a multinational oil company (MOC). Under this arrangement, both NNPC and the MOC contribute to funding oil operations in the proportion of their JV equity holdings, and generally receive crude oil produced in the same ratio. Companies engaged in this form of arrangement are assessed to tax under the PPTA at the rate of 65.75% of chargeable profits for the first five years of operation (when the company is yet to fully recover its capitalized pre-production cost), and 85% thereafter.
It is however important to note that the JV model is currently being phased out in the oil and gas industry, due mainly to the inability of the NNPC to fund its share of JV costs.
b) Production Sharing Contracts
Under this arrangement, the concession is held by NNPC. NNPC engages the MOC or the indigenous company as Contractor to conduct petroleum operations on behalf of itself and NNPC. The Contractor takes on the financing risk. If the exploration is successful, the Contractor is entitled to recover its costs on commencement of commercial production. If the operation is not successful, the Contractor bears the loss.
The PPT rate applicable to PSC companies is 50% of chargeable profits for the contract area.
c) Service Contracts
Under this model, the Contractor undertakes exploration, development and production activities for, and on behalf of, NNPC or the concession holder, at its own risk. The concession ownership remains entirely with the NNPC/holder, and the Contractor has no title to the oil produced.
The Contractor is assessed to tax on its service fees under the Companies Income Tax Act as amended (CITA) at 30%; while the concession holder (or the NNPC) is assessed to tax under the PPTA.
d) Marginal Filed Concession
Generally, a Marginal Field is defined as any field that has reserves booked and reported annually to the DPR and has remained unproduced for a period of over 10 years.
The main objectives of the government for introducing Marginal Field regime include:
⎫ Expand the scope of participation by small (indigenous) players in Nigeria's oil industry.
⎫ Increase the country's oil and gas reserves base.
⎫ Provide opportunity for portfolio rationalization.
⎫ Enhance employment opportunity.
a) Transmission and Conveyance
This involves the transportation of oil and gas to the refinery and gas stations. There is a pipeline network from the wellhead to the refinery or plant. Tankers and purpose-built vessels are also used for this purpose
Nigeria has four refineries: two situated in Port Harcourt and one each in Warri and Kaduna. The refineries are all wholly owned by the NNPC. The four oil refineries have a combined nameplate capacity of 505,000b/d. However, these refineries are only working at about 30% of their installed capacity; necessitating the importation of refined products to meet growing local demand. The FGN has recently awarded contracts for Turn-Around-Maintenance to be performed on the refineries to boost the level of their production.
The number of refineries in the country is expected to increase in future as new licenses have been granted. In addition, the Government's strategy of tying award of new oil licenses to securing commitment on the part of license holders to build new refineries, railway lines, gas pipelines or power plants should help in this regard.
c) Distributing and Marketing
Distribution and Marketing of refined petroleum products are complementary activities. Distribution involves the transportation of refined petroleum products from the refineries through pipelines, coastal vessels, road trucks, rail wagon etc. to the storage/sale depots.
Petroleum products are supplied in Nigeria principally through the Petroleum Product Marketing Company's (PPMC) pipeline system, which links the refineries to the about 21 regional storage/sale depots.
Petroleum product marketing involves the procurement and sale of refined petroleum products. Marketers lift products from PPMC depots and deliver to their various retail outlets. They also import refined products from outside of Nigeria to meet the demands of their customers.
d) Liquified Natural Gas
Nigeria holds the largest natural gas reserves in Africa but has limited infrastructure in place to develop the sector. Nigeria's first and most ambitious gas project, the Nigeria LNG (NLNG) facility on Bonny Island has six LNG trains currently operational with a total annual capacity of 31bcm.
It has become an increasingly important supplier of liquefied natural gas (LNG) to European buyers. The LNG facility is currently supplied natural gas from dedicated gas fields. The contract for the construction of a seventh LNG train is under consideration (expected to have nameplate capacity of 8.4mn tpa).
Other LNG projects that are expected to take off soon include the Olokola (OK) LNG and Brass LNG projects. All the companies that operate in the downstream petroleum sector are assessed to income tax under the Companies Income Tax Act, 2004 as amended (CITA) at the rate of 30% of their chargeable profit.
3. Oil Service Sector
a) Exploration Support Services
b) Drilling Services
c) Production Support Services
d) Downstream Services
All the companies that operate in the oil services sector are subject to tax at 30% of their chargeable profit.
How one can enter it?
A consider this sector reveals that there is almost business for everyone, this means that no matter who you are and your financial capacity you can still invest somehow in the Industry and make your own millions too. Most of the activities is at Downstream sector and that is where most of us can afford to invest. The Upstream sector is mainly for multinationals and big investors who has the money and the expertise. Before you talk of investing, you need to know where to invest, the decision you make depends on the depth of your knowledge in this business.
Porter's Five Force Model
For analyzing the Industry, we have used Porter's Five Force Model
1) Threat of Substitutes
The main alternatives sources to oil and gas for producing energy which used for electricity, transportation, heating, etc. are:
⎫ Nuclear Energy
⎫ Biofuels and other renewables sources such as solar and wind energy
These alternative sources of energy can replace a high number of hydrocarbons use in the global energy mix according to their performance, quality and price of course. This strategy requires a big amount of investments in R&D and producing procedures, so the possibility for substitutes to dominate the global energy mix until 2040 is very small.
2) Bargaining Power of Buyers
The main buyers of oil and gas products are:
o National Oil Companies
o International Oil and Gas companies
o Distribution companies
The bargaining power of buyers in oil and gas industry is relatively small due to the nature of this industry. Buyers are interested in the price and the quality of a product.
3) Bargaining Power of Suppliers
There are big suppliers in the oil and Gas industry for both Producers and Distributers all over the county. Simply searches using online data basis provide a plethora of companies and organization.
4) Degree of Rivalry
The competitiveness of oil and gas industry and especially in the upstream sector of the industry is significantly intensive. There are three different type of players in the upstream sector of the upstream sector
Small List of Companies:
o Ascon Oil company Limited
o Capital Oil Plc
o Honeywell Oil and Gas Limited
o Gaslink Nigeria Limited
o Oando Group
o Lubcon Limited Oil and Gas
5) Threat of New Entrants
The factors that affect the newest companies to enter oil and gas business, especially the upstream segment is:
o Huge capital required
o National Oil Companies control more than 90% of the proven oil and gas reserves
o High competition within the industry
o The big IOCs or as we call it Integrated Oil and Gas Companies which can easy compete with new competitors due to economics of scale
o Oil and Gas prices volatility
o Oil and Gas Reserves are usually located in war zones or geographical areas with geopolitical conflicts or political instability
o National and international law restrictions which can affect the new entrance of a company in the oil and gas business
So, we can conclude that Nis a large and growing economy and feasible for doing business. As world has become more advanced with respect to innovation and technology and access to information has increased, Nigeria is also keeping in touch with global trends.
Foreign direct investment in the country is expected to increase and the foreign expatriates are coming back to their home country due to better working conditions. Political conditions of the country are stable except few parts, due to unemployment labor is cheap, disposable income of people is low these days, so they will avoid buying luxury items, cost of borrowing is high, high foreign exchange rates suggest that it's better to export than to import in nigeria.
Understanding religious factors is important for doing business in nigeria. Population is moving towards the technology. Taxes rates are quite high. Environment friendly businesses have higher chances of success.
Then, people of nigeria think that 80% of the power is distributed in the economy, and it is a collectivistic society. Masculine nature of people suggests that competition and performance and conflicts are resolved by fighting them out. Nigerian people neutral towards avoiding the uncertainty and think for short term goals.
Among other industries oil sector is most important, large and growing rapidly. There are many types of categories in oil industry. upstream (exploration, development and production of crude oil or natural gas) requires huge investment, downstream (oil tankers, refiners, retailers and consumers) requires relatively small investment, and service and supply, the final category.
Among these categories Downstream is more feasible because it requires relatively small investment and in Upstream, there are already big fishes fighting.
...(download the rest of the essay above)