A New Type of Regulatory Reckoning


BY Rolake Akinkugbe-Filani

This opinion piece references the current stand-off between local oil firm Oando PLC and Nigeria’s Securities and Exchanges Commission (SEC) but is not intended to provide commentary of the merits or not of SEC’s actions nor on the merits or not of allegations levied against Oando. Instead, it is primarily intended to highlight the dynamics underpinning the emergence of financial and capital markets regulation and the growth of indigenous firms.

The stand-off represents a new regulatory reality in Nigeria’s private sector. There is a new era of scrutiny of local and regional corporates as industry competition deepens and Governments face policy dilemmas and in some cases, popular pressure. Then there is the convergence between financial and economic regulation, and the rapid and aggressive growth of what I call “expansionist” and ambitious local firms. As regulators become more proactive in implementing rules and regulations, corporate giants have lagged behind in being proactive about staying clear of regulators’ wrath.

Across Africa, over-zealous implementation of regulation, without thorough due process can be counter-productive and actually hamper genuine efforts at snuffing out really bad corporate eggs. For too long, complaints about the lax standards of African regulatory bodies went unheeded, particularly where economic and financial regulation were concerned. Now, African regulators, including those in Nigeria are finally catching up and have developed sophisticated, close to best-in-class mechanisms for policing markets. But has this been a double-edge sword?

First a brief look at the oil and gas sector and its peculiarities in relation to capital markets. Globally, the dip in oil prices, despite Brent’s early 2019 recovery, has already created a higher entry bar for any energy sector capital market plays on the continent, including Nigeria. Stock market adventures for the energy sector have historically been few and far between on the Nigerian market. In any case, appetite for new oil and gas stock has tended to converge around periods of economic booms or higher growth, reflecting an abundance of local sources of capital or periods of sustained high oil prices, when would-be investors see potential upside in the E&P story.

Since oil prices fell steeply more than two years ago, the oil and gas sector (upstream in particular) has been an even harder-sell for investors. Understandable, since some would-be market entrants, reeling from the profit implications of the price fall, were also grappling with stalled corporate maturity, a squeezing of credit lines, outstanding debt obligations, limited asset diversification, regulatory uncertainty, challenges with oil transportation and evacuation infrastructure, and in some cases insecurity and operational downtimes. However, downstream sector capital market forays have historically been a relatively softer sell given rapidly moving physical products market, and growing energy demands amongst Nigeria’s ever expanding population and commercial industries; factors which are relatively easier to explain to investors.

Today the deep and aggressive regulation of financial and capital markets globally and in Africa is coinciding with the continued equally aggressive expansion local private sector giants. Changes in Nigeria’s energy sector over the past decade – upstream divestments, regulatory policy moves, new partnerships, capital markets entry by oil firms etc – have represented the largest opportunities for indigenous Nigerian firms with the requisite expertise, partnerships and capital to ascend into the league of major upstream players in Nigeria and expand operations.

Indeed, local operatorship of divested assets, as well as a corresponding boost in local production – which currently accounts for roughly 15% of Nigeria’s total oil production – has been a key indicator of the extent to which Government policy on local content participation has been successful. Today, local Nigerian companies own more than 100 blocks across Nigeria’s oil-producing regions, and own at least 32 marginal fields. Those figures could still double over the next few years, creating new local contractor opportunities and thus new local financing opportunities. In short, Nigerian firms are no longer minnows in the oil game.

However, this rapid expansion has had unintended consequences, as local companies’ participation has also heightened, regulatory and financial scrutiny. A case in point is the Government’s early June rescinding of 6 oil licenses over alleged financial obligations owed by 5 local firms. These setbacks regardless of the eventual outcomes on regulatory violations, reflect an increasingly more crowded market of players, competition for assets and the high stakes pressure to enforce regulation. Operating in Nigeria’s energy sector is not for the faint-hearted. Both factors internal and external to operators, ranging from corporate governance missteps to infrastructure bottlenecks can potentially undermine investment and corporate integrity. Primarily for local oil champions, reputational risk arising from the general public’s perception that the oil sector is an enclave industry with little wider benefits to the rest of the economy is a factor. On the other hand, there is a tendency for the same general public to see the oil industry revenues and corporate bounty as an alluring target for speculative stock investments. Meanwhile, oil firms also have the additional high burden of proof when it comes to allegations of financial mismanagement, again in large part dictated by the ‘enclave’ industry label often ascribed to the industry.

There are big lessons to be drawn from the unfolding Oando-SEC saga. There’s no doubt that any publicly-listed company in the domestic market should be a leading private sector force, underpinned, ideally, by an abundance of capital and an impeccable reputation where disclosure, reporting and probity are concerned.. However, when companies like Oando first emerged in Nigeria, the field of local firms playing in energy was extremely limited, even downstream.

Many evolved organically, some started as family business or trading concerns that took advantage of demand and supply trends in Nigeria’s rapidly but insatiable energy market. The ambition to become corporate giants was spurred by commercial factors; such as the need to secure new markets, or sources of demand and also secure sources of supply. Hence many solely trading entities began to vertically and horizontally integrate, mirroring to some extent operating models more typically seen with global mid and large cap independents or international oil companies (IOCs). With such corporate expansion into the capital markets, financial reporting and accounting standards expanded the scope of scrutiny, and in relatively underdeveloped capital markets, shined the spotlight on opacity. Commercially now, industry players are pruning businesses and focusing on core operations and the wheel is now moving back towards divestment and asset rationalization as seen with the partial divestments of Oando Gas and Power and Oando Downstream in 2016. However, the regulatory trend is moving in the opposite direction, it is becoming expansionary.

As capital markets have grown, regulators have increasingly sought to benchmark themselves against global standards in line with global securities regulation post-2008 financial crisis. There is rationale to this approach, since in emerging global areas such as digitalization and technological innovation, adoption has helped stock exchanges in Africa scale operations, and attract new listings to the market. In fact regulators like SEC are very crucial to not just financial and capital markets development, but broader economic development due to the role they play in attracting investors who may eventually go on to bring in Foreign Direct Investment (FDIs) . Regulators also help promote financial stability, by developing and policing a system of rules of regulations that protect investors, and preserve market integrity as a whole. Relative market illiquidity in Africa compared to some global markets has however exposed some regulatory inefficiencies, since it weakens market discipline and thus corporate governance and control.

The dearth of energy firms on the stock exchange has also limited institutional depth and know-how in building a mutually reinforcing system of engagement between regulators like SEC and oil and gas firms. Although sectoral diversity and breath is important in developing capital markets, so is sectoral depth. Think of it this way, the more experience regulators have of engaging with firms from a specific sector, the easier it is for issues to be amicably and transparently resolved, through advocacy and shared-learning. Today, oil and gas companies represent less than 0.1% of companies listed on the Nigeria Stock Exchange (NSE).

The unfolding events – notwithstanding the merits of investigations or probe of Oando’s corporate and commercial activities – also underscore an emerging consumer- and investor- centric approach to regulation, which in itself is a good thing. But blind regulation, devoid of thorough and detailed due process, can ultimately pose a challenge to free enterprise, not excusing corporate excesses where they do exist. There’s a saying that good regulation should be conducive to both consumer protection and to business.

There is a massive responsibility on the main protagonists in this instance to make good on this dual imperative. Oando’s beginnings and its aspirations to transform Nigeria’s energy landscape are laudable, having grown from a small trading concern to one of the largest indigenous players of reckon with around 50,000 barrels of oil production. It cites amongst its aspirations to “change the Nigerian and ultimately African narrative through the building of Africa’s leading indigenous energy solutions provider…and to proffer innovative solutions that solve Africa’s energy needs and in turn enhance the quality of life for millions of Nigerians”. These goals must be done with a great deal of responsibility, circumspection and dare I say, introspection, given unfolding events.

As capital markets regulator, SEC’s mandate has always been clear, but the body itself will come under scrutiny if its ‘how” in the way it deploys its mandate does not reflect global best practices. Regulators have an overarching obligation to protect investors and consumers regulate. But they also have responsibilities to market operators to protect the integrity of a system that those same operators have to abide by but also need to depend on. None of these actors can do it alone, and there should be room to work together.

•Akinkugbe-Filani is an energy industry expert and financial services professional