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Prospects, people and power

September 10, 2010

Nigeria is a difficult but nonetheless attractive business environment. The driving force drawing FDI into Africa’s second largest economy, mostly reinvested earnings of oil multinationals, includes increased global demand for commodities, demographic-driven consumption potential alongside economic growth. (According to the US-based Population Reference Bureau, Nigeria’s population is expected to rise to 282 million by 2050; this will make it the world’s sixth most populous country.)

The IMF estimates that 70% of gross direct investment flows to Sub-Saharan Africa in 2008 went to oil exporters: Angola, Equatorial Guinea and Nigeria. Analysts believe that resource rich African countries with improved political situations are likely to deliver fast growth rates over 2010 and 2015. But Nigeria’s current political risk isn’t deterring investments.

Africa is the number three region in the world in terms of proven oil and gas reserves (9%). With discoveries in Uganda, Ghana, Sierra-Leone etc, reserves are expected to rise. Exploration is most intensive here than anywhere else in the world. Key resource holders are Nigeria, Libya, Egypt and Angola. Oil companies listed abroad with the most exposure to Africa include Afren (95% of 2007 revenues); Tullow Oil (58% of 2007 revenue); ENI (49% of reserves in 2007); Marathon (46% of reserves in 2007) and Total (29% of reserves in 2007).  Chinese oil companies: Petro-China (Sudan), Sinopec (Nigeria and Angola) and CNOOC (Angola) are making headway in Africa.

Nigeria is an important region for oil and gas. Offshore oil fields and gas-related investments are the major growth areas for production. According to a 2006 report by Merrill Lynch, “14% of Shell’s near-term volume (2005-10e) is expected to come from Nigeria, primarily Bonga, Erha and onshore gas fields.” The report further noted that “For Total, Nigeria represents 13% of volume growth mainly from Amenam, Bonga, Akpo and also the Usan field. Eni has lower but still meaningful exposure at 7% of medium-term growth.”

For these oil companies, Nigeria’s high-quality crude oil and huge gas potential, despite rising production costs, trump economic and political aches. A booming extractive-industry will fuel growth in infrastructure. Marked improvement in Nigeria’s infrastructure will impact economic growth and productivity. Part of the post-amnesty plans for the Niger Delta is to ramp up infrastructure development.

Coupled with a steadily improving macroeconomic condition and plentiful market opportunities, investors can reap huge dividends from Nigeria’s young and rapidly urbanising population. In addition, Nigeria’s fiscal accounts are swelling – thanks to peace in the Niger Delta and rising oil prices. Political stability, infrastructure and a ready pool of talent, however, hinder private enterprise and foreign investment. Under President Goodluck Jonathan, Nigeria’s power problem has been prioritised. Arguably, this is the biggest and quickest way to boost other economic reforms.

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