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

1. “Impact of Oil Price and Currency Adversities – Do we
have Robust Industry Regulations?”
Presented by John Ukpaka
Adepetun Caxton-Martins Agbor & Segun
15 May 2015
John Ukpaka- jukpaka@acas-law.com

2. 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 within
regulatory 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 foreign
earnings and by extension, its local currency position.

3. CRUDE OIL AND CURRENCY ADVERSITY
 Nigeria has been unable to successfully diversify its economy and remains largely an oil export
based economy.
 Fall in the international price of crude has had multiplier effects on the Nigerian economy and by
extension, 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

4. 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 to
support importation and local ‘dollarized’ expenditure.

5. THE NIGERIAN OIL AND GAS SECTOR REGULATIONS
 Extensive use of the USD in the Nigerian O&G sector has had a multiplier effects in other
subsectors of the Nigerian economy - “Dollarization” of the economy.
 Regulatory environment of the Nigerian O&G sector does not make or provide parallel regulatory
framework to control the nation’s currency.
 Consequently, while the oil and gas sector almost unilaterally determines the nation’s financial
and monetary position, it does not contain any robust regulatory framework for currency
adversities.

6. THE NIGERIAN OIL AND GAS SECTOR REGULATIONS
 Regulations in the Nigerian O&G sector are generally geared towards attracting investment in the
sector, increasing production and local participation, as well as preserving Nigeria's energy
reserves.
 Financial and monetary policy in Nigeria - regulated by the Ministry of Finance and the CBN and
not the Ministry of Petroleum and Natural resources.
 Still, certain regulatory practices and instruments in the O&G sector impact the Nigerian
currency position.

7. Select policy and regulatory provisions in the O&G sector which impact currency positions are as
follows:
 Currency Split in Contracts: Currency split policy applied in contracts in the O&G sector
requiring service providers to apply a naira portion to their contract receivables.
 The “Spend” parameter in Nigerian Content: one of the parameters for determining the
Nigerian 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 in
Nigeria on Nigerian items/services.
EFFICACY OF OIL AND GAS REGULATIONS

8.  The Retention Rule under Local Content Legislation: all operators, contractors and
subcontractors are required to maintain bank accounts in Nigeria and retain a minimum of 10% of
total revenue accruing from its Nigerian operations in such account.
 Localized Financial Services under Local Content Legislation: Companies in the O&G sector to use
Nigerian financial institutions only, save where impracticable.
EFFICACY OF OIL AND GAS REGULATIONS

9.  The Excess Crude Account (“ECA”):
• The annual budget is based on a conservative international crude oil price benchmark with
the surplus funds saved in a special fund account;
• Creation of the ECA in 2004 to protect the planned national budget against shortfalls caused
by 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 in
oil revenue emanating from fall in crude oil price in the international market among other
factors.
EFFICACY OF OIL AND GAS REGULATIONS

10. 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 currency
flight.
EFFICACY OF OIL AND GAS REGULATIONS

11.  This paper only considers currency stabilization policies from an O&G sector perspective; it does
not imply that there are no regulatory measures built into the Nigerian economic system to
protect 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 the
Fiscal Responsibility Act and other subsidiary instruments which regulate the Nigerian monetary
system.
 However, with specific regard to the O&G sector, when considering the generality of the extant
O&G sector regulations, it does not appear that they provide robust “shock absorbers” or control
mechanics for currency fluctuations in Nigeria; this is despite the fact that the country’s foreign
currency earnings derive largely from O&G sector activities.
CONCLUSIONS

12. THANK YOU
THANK YOU

13. 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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