A real African lion

Author: | Published: 24 Apr 2015
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Despite political risk and lingering corporate governance issues Nigeria is fast becoming a highly lucrative investment destination, according to James Wilson

Nigeria is the largest country in Africa by both GDP and population, making it one of the most interesting emerging markets globally. Although it is perceived as a risky market in some respects, a report by Ernst & Young published for the 2014 World Economic Forum positioned it as the least economically vulnerable of the MINT countries when considering the current account, external debt, government debt, inflation, growth in credit to GDP, import cover and currency change during the year.

By other measures, Nigeria was ranked 136th of 175 in Transparency International's 2014 Corruption Perception Index, an improvement on 2013 when it was ranked 144th of 177, putting it above other African hubs such as Kenya and Uganda. In the World Economic Forum's 2014 Global Competitiveness Index the country came in 127th of 144.

Behind the numbers, Nigeria presents a dynamic and shifting landscape, albeit one complicated by concerns over political risk and a high perception of corruption. And there have been a number of highly significant themes and developments that are key to shaping the market's opportunities and future prospects. At the top of the list are the low price of oil globally and the divestment programmes by international oil companies (IOC), the local content drive, reform of the power sector and the recent general election.

The country also has two of the most significant standalone ongoing projects in Sub-Saharan Africa: the Azura IPP project and the deep-sea Lekki Port development and associated infrastructure. Lawyers working close to the deals believe that both are pathfinder projects that will lay the blueprint for future developments in the country and region. "There will be a huge number of follow-on deals that will be adopting these structures," says the head of Africa at one global law firm.


The Nigerian elections were finally held on March 29 and a clear winner emerged as the incumbent president Goodluck Jonathan, seeking a second and final term, was beaten by retired general Muhammadu Buhari by over 2.5 million votes. Jonathan accepted defeat, allowing for what is so far a smooth transition and marking the first time ever an incumbent has lost re-election.

Buhari already has a track record in government and notably for the oil and gas sector he previously headed the Ministry of Petroleum in Olusegun Obasanjo's administration. He did also act as military ruler for two years after staging a coup in 1983. Buhari won the election on a pledge to get tough on corruption and is generally considered a strong leader. According to a partner of a UK law firm, the elections are "broadly encouraging" for investors. However the change in government may raise questions in the medium to long term, particularly in relation to political risk.

Oil and gas

Oil and gas, which accounts for about 80% of Nigeria's revenue, remained arguably the most active sector over 2014 largely as a result of M&A transactions resulting from IOCs, including Shell Petroleum, ConocoPhillips, Chevron and Total, divesting interests in oil assets to local companies. The assets being sold are predominantly onshore oil mining leases (OML) and the divestments have given rise to highly contested bidding processes, sky high valuations and billion dollar-plus transactions financed by local and international banks.

The most recent highlights were the sale of interests in OML 18, 24 and 29 by Shell Petroleum, Nigerian Agip Oil and Total E&P. In the deals, Aiteo Energy Resources and Aiteo Eastern E&P acquired a 45% interest in OML 24 and the Nembe Creek Trunkline for $2.85 billion, marking the largest oil and gas divestment in Nigeria so far and beating the $1.79 billion acquisition by Oando Energy Resources in July 2014 of ConocoPhillips' interests in Nigerian upstream joint venture assets, which included a stake in the Brass LNG project.

The other divestments saw Newcross Exploration and Production acquire OML 24 for $600 million and the consortium of Eroton, Midwestern Oil and Gas and Mart Resources acquire OML 18 for $737 million. In all, Total completed its divestments in March 2015 to pocket total sale proceeds exceeding $1 billion.

Coupled with local content laws, the divestments have arguably further indigenised the market and brought local players to the fore. A significant proportion of the financing came from local banks and the acquirers of the assets were indigenous oil and gas companies, a number of which are now taking equity investments from international investors or tapping international markets to bolster finances, expand and develop.

Among the notable examples of this is the $150 million investment by Singapore's sovereign fund Temasek into Seven Energy, which was the first such investment by a sovereign wealth fund. The investment was completed at the same time as a $105 million investment into Seven Energy by the International Finance Corporation (IFC). Another first in the market saw Nigerian indigenous E&P company Seplat Petroleum complete a dual listing on the London and Nigerian stock exchanges to raise $500 million. The listing was a first for the market and was Africa's largest flotation.

The developments have accompanied a trend of increasing cross-border Nigerian investments, driven by indigenous conglomerates such as Dangote and MRS Holdings. "A lot of capital is being exported from Nigeria to the rest of the region," says a UK partner, who adds that it is "increasingly important to have boots on the ground".

Low oil prices have had their effect on the sector and the government has already revised down GDP growth for 2014 from 6.5% to 5.5%. The price may also in time cast a different light on the valuations in the divestments and has already affected players such as Afren.


The power sector is in full reform. In 2010 the government began to privatise the Power Holding Company of Nigeria (PHCN) and its six generation and eleven distribution companies. This first phase was completed in November 2013 for $2.5 billion and local content dictated that 70% of all the debt come from Nigerian banks.

"Buhari won the election on a pledge to get tough on corruption"

In 2014 the government then sold 10 state-owned IPPs (National Integrated Power Project – NIPP). The plants are all gas-fired and include two combined-cycle gas turbine (CCGT) plants and eight open-cycle gas turbine (OCGT) plants that were producing 600 MW. In early 2015 three of the plants, Geregu, Omotoso and Olorunsogo, were completed and inaugurated while Sapele II was awaiting inauguration. In 2014 the government also floated the idea of privatising transmission infrastructure.

In addition to this, new investors are stepping in to develop gas-fired plants and gas infrastructure with financing from international banks. One of the key projects in this context is the 450 MW Azura greenfield IPP in Edo State, financed with $800 million from Standard Chartered Bank (lead arranger), Rand Merchant Bank, Siemens Bank, First City Monument Bank, IFC, FMO, CDC Group, Swedfund and a Nigerian Central Bank controlled fund. The project is the first IPP to get a World Bank partial risk guarantee and the first generating company to enter into a power purchase agreement (PPA) with the Nigerian Bulk Electricity Trading (NBET). It has already secured a gas supply agreement with Seplat Petroleum and has a target generating capacity of 1,500 MW. The developer is Azura Power West African, whose shareholders include Amaya Capital, ARM Infrastructure Fund, Aldwych International, Asset & Resource Management Company, African Infrastructure Investment Managers and American Capital Energy and Infrastructure.

A third but smaller development in energy is renewables. Current projects include the proposed construction of solar power plants by the National Rural Electric Cooperative Association and Total Energies Nouvelles Ventures each with a capacity of at least 30 MW across several states of Nigeria and the development of modular solar power projects of 100 MW each in a number of regions in Nigeria under a PPP scheme by Meliora Group and two other international companies in the Solar Band One consortium.


Nigeria has a number of large non-energy infrastructure projects, the most significant ones being the Lagos Rail Mass Transit project, sponsored by Lagos Metropolitan Area Transport Authority and with private sector participation under concession contracts, and the deep-sea Lekki Port, located in the Lekki free trade zone. The port is an estimated $1.5 billion project being led by Singapore-based Tolaram group.

Alongside these projects are a number of road projects including the Lekki-Ikoyi bridge and Lekki-Epe motorway, shopping centre developments and proposed real estate developments the biggest of which such is Centenary City, a smart city real estate development in a free trade zone. Centenary City is led by former Nigerian president Abdulsalami Abubakar and comprises 22 private sector investors. Dubai-based Emaar Group is developing the ten-year urbanization project which envisages a residential population of 150,000.