Post Subsidy Removal: PWC Predicts Mergers, Acquisitions of Oil Marketing Firms to Drive Asset Optimisation

•Says FG’s palliative should reflect living cost adjustment occasioned by policy

Peter Uzoho and Oluchi Chibuzor

Pricewaterhousecoopers (PwC) Nigeria has predicted that the removal of petrol subsidy by President Bola Tinubu would see the downstream sector of the nation’s oil and gas industry witness mergers and acquisitions by petroleum marketing companies in other to drive asset optimisation in the sector.

The professional advisory services firm also urged the federal government to ensure that any palliative effort being formulated takes cognisance of the natural living cost adjustment that is affecting all income levels of the population.

The PwC analysts made these assertions yesterday, in Lagos, at a press conference to discuss the outlook for the downstream oil sector post-subsidy era.

They underscored that the subsidy removal and downstream deregulation policy remained a transformative opportunity for Nigeria’s oil and gas downstream sector, adding that the marketing companies must begin to look at how to optimise their cost better.

Partner and Africa Oil and Gas Leader at PwC Nigeria, Mr. Pedro Omontuemhen, who was represented by the Partner and Mining Leader at PwC, Mr. Cyril Azobu, noted that with the subsidy era coming to an end, the nation’s oil and gas downstream sector faces a transformative opportunity.

Omontuemhen explained that subsidy shielded companies from the reality of their profits, maintaining that now, companies would confront the true market dynamics.

“In addition to navigating risks from global economic shifts, fluctuating energy prices, Nigeria’s macroeconomic conditions and forex regime, companies must embrace operational excellence to stay competitive.

“We are going to see a lot of mergers and acquisitions going on in the industry. That means bigger players will emerge that will command larger margins. The era of fixed margins is gone. The market right now is in a situation where your cost must be very low to be competitive”, Omontuemhen stated.

In his lead presentation, Partner, Energy, Utilities and Resources, PwC Nigeria, Akinyemi Akingbade, said the oil and gas downstream sector would evolve rapidly post-subsidy removal.  He said the government needed to respond with policies that would aid quick alternatives in other options that would help the nation to achieve its energy transition plan.

He noted that key alternative areas remained the gas market which was not deep enough, pointing out that with the subsidy removal, it presents an opportunity to tap the potential of the sector.

Akingbade explained, “We anticipate a consolidation of players in the sector as size and economies of scale will play a major role in shaping competition in the market.

“As the sector becomes more competitive, companies would need to review their supply chain management, leverage digital technology and have a sound risk management system to manage cost and deliver value to their stakeholders.

“For growth and sustainability, they should invest in other energy options e.g. Compressed Natural Gas (CNG) and auto Liquefied Petroleum Gas (LPG) as the world embraces low carbon energy.”

While examining the opportunities the subsidy removal policy presents, PwC also made a number of recommendations which players in the sector should consider, especially around reviewing their strategies.

Admitting that the policy presents an opportunity for alternatives, it however, contended that building local refineries remained the best option on the long-term view.

Akingbade further explained, “If your refineries are not working, it actually means that you are subsidising production in another country. Local production must come on stream and this means there must be strategic policies around the downstream sector.”

In her intervention, Partner in charge of Tax at PwC, Esiri Agbeyi, opined that the removal of petrol subsidy has called for a review of the living wage that would reflect the living cost adjustment across the country with respect to peculiarities of each state.

She explained that living wages become imperative because foreign exchange and inflation going up and down have affected a lot of things.

Agbeyi said, “Minimum wage as has been adopted in the US is basically driven for labour productivity. So they are basically looking at what is the income that can encourage productivity as opposed to the living wage, but living wage, you have to consider a whole lot of factors.

“So it is not unlikely when we arrived at our own minimum wage in Nigeria we were looking at living conditions, but definitely it needs to be upgraded.  So the country needs to do a proper study on the living wage across the country and the government needs to determine whether it can afford it. But the bottom line is that the current minimum wage is not taking anybody home.”

The analysts said the governments at all levels could fund this living wage by blocking leakages and loopholes, while facilitating a new era of development that is driven by the mineral resources available to them.