Recapitalization : A Crucial Step to Mitigate Forex Fluctuations Risk in Oil and Gas Business

By LOVETH AZODO, Lagos

In the face of Nigeria’s precarious foreign exchange market, insurance companies are increasingly transferring their oil and gas businesses abroad, exceeding the limits imposed by local content laws. A closer look at the past five years reveals that over 60 percent of this sector’s businesses are now ceded to foreign insurers, emphasizing the pressing need for a solution.

Data from the National Insurance Commission (NAICOM) indicates that, between 2018 and 2022, insurers attracted N501.3 billion in oil and gas business but ceded N307.5 billion, equivalent to 61 percent, to foreign counterparts. 

This situation contradicts the local content law, which mandates that 70 percent of all insurance risks associated with oil and gas businesses must be insured in Nigeria with registered Nigerian insurance companies. These risks encompass everything from prospecting and exploration to drilling, construction, shipping, distribution, marketing, and transportation within the oil and gas sector.

Insurance operators have attributed this trend to the severe depreciation of the naira since 2018 and the increasing difficulty of accessing foreign exchange, making compliance with the local content law an arduous task. Official exchange rates have skyrocketed from N361.3 per dollar in 2018 to N495.2 per dollar in 2023, while the parallel market rate has surged from N363 in 2018 to N1000 to N1113 in 2023.

One of the key challenges lies in the dollarization of the oil and gas business, transacted primarily in dollars. As the naira depreciates, local retention diminishes, while the value of associated risks escalates. Furthermore, the relatively low capital bases of Nigerian insurance companies limit their capacity to engage effectively in the capital-intensive oil and gas sector.

NAICOM, the industry regulator, acknowledges the difficulties posed by the oil and gas portfolio due to its substantial capital and professional requirements. These challenges have led to a significant uptick in the share of oil and gas business transferred to foreign insurers, increasing from 50.9 percent in 2018 to 64 percent in 2022.

The Role of Recapitalization: A Way Forward

To address this critical issue, insurance operators, such as Mr. Olasupo Sogelola, Managing Director/Chief Executive Officer of International Energy Insurance, are advocating for recapitalization. They argue that boosting the capital base of insurance companies is the key to improving local retention of oil and gas business, thus mitigating the challenges triggered by forex fluctuations.

Mr. Sogelola explains that the industry must attract more capital and invites successful Nigerian businesses operating abroad to invest in local insurance companies. Recapitalization is vital in enhancing the sector’s capacity to underwrite oil and gas business effectively. While some may oppose recapitalization, he underscores the importance of a structured approach to ensure companies have adequate time for this transition, as abrupt announcements could have detrimental effects.

Challenges and the Urgent Need for Local Content Law Enforcement

Mr. Adebisi Ikuomola, Deputy Managing Director, Technical, Anchor Insurance, notes that participation in the oil and gas business is decreasing. However, the possibility of full participation can only be guaranteed if the exchange rate for the dollar comes down or if insurers’ capital base is increased.

 He emphasizes the need for laws and regulations that encourage local participation through graduated domestication of insurance in the oil and gas sector. Despite the existence of local content laws and regulations, insurance companies have yet to fully leverage this opportunity to position themselves as major players capable of leading foreign firms in underwriting oil and gas business.

“Despite the local content laws and regulations established in Nigeria, insurance companies are yet to fully take advantage of the opportunity to effectively position themselves as major players capable of leading foreign firms in the underwriting of oil and gas business.

“The mandates to companies in the upstream petroleum sector to cede their insurance business to local insurers, is in line with efforts to maximise the participation of local insurance companies in the oil and gas sector,” he said.

NAICOM, the industry regulator, also recognizes the challenges posed by the oil and gas portfolio. These challenges stem from the specialty nature of the sector, which contrasts with the underwriting and carriage capacity in this type of risk. 

NAICOM stated: “Beyond the economic need of capital and professional enhancements in the industry, the urgent need for local content law enforcement cannot be over emphasized, to ensure for justifiable retention levels for all kinds of special risk Insurances including. 

The recapitalisation measure of the Commission is much handy in this regard to create the enabling carriage capacity especially in special risks segment of the industry.”

The need for recapitalization in the insurance industry is underscored as a crucial step to mitigate the challenges posed by forex fluctuations in the oil and gas business, which has driven the transfer of these businesses abroad. Addressing this issue is essential not only to comply with local content laws but also to create a robust insurance sector in Nigeria capable of withstanding external economic pressures