The oil and gas business is considered one of the riskiest industries in Nigeria. This is due to multiple risks that are associated with the sector. For instance, the political wars and influences in the country, from both the local communities and government officials. The impact that they have on the business operations is more significant than the one resulting from other factors such as the market or even infrastructure. The reason is that the success of the investments in the sector depends more on government policies, the communities, and the environment than the technical as well as economic factors. Companies in the industry mustn’t ignore the political risks during their valuation as they could affect their profit generation. This paper highlights the risks faced by oil and gas companies in Nigeria, risk strategies by these companies, and how to mitigate the effects of political instability.
Risks Faced by Oil and Gas Companies in Nigeria
Political Risk and Country Risk
Country risk is the uncertainty of investing in a particular nation as well as the level to which it can cause an investor to experience loss. Such can result from many factors, including economic, political, and technological influences, exchange rates, and other constraints. Assessments of the type of risk are based on relative risk factors, whereas political risk examines the likelihood of political instability in a particular country (Adegun & Abiola, 2020). This is the probability of disruption of operations of international business by political events or forces, whether they happen in the host nation or from a change in the global environment.
In a host nation such as Nigeria, political risk is greatly determined by uncertainty of the government’s actions as well as their political institutions. Additionally, it results from minority groups, for example, separatist movements. The country’s economic system is linked to the activities of the government and society. The unstable system is directly impacted by changes in politics. The development of the economy in the conflicted zones is reliant on the decisions made by the community, politicians as well as ethnic leaders. Most of the oil and gas companies in Nigeria have encountered problems related to the political and economic environment.
Royal Dutch Shell, Addax, and Chevron focus on developing socially responsible operations in Nigeria. Nonetheless, the Niger Delta area is a zone affected by conflicts whereby the economic, social as well as political situation is unstable (Adegun & Abiola, 2020). The absence of the government’s protection, in addition to corruption as well as the people’s oppression, causes great challenges for their operations. For instance, Shell, company started in 2005 after a merger of Shell Transport and Trading Company and Royal Dutch Petroleum Company (Adegun & Abiola, 2020). The new group encountered many issues, including the unstable situation in the host nation. The Nigerian government has failed for a long time to offer protection for both the public and businesses in the Delta zone (Adegun & Abiola, 2020). Moreover, the public did not support the operations made by the company due to its focus on ecological damage and contributions to social instability.
The essential political risks are the outcomes of the linked actions done by the political, community, union as well as tribal leaders. The politically as well as socially active groups contribute to the complications Shell faces in the region (Adekunle et al., 2020). The weak legal system and the challenge of corruption hinder the business’ progress as well as the creation of a strong image (Adegun & Abiola, 2020). Due to many years of military dictatorship as well as undeveloped democratic strategies in Nigeria, the political atmosphere is unstable. Additionally, continuous changes witnessed in the political situation of the country cannot help in the efforts towards a stable development of the company in the region.
While offering suggestions on overcoming the challenges, it is important to focus mostly on external factors like the prevalent ones. The instability in society, military conflicts as well as violence are the basic issues to challenge the operations of Shell enterprises. This is why it is essential to focus on the promotion of human rights in society and on the company’s employees’ support as they act as representatives in Nigerian society, which is diverse. The next step is a response to the local people’s criticism regarding the business’ inability to overcome the negative ecological effects as well as poverty in the area.
Risk Strategies by Oil and Gas Companies in Nigeria
A risk management strategy offers a structured as well as coherent approach to identifying, assessing, and managing risks. The risk of entering and conducting business in the Nigerian market is significant. Successful corporations mitigate the risk in the country with detailed market research as well as preparation. For Shell and other oil and gas companies in the nation, being proactive has helped them stay ahead of time and not wait until matters rise (Adekunle et al., 2020). Some of the accomplishments of these companies include building resilient strategies.
Before establishing their businesses in Nigeria and starting operations, these companies first began by gathering information. It included data about the sector, labor, and customer base to better comprehend the landscape (Adegun & Abiola, 2020). After that, some firms such as Shell and Chevron utilized that data to create a detailed business model that considers the country’s peculiar demographics, how to conduct business, and current business surroundings (Adegun & Abiola, 2020). Integrating the considerations into the model allows Shell to plan for possible threats and handle the impact of other unpredictable situations. Lastly, the company, similarly to other top firms, has established plans to set some of its main operations in the major cities due to better security and more stable environments.
The oil and gas companies in Nigeria are also paying attention to macroeconomic conditions as part of their risk strategy. Since the country is considered an emerging market, they need to monitor the status of the global economy which can guide the number of investments in new projects in the country. This further shows their approach toward making well-informed decisions that could impact their businesses.
Chevron, for instance, has made it known that it intends to conduct business with the right partners. It has made efforts to employ local people who have credible and reliable information about the oil and gas industry (Adegun & Abiola, 2020). These individuals help in developing distribution channels as well as the construction of supply chains that allow the company to deliver efficiently. Moreover, since they are from Nigeria and understand how operations happen in the area, they help in preventing possible risks.
While accumulating information and planning for short-term as well as long-haul aims, the companies understand that it is equally important to invest in the current resources. In addition to employing local people, they ensure that the talent available has sufficient training as well as opportunities necessary for growth in their positions (Adegun & Abiola, 2020). Having a team of employees, especially at the management level, that is both great at their jobs and can respond well to various issues in the market is essential for the company.
The oil and gas companies have committed to ethical practices as part of their social responsibility efforts. Corruption is among the major risks companies face while conducting business in Nigeria (Adegun & Abiola, 2020). Thus, in attempts to mitigate the risk, the firms have developed a code that allows them to operate in a way that follows strict and ethical practices. Most important is that the principles are used as a guide for the leadership team as their decisions will affect the businesses.
Despite negative comments about companies such as Nexen and Total by some of the government officials in Nigeria, these firms have ensured that they maintain a strong community as well as stakeholder engagement. Developing relationships with stakeholders and the community is a good way to guarantee success while minimizing possible risks. One way that the organizations have been able to achieve this is by contributing to the socio-economic development of the areas surrounding their operations. For instance, most of them have ensured that more than fifty percent of all individuals working for the organizations are Nigerians (Abdulsalam & Babangida, 2020). When a foreign investor arrives and starts to set up operations in a country, the local people always want to see what the company offers them.
This is important since, without cooperation from the locals, it is difficult to secure raw materials in the areas. Offering them a source of livelihood not only shows that a company is interested in making profits but also benefits the people in their environment. As mentioned earlier, local people can offer important information about how business is conducted in the country. This data is very key to a company’s operations, and by employing local people, it becomes easy to obtain as they feel indebted. The image of any corporation depends on how many individuals it has employed from the surrounding communities.
Another way companies have ensured that they maintain a strong image is by starting and participating in other continuing community development projects. For example, Shell is an active contributor to the Bonga Deepwater project (Abdulsalam & Babangida, 2020). In a developing country such as Nigeria, some places lack clean water, good roads, or even schools. The image of a company can change depending on how it responds to such issues (Adekunle et al., 2020). For instance, after determining that local communities do not have access to clean water, the company can offer help by building wells for people. This way, the company builds a relationship with the people, and consequently, the image improves, which guarantees success while minimizing the risks.
Apart from contributing to projects and employing the local people, another way that these companies have maintained a strong image is by offering scholarships to students from top universities in Nigeria. In developing countries such as the one in the discussion, families depend on individuals that have obtained higher education. Communities gather their resources to send such students to universities since they understand that they will help them in the future after securing good jobs. Chevron and Nexen have established programs that send selected students to the top schools in the world (Abdulsalam & Babangida, 2020). This has resulted in individuals in the country having good things to say about the firms and, thus, a good image.
Lastly, in an attempt to minimize risks by maintaining a strong image, the companies have helped in the fight against terrorist groups in Nigeria by funding various campaigns. These groups terrorize the local people by scaring, assaulting, and even killing people. Having conducted business operations in the country for a long time, the firms feel like part of the community. This has been shown in their public condemnation of the activities of a group such as Boko Haram (Ohaka & Ogaluzor, 2018). The organizations have also rebuilt schools that have been torched by such groups and provided funding for children’s centers for kids who have lost their parents. It thus becomes difficult for local communities to allow the government to use its power against the company’s operations.
How to Mitigate Effects of Political Instability
As suggested earlier, significant changes in the political landscape can easily impact business operations, for instance, through new regulations and initiatives that are set by the new administration. Thus, a company must form a contingency plan that it can execute if there is a sudden policy change (Adekunle, Bagudo, Odumosu, et al., 2020). For instance, the company can plan to open operations in other regions with more favorable policies. Even though the current regime allows operations to happen without challenges, for expansion, companies must research establishing a business in other places. This offers them enough time to assess the other areas since it would be difficult to obtain relevant information when in a hurry to close operations in Nigeria. Additionally, when the potential host nation learns that the corporation is desperate, it could have the chance to ask for more than desired in terms of the percentage of local employees to be employed and taxes.
The government in Nigeria does not offer the needed conditions such as protection and support for the effective operations of the companies in the Niger Delta region. Additionally, it has failed to deal with the issue of corruption with references to productive legal regulations. Political instability affects business operations and thus, leads to losses (Adekunle, Bagudo, Odumosu, et al., 2020). To alleviate such effects, the government needs to offer more protection for the firms and ensure that the policies set are not acting against them but leveling the field for all organizations in the industry. For a long time, the Nigerian government has been known to put in place policies and regulations that aim to benefit local companies and hinder the development of foreign countries.
Shell, being a foreign corporation, has had to endure and attempt to grow despite the restrictions caused by government policies. One of the reasons the government does this is to force foreign companies to invest more in the host nation. However, they fail to understand that the company has invested a lot already and shows a willingness to continue doing so. If they decide to move to a different country, then many Nigerians will suffer as the corporation contributes to the economy. For instance, Shell has invested in the development of the businesses in the nation greatly due to unexpected earnings. The fact that the company opted to participate in a project named Bonga Deepwater shows that it is determined to continue its operations in the country due to huge profits. However, it is difficult to report on the government’s positive influence on the same. It is, thus, important for the government to pay more attention to private industry in the country’s development and progress of society.
The fact that oil and gas companies such as Shell and Total are among the biggest investments in Nigeria makes them a target and thus vulnerable to the risks related to the government as well as the public. It is under continuous pressure by the two due to their expectance of receiving some benefits due to its operations. Aiming to increase profits and accumulate significant revenues, corporations should also offer the public and government details concerning their operations. Nonetheless, despite promoting the idea of sustainable development and social responsibility, the reputation in public remains negative. Offering employment to the population not only impacts the country’s economy but also boosts its image.
In the paper, it is evident that the Nigerian government has failed to protect foreign investors from insecurity. It has also established policies that hurt the business operations of the company, which has led to losses. Nigeria must realize that Shell and others have invested much in the country. If it decides to close its operations in the country, many citizens will lose their source of livelihood, and also projects that were funded by the investors will stop. Foreign investments always benefit the local people directly and indirectly. Through the paper, it is clear that political instability negatively impacts the business operations of companies in the oil and gas sector. The government must ensure that the political atmosphere is not threatening so that investors feel safe to continue their operations.
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