Paddy Adenuga’s entrepreneur story and the depressing predictability of Nigeria’s elite

Lions gonna lion
Lions gonna lion
Image: Reuters/Yves Herman
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It was the economist Albert Hirschmann who espoused the idea of an ‘enclave economy’ in the late 1950s. This is a phenomenon where one sector of a country’s economy is highly developed but exists in a way that has practically no bearing on the rest of the country’s economy.

The best example of this is, of course, the oil industry, especially in developing countries. In Nigeria, it’s particularly stark when you consider the level of sophistication, investment and general development of the oil industry compared with the rest of the economy..

But this enclave nature creates another perhaps psychological effect. The vast majority of Nigerians do not have any relationship whatsoever with the country’s oil industry. All they ever see is the vast wealth it produces when it is on display: expensive cars, private jets, opulent buildings and newspaper stories about incomprehensibly rich people.

This “knowledge gap” as to how people in the oil industry come about their wealth has been filled by awe and myths. If these people are so wealthy, surely it must be that they are supremely talented and have been blessed by God? So when the son of one of Nigeria’s richest men—worth $4.5 billion, according to Bloomberg—recently published an 8500-word blog retelling the story his ultimately failed bid in 2013/14 to buy some North Sea oil assets from Chevron Netherlands, it presented a rare insight for Nigerians to see how the rich and famous in the oil industry go about their business.

Bored and restless

The story begins with a bored and restless 29-year old man seemingly under some sort of self-imposed pressure to achieve something big before turning 30, perhaps to impress his family. All that energy finally found an outlet when he came up with a strategy to get into the oil business. His starting point was noting African oil producer nations like Angola, Equatorial Guinea and Nigeria require investors to be an operator with production capabilities or partnered with a technical partner.

Paddy Adenuga decided he was going to use a “Trojan Horse strategy”.

I had read ancient Greek literature when I’d attended military academy in Texas and it served as inspiration. I would acquire an oil & gas operating company in Europe (the Trojan Horse), where the political barriers and costs to entry in comparison to Africa would be significantly lower. I would then use this newly acquired company, which would now be of Afro-European in heritage, to become a technical partner to many local and international investors in the upstream oil & gas business in Africa.

Adenuga’s target was for his company to be the first of its kind and “most sought-after” oil & gas company in Africa because of its “unique DNA and ownership”. He writes: “After thinking of this idea, I took myself out to a bar a few blocks from my house and ordered myself a nice strong drink. I felt like a genius.”

On some level, this made some sense. Speaking to a number of experts in the oil industry about his chosen strategy, my summary is that:

  1. Owning a producing European asset could have allowed him raise cheap(er) debt, backed by the asset’s cashflows, to fund an entry into Africa. This is of course dependent on the productivity of the fields he was buying and oil prices.
  2. There are several marginal fields in Nigeria that could do with a technical partner and funding to exploit the oil resources in them. In exchange for the expertise and funding he was bringing to such fields, he would have taken up equity in them.
  3. There are also a number of politically connected people in Nigeria and across Africa who are sitting on lucrative oil licenses but lack the technical expertise to exploit them. The Chevron Netherlands brand name would have at least gotten him a foot in the door where those people would listen to him.

But there is nothing unique about any of these potential strategies and none of them was guaranteed to work. Oil prices began their descent in August 2014, just at the time he was in hot pursuit of the asset, and have not hit such highs since then. Indeed, the eventual buyer, Petrogas of Oman, stopped production in some of the assets in 2017 due to low oil prices.

Targeting marginal fields would not have been a walk in the park either. For one, he would not have been bringing any unique expertise to the table and the range of foreign technical experts who specifically focus on Africa is quite formidable. One example is Texas-based Kosmos Energy which specializes in exploration in areas abandoned by the majors. Kosmos has since found oil in Ghana, Senegal and Mauritania. Paddy Adenuga’s outfit would not have been able to match Kosmos if they went head to head for African assets.

Getting into Angola as a technical partner would have been even harder for a small player. The state oil company, Sonangol, is quite formidable in the local industry. The Chinese are also deeply embedded in the Angolan oil industry much more than they are in other African countries as are a range of other IOCs. Equatorial Guinea perhaps offered the best prospects for his strategy of going after undeveloped licences as a technical partner and funder. But far from being “the prettiest girl in high school who everyone wanted to take to the prom” as he described it, he would simply have been just one of many very pretty girls.

There’s much to commend in Adenuga’s tenacity and willingness to take a big bet. Certainly the Nigerian economy could do with a lot more bold and daring entrepreneurs willing to go against the grain of what is the acceptable way of doing things. The trouble is that his story is none of these at all. It is the same kind of story that has caused so many problems of late in the Nigerian economy.

The myth

To begin with, as stated above, there was nothing particularly special about the strategy of acquiring a European operation to use as a ‘Trojan Horse’ for an African invasion. Further, purchasing the asset came with a substantial abandonment liability—the legal requirement to restore an oil production facility to as close to its natural state at the end of production. This “abandex” was estimated at $300 million “at first glance”—a significant sum of money for an asset with “weak reserves and very little production life”. If the strategy was to raise debt backed by the cashflows, it’s hard to see how it would have worked.

The biggest clue that this was a bad idea came from “Edgar” (my favorite character in the whole story), an English banker who had been doing oil and gas deals for longer than Adenuga had been alive. He insisted on being paid upfront—a clear sign that he had no confidence in the deal or the strategy. But where he might have intended that as a warning to Adenuga to let it go, he interpreted it as a love of money by Edgar.

On and on it went. When he was advised by the people he was paying a significant amount of money to advise him to only bid $1 for the asset (plus the ‘abandex’), he instead advised his advisers to bid $50 million. Anyone who has had close dealings with a Nigerian “big man” will recognize this type of behavior very well.

Through the entire process, the ‘abandex’ is treated as no more than a minor irritation by Adenuga. In one particular adrenaline rush, he even let Chevron know he would be willing to pay $100 million. In the end, he came up with an idea to get all the other bidders to team up with him in a joint-venture arrangement that would have left Chevron with no choice but to accept his offer. All of these escalations were bookended by prayers, showboating and strong drinks.

None of all these should matter. It was after all a private company using private capital to bid for another private company, however misguided. But this is where Hirschmann’s ‘enclave economy’ breaks down. Everything might happen in the enclave—except when people like Adenuga offer us a glimpse inside it—but when there’s invariably trouble, it spills out to the rest of the economy in terrible ways.

A few months ago, I attended an event in London where the guest speaker was an executive director of Asset Management Corporation of Nigeria (“AMCON”)—the ‘bad bank’ set up in 2010 to stabilize the Nigerian banking sector after it had run into all sorts of trouble making dud loans. The numbers involved in AMCON are staggering. As of last year, just 350 Nigerians had outstanding loans of 2.5 trillion naira ($7 billion) that the executive director was candid enough to say they had practically no chance of recovering.

In essence, these loans were taken out and then handed over to the taxpayer when they went bad. Around a third of these loans relate to the oil and gas ‘enclave’ as the chart from AMCON’s website shows.

Indeed, Adenuga senior was revealed to be a debtor to AMCON, among others, by a newspaper a couple of years ago. The last time AMCON published a list of its top 100 debtors, the top three were all oil and gas companies with close to $1 billion outstanding among them. All of them taken out in the heady days of $100 oil and aggressive assumptions about how much money it was possible to make.

The best thing about Paddy Adenuga’s story is that he did not win the bid. Given his motivations and cavalier attitude to risk, it would almost certainly have run into trouble when oil prices cratered in 2016/17. Nigeria’s business elite have found a way to take excessive risks backstopped by the tax payer. Making losses is as important as making profits in a market economy because losses signal to the rest of the economy what not to do. But this necessary process has been badly distorted in Nigeria by the implicit guarantee from the Nigerian government.

There is much to learn from this story and the tale as told by Adenuga is an invaluable piece of insight in a country where these things are only ever passed around by word of mouth in embellished form. But it is not what many social media debates have labeled it.

This is certainly not the story of a young man who decided on an innovative strategy to break into an established industry or upend the old order. It is a story about how things have always been done in the oil industry in Nigeria and how the negative effects spill out into the rest of the economy. It is a rare insight into how a carefree attitude towards risk is reinforced when government can be relied upon to come to the rescue of the risk takers with tax payers money.

Young Nigerians searching for meaning in this story should understand how interconnected an economy is. When banks lend badly and sustain losses, they end up lending less often to businesses who have done nothing wrong and who badly need the funding. Money is also finite so when government bails out risk taking businessmen, there is less money to build roads and other badly needed infrastructure.

The story closed with Adenuga deciding on an insignia (to be added to shoes and traditional attires as is now the norm for Nigeria’s money class). He settled on a lion—he being Simba, the son of his August (Leo) born mother.

He’s going to roar again, that’s for sure. But do pay attention to the detail when next he does.