• Category Archives Africa
  • Nigeria: The Challenge of Petroleum Resources Management (II)

    Nigeria boasts the largest economy on the African continent; her Gross Domestic Product, GDP, of US$573.652 billion in 2014, exceeded the next-largest, South Africa by more than 50%. With an output of about 2 million barrels per day (bpd), the country, a member of Organization of the Petroleum Exporting Countries, OPEC, also produced more crude oil than any African country in 2014. Nigeria has also been a destination for significant Foreign Direct Investment, FDI, particularly in the oil and gas sector. Oil majors Shell, ExxonMobil, Chevron, Total and Eni have invested billions of dollars in the country’s deep offshore projects. Gross Domestic Product 2014 - Top African CountriesPetroleum resources provide more than 80% of the country’s export revenue; however, the slump in crude oil prices from over US$100 per barrel mid-2014 to less than US$40 per barrel at present, has severely affected her foreign exchange earnings. The country’s reserves have fallen by more than a quarter from January 2014 levels. According to Reuters, the fall in reserves was due in the main, to sale of dollars by the central bank in order to defend her currency, the naira, which was pressurized by falling oil prices. Nigeria’s growth in real GDP has also fallen, in sympathy with global crude oil prices, as has FDI. In 2014 for example, FDI ― of which Nigeria's Foreign Exchange Reserves (2014 - 2015)the oil and gas sector takes a significant proportion ― fell by about 16% from the previous year, according to World Bank data, following slumping oil prices.

    The impact has been palpable. Many state and local governments are having great difficulty paying salaries and meeting other recurrent expenditure obligations with little left for embarking on capital projects. The country’s recent banking and currency restrictions were attributed to banks’ inability to meet foreign exchange obligations.

    Nigeria - Real GDP Growth (Y-on-Y) vs Oil Price (Brent)

    The country’s president last week presented a budget of 6.08 trillion naira (about US$31 billion) for 2016 to the National Assembly. The proposed budget boasts a record increase in non-oil revenue streams. However, some analysts have been quick to point out that the country’s reference crude oil price has already fallen ― even if briefly ― below budgetary provisions and that even some of the proposed “non-oil” revenue streams depend on oil for viability.

    With the current low oil price regime projected to endure, a strategic reassessment of the petroleum sector’s business model is imperative. Continue reading  Post ID 408

  • Nigeria: The Challenge of Petroleum Resources Management

    Petroleum resources constitute a major proportion of Nigeria’s foreign exchange earnings; however, poor management, corruption, slow reserves growth as well as increasing output from new and existing producers, present challenging prospects for the country’s  economy. 

    NNPC TowersNigeria is a member of the Organization of Petroleum Exporting Countries, OPEC, and according to the National Bureau of Statistics, petroleum resources have since 1984, accounted for not less than 90% of the country’s total export value. The country earns a significant proportion of her foreign exchange from petroleum resources but has been far from prudent in the management of such earnings. While the country has earned hundreds of billions of dollars from petroleum resources over the past decades, the CIA Handbook reports that about 70% of its population still lives below the poverty line.
    Nigeria is not the only country challenged with issues of resource curse. A report in the European Economic Review for example, shows that between 1965 and 1998, Gross National Product decreased by an average of 1.3% among OPEC countries compared to an average growth of 2.2% in the rest of the developing world. Figure 1 shows Nigeria’s GDP growth rates for the period 2008 and 2012; while non-oil rates held high positive values, those for oil were negative in three of the five years. Figure 1. Nigeria- GDP Growth Rate At 1990 Constant Price  (2008 - 2012)With her rather ambitious goal of being among the world’s twenty most-developed countries by the year 2020 and the vagaries of global petroleum supply, a proper rethink of her petroleum management policies is informed.

    Major Challenges
    With petroleum resources the mainstay of Nigeria’s economy, two issues in broad terms, are already defining her prospects.
    First is inveterate corruption. Transparency International, in its 2013 Corruption Perception Index ranked Nigeria an abysmal 144 (together with Central African Republic, Iran and Papua New Guinea) out of 175 countries. Namibia (57), Ghana (63) South Africa (72) ranked much more respectably.
    Corruption has meant that many activities in the country’s oil and gas sector over the past decades have been carried out in cultic secrecy while proceeds are brazenly misappropriated. For example, details of the country’s actual petroleum production have over the years been somewhat nebulous; project costs are reportedly hyper-inflated, legislators hold that a proper audit of the national oil company’s books has not been done in decades and petroleum product (mainly gasoline) subsidies are reportedly fraudulent, ballooning to an inexplicable US$8 billion in 2011, representing 30% of government expenditure, 4% of GDP and 118% of capital budget.
    Countries such as the United States and the United Kingdom have met great resistance in their attempts to get their respective corporate nationals to disclose details of financial transactions with the Nigerian government. The Petroleum Industry Bill, PIB, which was supposed to address some of the transparency and accountability issues in the country’s oil and gas sector, has been languishing in the legislature for more than six years; and with various versions being bandied about, there are genuine concerns that if indeed a bill is passed, it may be so abridged as to defeat the raison d’être.

    Uncertainties associated with the provisions of the PIB have led to assets divestment and low capital expenditure in the country’s oil and gas sector by International Oil Companies, IOCs; the impact will certainly be heavy on Nigeria’s already blighted growth in proved reserves growth (See Figure 2).Figure 2. Nigeria- Growth In Proved Crude Oil Reserves (2000 - 2014)
    The second and more recent is the growing petroleum output from new and existing producers. The United States has significantly ramped up her natural gas production due mainly to technological developments such as hydraulic fracturing (fracking) and horizontal drilling in shale formations. The country has also increased its crude oil production from liquid-rich shale formations to overtake Saudi Arabia as the world’s highest producer. Angola recently announced that her crude oil production has surpassed Nigeria’s.

    The implication then is that the United States which used to be the highest importer of Nigeria’s petro-products, had in 2012, for the first time in more than a decade failed to import any Liquefied Natural Gas (LNG) from Nigeria; Europe’s share of Nigeria’s LNG exports also fell from 67% in 2010 to 43% in 2012 according to the Energy Information Administration. In addition, 2012 saw the US import of Nigeria’s crude oil fall by 50% over 2011 levels.

    With countries such as Canada (oil sands) and Brazil (subsalt) among others also ramping up production, there are already severe revenue implications for Nigeria.

    The Way Forward

    The nation’s archives are replete with lapsed development plans; not only was there no will to implement them, the processes themselves were mostly flawed. For example in recognition of the inability of existing refineries to meet product demand, licences were awarded for the establishment of eighteen refineries; but about a decade later, not even one so much as received a final investment decision. Issues such as access to feedstock as well as product pricing (which impact refining margins) were never addressed. Refined product prices were fixed below cost while government determined the level of subsidy. A proper management roadmap for the country’s oil and gas sector must then of necessity entail the following:

    1. Political Will
    The principal requirement for restructuring Nigeria’s oil and gas sector is a strong political will to resolutely tackle corruption and institute all necessary sectorial reforms. It is a position that is certain to attract passionate resistance from very powerful and deeply entrenched interests; from the petroleum product importer for whom a functional refinery is anathema, to the product transporter in whose nostrils a viable pipeline system is a stench. Such notoriously inefficient processes must be taken down or the decay will progress even exponentially and posterity will be the worse. Leadership regimes have often adopted a “live-and-let-live” approach in dealing with such bastions of corruption.

    2. Proper Product Pricing
    For a country that imports more than 80% of her refined petroleum product requirements, Nigeria’s petroleum product subsidy regimes as currently constituted are wasteful, inefficient and inimical to capital investment; they need to be reviewed. However, there is a limit to the “corrective shock” an economy can sustain without compounding problems. If Nigeria’s productivity for example, is adversely impacted by a one-step (immediate and total) subsidy removal, then the country could be burdened with more problems than it initially set out to address.

    A better approach would be a phased and benchmarked removal process. Previous attempts at subsidy removal have been met with extreme violence often bringing economic activity to a halt for several days; and that because the trust of the people with respect to proceeds from subsidy removal was squandered. Placing a palliatives horse before a subsidy removal cart would most probably secure the willingness of a greater proportion of civil society groups to join the restructuring agenda. By guaranteeing refining margins to new refineries for example, subsidy will be removed from consumption and placed on production; such subsidy can then be subjected to a stepped (say a 3-step, 30%-30%-40%) removal over a few years depending on the particulars of the refining infrastructure.

    A significant proportion of the country’s oil and gas supply outages derive from ageing infrastructure; operators balk at investment in infrastructure because fixed product prices prevent a proper return on investment. For example, the lack of adequate refining capacity has been a major driver for high product prices. The country’s aggregate refining capacity utilization has been abysmally low (see Figure 3) averaging less than 30% over the past decade; even at 100% utilization, the existing refineries would be unable to meet demand but no operator has been willing to build new refineries due to unfavorable refining margins occasioned by product pricing.
    Figure 3. Nigeria - Average Refining Capacity Utilization (2001 - 2013)3. Effective Regulation and Restructuring
    State agencies in the country’s oil and gas sector need urgent reorganization and refocusing for transparency and efficiency. An effective oversight agency, free of bureaucratic encumbrances is imperative. Issues of corrupt practices and enforcement of standards have gone begging. The requisite matériel and personnel to carry out effective regulation have been inadequate; subjects of regulation have even been relied upon for logistics and critical evaluations. These should not be the case. The country’s national oil company has become inefficient and unwieldy, having been saddled with the conflicting roles of both regulation and operation; the utter collapse of its refining and marketing processes is symptomatic.
    Some of these issues were supposed to have been addressed by the PIB which has seemingly been mothballed in the country’s legislature.

    All said, president Goodluck Jonathan, who hails from the Niger Delta―a region blighted by oil and gas activities―and who may contest for a second and final (therefore politically unencumbered) term of office, should be adequately placed to institute these reforms in the event that he contests and wins. It remains to be seen however, if he can then step up to the plate.