Kachikwu: Boosting Oil Revenues to End Recession
Nathan P. Ajene writes that the efforts of the Petroleum Ministry under Dr. Ibe Kachikwu are producing positive economic and financial outcomes for Nigeria
IN THE BEGINNING…
When President Muhammadu Buhari gave Dr Emmanuel Ibe Kachikwu marching orders to take charge of the dysfunctional, opaque NNPC in August 2015, the oil sector and national revenues were in turmoil. The previous year had witnessed one of the most turbulent periods in the history of the global oil industry marked by turbulent and crashing crude prices.
But the worst was yet to come. A year later, in August 2016, the combination of rising militancy, bunkering and massive vandalisation of pipelines forced a steep reduction in oil production, down to 1.1 million barrels a day according to the Trading Economics, an international platform for economic research. Along with low oil prices, this deep cut of more than 50% cut in production constituted a double jeopardy to the highly challenged economy.
Given the reality of Nigeria’s mono-product economy and lack of savings, the best solution to the oil induced economic crisis would obviously come from improvements in the key factors that caused the problem. Working with his teams at NNPC and, later, the Ministry of Petroleum Resources, Kachikwu focused laser-like, on achieving this.
One of the first priorities he focused on was to engage and mobilise members of the Organisation of Petroleum Exporting Countries (OPEC) to take collective action by implementing production cuts in order to shore up and stabilise global oil prices. The minister of state for petroleum resources was one of the first persons at the international level to push for this strategic measure to check the glut in the market which caused the steep plunge in oil prices.
Despite initial opposition from countries such as Iran and Saudi Arabia, Kachikwu along with other OPEC members pressed on with a strong international lobby for cuts that were eventually accepted by both OPEC and non-OPEC members like Russia. The imposition of production quotas which took effect in – have successfully pushed up oil prices from the historic low of about $28 to $50 per barrel.
Kachikwu didn’t stop there. To ensure that the country is not negatively affected by the cuts, Kachikwu leveraged his network within OPEC to secure exemptions for Nigeria on two occasions in recognition of the country’s unique situation. This meant that unlike other OPEC members who were expected to cut their oil production output, Nigeria retained its production quota of 2.2 million barrels per day. This was an enormous and much needed reprieve for an economy in distress.
Kachikwu’s role in the emergence of Mohammed Sanusi Barkindo as OPEC Secretary General has also strengthened Nigeria’s capacity to influence the policies of the global oil industry in a way that protects its interest.
At the local level, Kachikwu’s efforts have been as impactful. He has been in the forefront of promoting peace efforts in the Niger Delta to check militancy and reduce incidents of pipeline vandalism. From constant engagement of elders, community leaders, stakeholders and youth groups to initiation and implementation of development programs, sometimes in partnership with state governments, international development partners an atmosphere of calm, understanding is gradually setting in despite pockets of issues that arise periodically.
This regime of diplomacy and constant engagement has lowered incidents of production disruptions and led to a strong boost in oil production levels. From a historic low of 800,000 barrels per day in September 2015 the country is now producing as much as 2.5million barrels.
In specific terms, Kachikwu facilitated the historic meeting with Niger Delta leaders and representatives under the platform of the Pan Niger Delta Elders Forum (PANDEF) with the President Muhammadu Buhari in November 2016. Since then the PANDEF platform has taken the position as the central point of contact on Niger Delta issues with the federal government.
He also played a key role in the town hall meetings that Acting President, Prof Yemi Osinbajo has been holding with host communities of oil producing states to ensure security and protection of infrastructure as well as development of the Niger Delta region.
The peace efforts are part of a larger 20-point plan of the ministry of petroleum resources that is being supported by the Acting President to bring permanent peace in the region. The plan aims to create about 100,000 jobs in each of the states, attract private sector investment to areas that promote peace, build infrastructure and invest in education programs for youths to reduce the attraction of militancy. Other aspects of the 20-point plan include the domestication of oil and gas business opportunities to achieve greater participation of the people of the oil-producing region.
Additionally, Kachikwu’s proactive engagement of international oil companies operating in the region has also helped to improve security. The successes recorded include significant reduction in militancy, decrease in instances of pipeline vandalisation and a substantial increase in the daily crude oil production recorded by the country when compared to the same time last year.
Kachikwu has also put in place a system for financing oil and gas operations without putting pressure on lean government revenues. A good example is the introduction of a private sector-led funding regime for joint venture oil and gas operations to replace the decades old cash call system.
Under the cash call system, government through the Nigerian National Petroleum Corporation (NNPC) which holds the government’s interest in the six JV operations with International Oil Companies (60% with ExxonMobil, Chevron, Total, Agip and Elf, and 55 per cent in the JV operated by Shell) was required to contribute to the approved annual budget for all programmes in accordance to its equity holding, while profits and losses were similarly shared. This arrangement never worked as planned and the country defaulted on several occasions racking up arrears of $6.8billion from 2010 to 2015.
Under the new scheme the government would no longer contribute directly to the JV projects from budgetary provisions. Rather its contribution is structured to be funded by banks under an arrangement that will allow them to recover their monies while the federal government will only collect dividends from the profits.
To ensure a fresh start, Kachikwu facilitated a settlement of the $6.8billion cash call arrears with international oil companies in a landmark deal that will save the country about $1.7 billion.
HIGHER OIL PRICES + RISING PRODUCTION VOLUMES = MORE REVENUE
Along with other measures in the economic reform strategy of the Buhari administration, the efforts of the Petroleum Ministry under Kachikwu are producing positive economic and financial outcomes for the country. The country’s depleted purse has been experiencing a significant boost from higher oil earnings as a result of stable global oil prices (which now hover over $50) and a huge increase in local production capacity which has now hit a high of 2.5 million barrels per day. This has led to a steady rise in the country’s foreign exchange reserves which recently peaked at $31.22 billion, the highest in two years.
Though still significantly below pre-crisis levels, this gradual turnaround in the finances and revenue profile of the country is impacting the economy in two major ways.
First, the robust foreign exchange reserves are giving the Central Bank the firepower that it requires to provide liquidity in the foreign exchange market, a move critical to stabilising the value of the naira. Between February and April this year, the CBN leveraged the reserves and injected a cumulative sum of $3.61 billion into the foreign exchange market. As a result of such interventions the naira has remained relatively stable for about seven months, hovering at about N363 to dollar in the parallel market.
At a more fundamental level, the improved financial position of the country driven by a surge in oil earnings is boosting government’s efforts to get the country out of recession through increased funding of capital projects and other strategic initiatives in the 2017 budget.
Recent data from the National Bureau of Statistics show a steady pattern of recovery in key macroeconomic indicators traceable to the improvement in revenues and other factors. In June, inflation rate stood at 16.10 percent, the lowest seen in 13 months. Analysts estimate that it would fall further to 15.96% in July.
The Production Managers Index (PMI) which indicates the level of manufacturing activity and the health of the economy is also growing at its fastest pace in two years, signaling significant expansions in the economy. According to NBS the index jumped to 54.8 in July, from 52.9 in June because of the fast pace of expansion in both output and new orders despite some decrease in for-export orders.
In addition, the deceleration in the gross domestic product has also slowed down significantly from 1.6% in fourth quarter 2016 to 0.6% in 1st quarter 2017. The state of uncertainty is gradually changing to that of stability and predictability.
While this is yet to translate in practical terms to lower food prices in the markets, more money in people’s pockets to spend, there is a reasonable basis for optimism that if sustained and complemented by other efforts of government, the picture would soon change in visible ways.
Under the leadership of President Buhari and Acting President Osinbajo, Kachikwu’s leadership of the oil and gas industry in the wake of the drastic fall in oil prices in late 2014 have contributed to the rally in global oil prices, increased oil production and significant improvement in the overall health of the economy. As a result, the country is in a much better place than it was when the Game Changer was appointed two years ago.