Buhari’s reforms and transformations, 4 years after

...PIB, oil licensing rounds, fuel subsidy removal top expectations

Key agendas ranging from drawing up competitive fiscal and regulatory terms for the oil and gas sector, to organizing transparent oil licensing bid rounds, removing fuel subsidy, deregulating the downstream sector and liberalizing gas prices are some of the most urgent tasks awaiting President Muhammadu Buhari’s second term, after a dreary performance in the last four years.

Buhari’s second term will have big implications for Nigeria’s oil and gas sector, which accounts for 90 percent of Nigeria’s foreign exchange earnings, however still contributes little to the GDP. The sector’s contribution to GDP has remained in the one-digit margin, with an all-time high of 9.84 percent in Q3 2017.

Experts in the oil and gas sector have ranked reforming fiscal and regulatory terms, by passing into law, a competitive petroleum industry bill as the most urgent task the administration should prioritise as a new term beings. Next is leveraging the oil and gas sector to provide linkages across the economy and creating efficiency in the oil and gas sector.

For Adeola Adenikinju, director, Centre for Petroleum and Energy Economics and Law, and a member of the Central Bank of Nigeria Monetary Policy Committee, the most important agenda for government is ensuring passage of the Petroleum Industry Bill (PIB) to provide transparency in the sector. Also, to reform the NNPC and provide clarity for fiscal and regulatory terms so the oil sector can confirm to international standards.

“We have an upstream that is not operating optimally, Midstream that is not functioning and a downstream that is dying so we have to think of a way to ensure private sector can make investments in the sector,” Ademola Henry, team leader at Facility for Oil Sector Transformation (FOSTER II) said.

Henry further explained that the major task before the new administration is to reform the sector for more efficiency, more effectiveness, find a way of reducing leakages in the sector, and maximizing opportunities.

Buhari had historically opposed market liberalization in the Oil and Gas sector, publicly citing corruption risks as the rationale for his position. He also argues that through state control, oil profits can be more easily distributed to nascent sectors of the economy and help the masses.

But with Nigeria’s economy at a breaking point, Buhari may be forced to adopt unprecedented liberal reforms to solve old perennial problems with Africa’s most populous nation boasting of the greatest number of people in what World Bank calls ‘extreme poverty:’ 87 million Nigerians living on less than $1.90 per day.

Henry Biose, a petroleum economist based in Port Harcourt believes a petroleum industry law is a critical framework that will drive investments followed by actions to liberalize the gas sector. “Our current laws are out-dated and if the PIB is not passed, uncertainty in the sector will increases and investors will stay away due to absence of law to protect their investments.”

As it has been for more than a decade, the PIB remains the biggest regulatory issue in Nigeria’s petroleum sector although there was a significant progress in the bill in the last three years, which was championed by Bukola Saraki-led Eight National Assembly (2015-2019).

The president withheld his assent on certain grounds, chief among was the proposal in the bill to have the Petroleum Regulatory Commission (PRC), retain 10 per cent of the revenue generated by the commission for its own operations.

However, the Nigerian Extractive Industries Transparency Initiative (NEITI) says the absence of the PIB costs Nigeria $15 billion yearly in investments.

NEITI, in a joint study with Open Oil, a Berlin-based extractive sector transparency group, also found that Nigeria lost at least $16b from 2008 – 2017 due to non-review of the 1993 Production Sharing Contracts (PSCS) with oil companies. Nigeria’s Deep Offshore and Inland Basin Production Sharing Contracts Acts stated that terms should be reviewed if oil prices exceeded $20 per barrel and 15 years from the commencement of the PSC Act.

Another major dilemma for the present government is issues concerning oil bid round, which last took place in 2011.

Last year, Madagascar, Algeria, Ghana were some African countries that started oil licensing rounds to boost their reserves, increase revenue as well as their capacity to take advantage of soaring oil prices but Nigeria, Africa’s biggest producer, has been unable to finalise bid round plans started since 2016. Over 186 marginal fields lie fallow because bid rounds have not been conducted leading to loss of billions of naira in revenue.

According to a Businessday February 12 report, the Department of Petroleum Resources, the oil sector regulator, charged with the responsibility of conducting the bid rounds was not ready to conduct the bid rounds slated for the first quarter of 2019.

“The DPR is not anywhere close to concluding preparations for the next bid rounds, in fact from all indications, it does not seem it will happen any time soon, because the guidance notes for the bid rounds are not even prepared yet. It does not even look like it could happen this year,” said a source that preferred anonymity.

Luqman Agboola, head of energy infrastructure at Sofidam Capital expects a president who will not only ensure transparent bid rounds, but also be more capitalist oriented which would help Nigeria domesticate the value chain in the oil sector and also increase oil revenue.

“Oil bid rounds should be more competitive and transparent, let Nigerians know who is bidding for each field,” Agboola told Businessday.

Deregulation of the downstream petroleum sector is another key issue that will be facing President Buhari. Before the 2015 elections, Buhari strongly questioned the fuel subsidy arrangement, which was one of the issues that irredeemably dented the image of his predecessor, Goodluck Jonathan.

Despite attempting to coat it as “under recovery”, the current administration has not moved away from subsidy payment. In fact, it budgeted over N300 billion to fund subsidy in 2019.

“It is a big shame that we are one of the world’s biggest producers of crude oil and still the world’s biggest importer of petrol, the new minister must change this,” Adenikinju said.

Experts also expect Nigeria’s next petroleum minister to boldly reform the downstream sector and abolish wasteful fuel subsidies. The Federal Government spent N7.9 trillion importing petrol to augment supply from the country’s rickety refineries, according to data from the National Bureau of Statistics (NBS).

Austin Avuru, CEO of Seplat has often advocated that oil should play the role of an enabler to other sectors of the economy, providing linkages with other sectors that will grow jobs. He identified gas as the next goldmine if reforms are enacted.

Today, Nigeria is only capable of pumping some 2.5 million barrels of crude oil per day despite sitting on more than 40 billion barrels of proven reserves. The country’s mid-stream and downstream infrastructures are arguably in worse shape than upstream production.

The country’s refineries – mostly concentrated in the oil-rich Niger Delta region – currently operate at under half of their intended 500,000 barrel per day consolidated capacity which billionaire Aliko Dangote sees as a business opportunity leading to a $15 billion refinery.

Stakeholders in the sector are of the opinion that processing 650,000 barrels of crude oil daily would give the billionaire a near monopoly on Nigeria’s refining sector although not necessarily a step in the right direction for market liberalization.