Hard Times Ahead for Nigeria
Recent estimates by the Oil Producers Trade Section of the Lagos Chambers of Commerce that Nigeria’s annual revenue from crude oil could be cut by $10 billion in 2015 is indicative that there are more tough days ahead. Chineme Okafor writes
Nigeria’s crude oil revenue from a recent presentation made at the 2015 Oloibiri Lecture Series and Energy Forum (OLF) in Abuja by the Oil Producers Trade Section (OPTS), will indeed pass through tough calls in 2015 and perhaps early parts of 2016, depending on certain market conditions.
OPTS, a private sector group under the umbrella of the Lagos Chamber of Commerce and Industry whose 22 members operate 96 per cent of the total oil and gas production in the country estimates that if crude oil price continue on its current volatile trend and averages $53 in 2015, Nigeria’s revenue from oil and gas operations could be cut by about $10 billion (N1.9 trillion) or a gut-wrenching 30 per cent.
Through its chairperson and Managing Director of Total Upstream Companies in Nigeria, Elisabeth Proust, OPTS said that low crude oil prices have significantly reduced the level of investable funds across the world and in Nigeria, more so at a time when competition for investments is sharpening.
Clearly, Proust explained that like in 2014 when oil prices averaged $77.5 and collectible revenue dropped significantly to result in the slowing down or cancelling of many infrastructure projects that Nigeria desperately needed, the same scenario may play out again with the current conditions in 2015.
Adding that Nigeria’s situation is made peculiar with her in-country challenges of crude oil theft, pipeline vandalism, long contract approval times, alarming insecurity of products, assets and personnel, Proust stated that emerging trends even within Africa now leaves the country with formidable competitors for increasingly scarce investments funds; this is however notwithstanding her enormous resource base and existing oil and gas export infrastructure.
“There is no doubt that the low crude oil prices that we are experiencing today are having a severe adverse impact on the revenues of both producers and host governments globally.
“Unfortunately, Nigeria is not immune to this revenue squeeze. We estimate that if crude oil prices average $53 per barrel in 2015, compared to $77.5 in 2014, FGN oil and gas revenue will decline by $10 billion this year, or a gut-wrenching 30 per cent,” Proust said.
In stating this expected oil revenue squeeze for Nigeria, Proust seemed to have stated the obvious but also added the depth of the crunch, which comes quite starkly new and revealing of what Nigeria’s financial take from the sector will look like under the protracted pricing condition.
This is further aggravated by reports that the Nigerian oil sector is rather contracting with its mild 15 per cent point contribution to the Gross Domestic Product (GDP) ratio as against 85 per cent from the non-oil sectors. In reality however, the sector seems to have served more as a source for economic rent than an economic enabler considering that about 85 per cent of Nigeria’s national expenditure rely on income from oil and gas production. Stark Realities There is no doubt that since the 1970s, the oil and gas industry had faced numerous cyclical swings in prices and the current slide was perhaps not unexpected.
It is also not in doubt that the industry has the capacity to swing the prices to an upward trend given that several factors play out on the demand and supply of oil; what is however unknown to all stakeholders is how soon this would happen. For Nigeria, the lengthier it becomes, the more soul-searching and readjustment she would be left to initiate.
Unlike in the past cycles, several dynamics have emerged to soften and keep crude oil prices where it is recently. While there are as usual, political unrests in parts of the world, and the global economy is either accelerating or decelerating especially Europe and Asia, beneath the surface developments like discoveries of new huge hydrocarbon fields, technological breakthroughs as seen in deepwater developments and increasing stability in Iraq have all culminated to ensure that oil price remained range-bound at $45 to $60 per barrel of Brent to further suggest that this price cycle may be different.
In addition to Saudi Arabia’s reported refusal to give up market share by allowing member countries of the Organisation of Petroleum Exporting Countries (OPEC) to cut production and stabilise crude oil prices, the expected coming of Iranian oil back into the global market could send an already-saturated market back into a price nosedive.
To add to the US shale oil boom, which on its own is a challenge to OPEC, Iran if it hammers out a deal on its nuclear program is expected to flood the market with its sanction-stunted oil. Analysts in this regard posit that the country will quickly look to sell off approximately 35 million barrels of surplus, stored oil for which it has apparently not managed to find buyers.
Before its sanction in 2012, Iran produced 3.6 million barrels of oil a day, of which it exported about 2.5 million. Today, it produces much less, about 2.8 million barrels a day and exports just 1.1 million.
Even if US shale oil production declines, analysts still expect that Iran’s oil would replace it on the market with a reasonable return to its 3.6 million barrels a day in the first year to add about 800,000 barrels to the global supply if production from elsewhere holds approximately where it is now, and other OPEC members such as Saudi Arabia do not reduce their output to accommodate Iran.
While this is expected to further delay the spike in prices of crude oil, Nigeria, which at the beginning of the current slide in oil price recorded last quarter 2014 earnings of just about N620 billion, and thus leading to last minutes austerity measures could be caught dangerously in a mess unless it reacts quickly.
Proust in response to this risky situation, stated that certain prevalent issues such as crude oil theft, pipeline vandalism and associated product shut-ins, insecurity of industry personnel and assets, which had been identified by operators in the country as holdbacks, were still inherent and ready to hold Nigeria from competing well.
“The advent of shale oil is underpinning an oil industry renaissance in the USA and propelling USA crude production to levels unthinkable 10 years ago, attracting massive investments in the upstream and downstream as well as infrastructure build-out.
Deepwater developments in Brazil are attracting a growing share of global investment, while the massive offshore gas discoveries in Mozambique and Tanzania are expected to draw tens of millions of dollars in investment, competing in Nigeria’s own backyard,” she said.
Exacerbating the sharpening competition for investment funds, Proust added: “Nigeria has in-country risk factors that hinder its ability to compete.”She explained however that Nigeria can adopt smart approaches that include cost optimisation, upgrade of industry capacity and efficiency of existing facilities as well as prioritisation of projects and investments to balance the short and long term effects of the cyclical price fluctuations. Smart Approaches Needed In response to the price instability, Proust explained that operators introduced cost optimisation programs to boost their bottom lines, but that the advent of shale oil in the US, Brazil’s deep-water development, which is attracting huge share of global investment as well as both Mozambique’s and Tanzania’s massive offshore gas discoveries had combined to make Nigeria with her in-country risk factors less competitive in the market.
She stated that any solution to the current challenges must be all-embracing and capable of getting the support and buy-in of all stakeholders in the industry.
Adding that such solutions must strategically balance short and long term effects, Proust said: “First, industry needs to challenge and optimise its own costs, we need to redouble our efforts to improve capacity and efficiency of existing facilities and prioritise projects and investments.”
In addition to the recommendations from the OPTS, the Nigerian National Petroleum Corporation (NNPC) at the OLF listed at least eight key immediate measures that the federal government would need to immediately adopt against the crude oil price volatility and its impacts on Nigeria’s revenue profile.
NNPC in pushing across a card for a comprehensive reform of the industry, noted that an engagement of its proposal, will in addition to that of the OPTS ensure that Nigeria reacts positively and competitively with the current market situation as well as move the sector away from its status as a source for economic rent to an economic enabler.
NNPC’s Group Coordinator, Corporate Planning and Strategy, Timothy Okon said in his presentation that the passage of the Petroleum Industry Bill (PIB), restructuring of public finance, scrapping of petrol subsidy regime, review of capital expenditure, focus on profitable subsidiaries of NNPC, and exploration of the Asian market could act as a game changer for Nigeria against the price instability.
Okon also listed quick delivery of domestic gas and Liquefied Natural Gas (LNG) projects, as well as optimisation of domestic crude oil refining as part of the measures that could keep Nigeria competitive in the industry.
He added that the industry has served the interest of rent seekers in the country for too long and needs to now turn its tide to become an economic enabler for inclusive growth in Nigeria.
“No one can confidently predict the length and severity of the current oil price slump. Therefore, it is critical for the Nigerian government to identify a clear set of scenarios for where oil prices may go, and to develop a set of practical options for how to respond to continuous evolutions in the prices at present and in the future.
Given the oil prices at record lows, the cost of procuring fuel for Nigeria, both domestic supply chain or product importation is also declining. This should enable the government to remove fuel subsidies and establish pure market-based mechanisms for fuel pricing,” Okon said. He further said: “Hard times call for a hard-nosed examination of existing plans to spend large significant capital in the oil and gas sector.
It will be important for FGN and for NNPC to maintain a prudent level of capital spending to support cash generation in the medium term and to develop critical infrastructure to build the country’s gas and power sector.”
“NNPC should also take a rigorous look at its overall capital expenditure programme so that non-critical projects are cancelled or deferred while the truly critical project portfolio is pursued with an intensive cost optimisation approach.
Now is the time to challenge and overhaul expensive design, procurement and construction practices and agreements to aggressively strip out costs and reset performance targets to get the best return on investment,” Okon added.