Since May 29, when President Muhammadu Buhari was sworn into office, it has been trying times for the country. Reason: governments at all levels are struggling to meet their financial obligations. Many a state owes workers. Projects are left unattended to because obligations to contractors cannot be met. The situation leaves Buhari with no choice than to seek ways to get more cash into the Federation Account from oil sales, which have witnessed an all-time low in the last one year.
But, salt is about to be added to the country’s injury with the anticipated re-entry of the Islamic Republic of Iran into the global oil market. This was sequel to the planned lifting of sanctions imposed on Iran by the world powers. To some experts and stakeholders in the local oil industry, the development is bad news. Their fear is that Iran’s re-entry into the global oil market may cause serious fiscal upset for oil dependent countries particularly Nigeria, Africa’s biggest oil producer and largest economy. The worry is that the increased supplies from the Islamic Republic are capable of worsening the oil glut and further shrinking Nigeria’s income. Such fears are not without basis. Nigeria, as Africa’s biggest oil producer for years, with proceeds from oil accounting for between 85 and 90 per cent of her foreign exchange earnings, failed to judiciously use the huge proceeds from the resource to grow her economy due partly to lack of investment and partly to inability to foresee the need to save for the rainy day. This explains why Nigeria’s fiscal system suffers serious upsets whenever there is downturn in the global industry with the attendant tumbling of oil prices.
According to Nigeria Extractive Industries Transparency Initiative (NEITI), Nigeria earned $143.5 billion as revenues from oil and gas between 2009 and 2011, while in 2012; it received $62.9 billion as revenues. The statistical arm of the United States’ Department of Energy, the Energy Information Administration (EIA) said Nigeria’s earnings from oil export in 2011 were $99 billion and $70 billion in 2010. On its part, the Organisation of Petroleum Exporting Countries (OPEC) in its recent revenues fact sheet noted that Nigeria’s oil export revenue in 2014 was $77 billion and the lowest since 2011. These figures point to the fact that oil proceeds over the years lacked prudent usage, as there is not much on ground in the form of infrastructural development to justify such huge revenue earnings. To make matter worse, the current oil price slump, which started mid-last year, also upset the 2015 budget compelling the Federal Government to adopt a downward review of the benchmark from $78 to $52 per barrel. The uncertainty that surrounds budget implementation whenever there is downturn in the global oil industry has become a reoccurring decimal.
Some analysts have predicted that the industry will remain low for at least the next two years before it will be able to rebound to the level of first quarter of 2014 when prices averaged at least $100 per barrel. Now, the fear of elongated downturn in the industry appears to have been heightened by the Iran nuclear deal with the United States, European Union and the United Nations Security Council. The deal, according to those schooled in the dynamics of international politics and diplomacy, is likely to lead to lifting of sanctions imposed on the oil rich Islamic Republic in the next six months. The announcement of the nuclear deal sent shivers to the global market with instant reaction on prices. The re-entry of Iran will, according to reports, add between 500 – 1,000,000 barrels per day of oil into the global market. Already, OPEC’s production quota is currently being overshot by 340,000 barrels daily. The greater challenge is that Iran shares the same market with Nigeria, which includes China, India and Japan.
Besides, Iran reportedly has over 30 million barrels of oil produced and stored in massive floating tankers off its coast. Currently, consumption in China has dropped as a result of oversupply of the market, and India, another major buyer of Nigerian crude, said its output is increasing. This, according to stakeholders, means that Nigeria will walk a tight rope if Iran resumes production and exportin earnest.
Where Nigeria got it wrong
The Chairman, Society of Petroleum Engineers (SPE), Nigeria Council and President, Petroleum Technology Association of Nigeria (PETAN), an umbrella body of Nigerian firms that play in the upstream sector, Mr. Emeka Ene, said Nigeria planned to fail by failing to invest in the industry to boost its production. He said other producer countries had always invested in boosting their production whenever oil price is low and this enables them have enough barrels to sell and make profit when the price is high. But that is not the case with Nigeria where the reverse is the case, as it further depletes what she has.
Ene said: “As a country, we need to look at the oil cycle in a 10-year cycle. We have been in the up cycle and we are now in the down cycle. Supply and demand in the oil industry has not changed. Currently, supply exceeds demand but if you look at the forecast by the International Energy Agency (IEA), we expect that by 2016, the gap in oil price will start to narrow. So this is a time for Nigeria to actually do the opposite of what it is doing, which is to invest. If you don’t invest, when demand will exceed supply, we will not have the barrels to meet that demand.”
Ene said common business sense dictates that a country buys low and sells high and that this is the time to invest in the industry.
“As we speak, Kuwait is investing $34 billion over the next three years in its oil industry to improve production, and United Arab Emirates (UAE) is doing $36 billion. Same thing for Saudi Arabia, but in Nigeria we are cutting back on our investments by over 30-40 per cent. So, to counter the effect from Iran, Nigeria will take action by investing in her oil industry to boost production and become a competitive market place,” he counselled.
For Dr. Austin Nweze, an oil industry analyst and lecturer at the Pan Atlantic University, Lagos, the return of Iran to the oil market will further constrain Nigeria’s oil revenue.
He said: “The Iran deal signals a huge challenge to Nigeria. A week ago, it was reported that a Nigerian ship laden with crude oil was looking for a buyer but it couldn’t find. That is a serious sign of the challenge that lies ahead for Nigeria. Currently, China and India that are major buyers of Nigerian oil have alternatives.”He further said Russia is pumping more oil into the market, and it recently had a deal with China. Also, Angola has more oil now as well as some emerging oil producing countries. United States is now the world’s biggest oil producer after Saudi Arabia. According to him, it may be difficult for the United States to resume purchase of Nigeria’s oil. “The fact is that the challenge ahead for Nigeria is enormous because the market share of its crude oil, which is its major foreign exchange earner, is shrinking by the day,” Dr. Nweze pointed out.
While projecting that oil price drop will continue through this year, he said, “United States has stopped buying Nigeria’s oil. Nigeria has not been benefitting from the African Growth and Opportunity Act (AGOA), which offers tangible incentives for African countries to continue their efforts to open their economies and build free markets. These are few of the economic concerns we expected President Muhammadu Buhari to discuss with President Barack Obama during his recent visit to the United States. Such benefits will help Nigeria to revive its comatose textile industry and other sectors of the economy.”
On her part, the Principal Consultant, Lonadek Oil and Gas Consultants, Dr. Ibilola Amao said:”The return of Iran into the global oil market is an excellent opportunity that would force Nigeria to domesticate the use of the products from her petroleum industry and fix her economy. We would be compelled to focus on refining, petrochemicals, fertiliser, agriculture and agro-allied industry whilst building the required infrastructure that would form the back bone for national development and socio-economic transformation. Maximum “in-country” value would be created for what would otherwise have been wasted away as crude sales with minimum value creation. I welcome this change and cannot be happier.”
She further noted that such critical situation would also compel Nigeria to explore better ways of actualizing her aspiration to utlilise and monetize its gas resource. “It would accelerate our strategic thinking process since the worthlessness of focusing on the export of unprocessed natural resources and the budget deficit impact would become very glaring if we do not address the issue of exporting unfinished products properly.”
Effect of OPEC’s refusal to cut production The refusal of members of the Organisation of Petroleum Exporting Countries (OPEC) to cut its output into the global market constitutes a major challenge for Nigeria. The refusal has left the market oversupplied especially as the leader country, Saudi Arabia decided not to budge in its decision to continue to pump crude into the market despite purported entreaties from some members such as Nigeria.
According to the Chair of the Nigeria Natural Resource Charter (NNRC) and former Minister of Petroleum, Odein Ajumogobia, such interventions in the past had immensely helped in rebound of prices. He said for instance, prices had averaged $18 per barrel from 1990 to the end of 1997 but from December 1997 to July 1999 oil prices had fallen from $18 per barrel to about $12 per barrel. In December 1998 the price dipped below $10 per barrel, by April 1999 the price was just over $11 per barrel. But OPEC intervened by joining forces with non-OPEC producers such as Mexico, Oman, Norway and Russia to cut 2.1 million barrels with effect from April 1, 1999. By end of April the price had rallied reaching about $16 per barrel and $18 by July and rose to $20 per a barrel afterwards.
Also between 2007 and 2008, the world witnessed the greatest level of volatility in oil market with prices going up from $65 per barrel in 2007 to all time high of $147 per barrel in July 2008 and many analysts predicted a rise to $200 per barrel but by October of the same year, it had dropped to $32 per barrel. Similarly, OPEC intervened again, cut production and price rallied and got to $70 per barrel. Very few people predicted that oil price will rise soon to $100 per barrel afterwards but by the beginning of 2014 oil prices have gone up averaging about $110 a barrel before the current slump set in by mid last year. However, the fear that the current price slump may last longer than expected is hinged on the fact that the leading oil producer members of OPEC such as Saudi Arabia and Kuwait have refused to buy into the proposal by other members to cut production. Besides, the United States, a major global oil producer and consumer, is accessing its oil reserves apart from the regular production; therefore, it is not buying from external market. Also oil demand by other big buyer countries such as China has dropped following a lull in the economy. Therefore, the glut in supply is expected to continue until all members of OPEC reach a consensus to cut production, he added.
The Managing Director, Seplat Petroleum Development Company Plc, Austin Avuru, said besides oil price drop, security issues in the Niger Delta and bottlenecks, which include project delay, delay in approval of projects and unpaid arrears of $5billion cash calls, the Nigerian National Petroleum Corporation (NNPC) and the government failed in management of oil revenues for the good of the economy and the populace.
He noted that other oil producing countries managed their industries and oil revenues efficiently and currently have deep pockets in terms of sovereign wealth funds and hardly feels the impact of oil price slump. He said today, Norway has a GDP of $512billion and has a Sovereign Wealth Fund (SWF) of $893billion; Qatar with GDP of $203billion, has SWF of $256billion and Saudi Arabia with GDP $748billion has SWF of $762billion.
“Why I have given these figures is because these same countries have managed their economy better. They saved for the rainy day and today they can play the game while Nigeria is watching. Which means Kuwait and Saudi Arabia can afford to derive zero revenue from crude oil production over the next three years and survive because of their SWF,” he explained.
The way out
Ene said Nigeria should in the short term invest in its brown and marginal fields. Brown fields are those fields whose production levels have dropped due to age.
“We need to look at brown fields, marginal fields and independents. All the brown fields and wells that have been developed already, we need to do infield drilling, work-over, and we get cheap barrels. Through this we can increase our production by up to 20-30 per cent just by investing in that. That is what we need to now as a country, there is need for campaign to boost production. Short term oil gain should be the target. To even come close to future plans of other oil producing countries, Nigeria’s budget for the oil industry should actually be higher than what it was last year.”
On the need for diversification, he said: “Diversifying oil revenue and increasing domestic use of crude is not what can be done overnight. You can’t do that between now and December. It has to be a holistic approach. We have pushed the concept of the Niger Delta energy corridor to allow primary fossil fuels to be processed in Nigeria and export finished product but that doesn’t happen overnight. Government has to create the investment environment.”
Ene said gas’s potential is huge but it took 10 years for Nigeria Liquefied Natural Gas (NLNG) to come into fruition.
“It took NLNG Act for it to happen, so if we want to diversify our economy, that’s a great idea but it requires a coordinated efforts to achieve it. Right now, we are facing challenges of restructuring and reforming the industry to be leaner, more efficient and to produce cheaper barrels at a time when the industry is low so that we position the industry to reap the benefits when the industry is high,” he added.
Dr Nweze said the Federal Government should think critically and strategically to diversify it sources of revenue and how to maximise use and benefit of Nigeria’s hydrocarbon resources. He said there have been suggestions to the government to be thinking of alternative major sources of income and place less attention on oil perhaps between the next 10-15 years because overdependence on oil may disappoint her but nobody knew it would come so soon.
He, therefore, said government must be aggressive enough to search for buyers of its crude oil especially now that the traditional buyers such as the United States and Europe have taken the back seat. It is said that even militants in troubled countries such as Syria stole crude oil and sell it on spot markets to sustain themselves which also is part of the cause of low oil price. But primarily, the government should address the problem of power supply. Power, according to him, accounts for between 65-85 per cent of the primary components for the industrial sector. Therefore, for the industries to survive and operate profitably there must be stable power supply.
“It is because of this reason that some companies rejected the Central Bank of Nigeria’s offer for the power sector because whatever they could have got would have gone into power supply. The government should declare a state of emergency on power and do industrial clusters. For instance, in Agbara industrial area, some firms run permanently on gas just to have uninterrupted power supply because of the nature of their activities,” he added.
To also boost industrial development, Nweze said government should find a way of incentivising indigenous firms. According to him, making local firms pay for gas at international price isn’t encouraging.
“We need to have a special pricing to enable local industries pick up. Government should encourage the establishment of petrochemical companies by the private sector. That will help diversify utilisation of the country’s hydrocarbon resources. There should be availability of gas to power the industry. The government should look at refining its crude in-country, and export the products. But most of all, government should give the direction where the economy is headed,” he noted.
For instance, the Nigerian National Petroleum Corporation (NNPC) doesn’t have clear directive now. The Corporation, he said, should device aggressive way of marketing Nigeria’s crude rather than relying on third party. Besides, NNPC is supposed to be fully in charge of Nigeria’s oil production but currently the international oil companies (IOCs) that operate in Nigeria are in charge.
“What these IOCs declare as the production is what Nigeria takes. Government allowed so much in their hands and that is the reason Nigerians are not deriving full benefit from the oil and gas industry,” the university don pointed out. To him, the current situation that Nigeria faces requires urgent thinking and nobody is thinking so, government needs to think and focus on resuscitating the industry by meeting with businesses and investors to find ways of developing the economy rather than depending on foreign countries. “No foreign country or company will develop Nigeria. The development we need as a country will certainly come from within. Our local investors hold the key to development of the economy not foreigners,” Nweze said.
According to him, Nigeria boasts hundreds of Dangotes to develop her industries and the economy.
“Government should have meetings with them and give them confidence that their investments will be safe. They should be encouraged to bring out the money and invest in the economy. The entrepreneurs are scared. The government can probe whom it wants to probe but must allow business to flow,” he advised.
Nweze added that there is no country without corruption, therefore, government should build confidence in local businesses and entrepreneurs find the challenges they are having and provide quick low-hanging fruits for them, so that these funds are not frittered away to foreign countries adding that Indonesia did same. He also called on government to address the issue of interest rate, noting that high interest rate stifles the economy. Low interest rate is important for businesses to take off and important for entrepreneurs. It will also help small businesses to stand and grow,” he added.
He said: “The civil servants can corrupt angels; therefore, what President Buhari will do is to strengthen the institutions, so the ministers will be able to work. The civil servants have a way of covering corruption in the ministries adding that Mr. President should also know that one government cannot solve all the problems of this country, so he should remove oil subsidy, diversify and centralise the economy by building industries,” he said.
He noted that a study by government agencies showed that of the 774 local government areas, every local government area has natural endowment; therefore, government should help to develop such natural endowment and build clusters around them. With this approach, migration from rural areas to cities such as Lagos and Abuja will drastically reduce because it will create massive employment.
He said the three major sectors of the economy – the telecoms, oil andgas, and financial services employ less than two million people, therefore, to create the expected job opportunities, government should build the industries and encourage investment so that what happened in 2008-09 financial crisis, when foreign investors took away their money doesn’t repeat itself.
Dr Amao said Nigeria must privatise her refineries.
The President of the Nigerian Association of Petroleum Explorationists (NAPE), Chinwendu Edoziem, also expressed concern that the oil price crash may lead to stopping exploration for discovery of new oil fields.
These are indeed times for new ways of doing things.