Nigeria’s Economy Faces Difficulty Over Free Falling Oil Prices

Nigerian Petroleum Minister Diezani Alison-Mudueke.

Written by Chijioke Nelson and Anote Ajeluorou

Nigerian Guardian

CBN increases forex market intervention to $500m

• Lack of periodic review of policies bane of oil and gas industry, say experts

A GLOOMY prospect for the nation’s economy, which relies heavily on oil receipts may have been high with the free falling prices of the commodity at the global market.

   The development, which is partly associated with the recent surge in Shale Oil production by Northern American countries, led by the United States of America, has seen crude oil fall steadily from one year high of $110.48 a barrel in May 2014, to a two-year low of $92.31 a barrel in September 2014.

   The 6.2 per cent decline has, however, put pressure on the member nations of the Organisation of Petroleum Exporting Countries (OPEC), including Nigeria, which is currently reeling in fears for its low external buffers and 2014 budget performance.

   The Nigerian Bonny Light, though at $95.2 a barrel, is still substantially above the 2014 Budget Benchmark Crude Price of $77.5 a barrel, the production volume since the year has largely underperformed the 2.38 million barrels per day estimation.

   The development is also an indication of the potential macroeconomic challenges ahead, if oil prices sustain the free fall in price without a corresponding increase in production figures.

   This has raised the need for sustained campaign for the diversification of revenue sources and broader economic structure, with urgency in the processes that are aimed at achieving it.

   Though the funding scheme designed to support the development of the agricultural sector is a step in the right direction, similar efforts should be made towards the manufacturing, telecommunication, tourism, and transportation sectors, among others, to ensure the country leaps beyond identification of potentials, to realising them.

   Meanwhile, the Central Bank of Nigeria (CBN), had last week, increased its foreign exchange offering at the Retail Dutch Auction System (RDAS) from $300 million to $500 million.

   The decision to increase the forex offering was attributed to cover-up for the second weekly auction, which fell on public holiday and assessed demand surge during the Eid-el-Kabir. 

   About 20 banks participated in the offering at the primary market segment of the RDAS at the marginal rate of N155.75/$, while the apex bank’s measure spurred gains in the naira, as it closed at N163.80/$, making a 15 kobo.

   The naira equally strengthened by 50 kobo at the bureau de change segment to close N168.50/$.

  According to Afrinvest Securities Limited, there is an anticipated pressure on the currency this week, as the bank holidays limit the number of days available for the auction.

   Meanwhile, In all sectors, Nigeria does not lack good policies and ideas to make things work for its citizens. Rather, it is lack of policy inconsistency and inability to periodically review such policies to meet with ever changing realities that have been identified as the bane of national development. 

   Nowhere else is this also truer than the oil and gas sector, Nigeria’s mono-product managed by the Nigerian National Petroleum Corporation (NNPC).

  At least these are the informed and insider views of three retirees of the corporation, Michael Olorunfemi, Akin Adetunji and Ade Olaiya, who started out with Nigerian National Oil Corporation (NNOC) before it transformed into NNPC. Together they have a combined industry experience of almost 100 years. They have documented these views in their new book Nigeria Oil and Gas: A Mixed Blessing? with A Chronicle of NNPC’s Unfulfilled Mission as sub-title. The book is scheduled for launch this month in Lagos.

  Also, even in a democratic era, policies continue to tumble down from government in military-era fashion, with little or no consultation, as the Petroleum Industry Bill (PIB) seems to suggest, which has been bogged down at the National Assembly for almost 10 years now without being passed into law.

   According to Adetunji, “One of the areas we looked at is inconsistency in policy and lack of periodic review of policy, which are the bane of policy implementation. And, what are the success factors of other OPEC countries as against Nigeria’s? Are we really following a clear-cut path to recovery? It was observed that our foreign reserve has fallen from $40 to $35 billion. Where we thought we would be increasing, we’re retarding. That spells doom for the oil industry. If we continue to decline, sooner than later, we will become a net importer of crude and not just finished product. Apart from revenue implication to government, it is also a disaster to national economic growth.

  “So, what needs to be done is to ginger up exploration, to be able to add more to the reserve because one thing about oil is that what you find today does not come into your market until five years’ time or more. This is the kind of lag we now run; it needs to be arrested. We need to stimulate exploration path.

   “We took a quick look at PIB itself that has taken a decade to come into being. It’s a good piece of legislation with good intention, but is that the best approach to it? Rather than going the omnibus way of compiling everything into one legislation, each of those areas had their own enabling legislation, which could have, on their own, be individually modified, and not constitute a new legislation but amendment. Those would have been implemented faster and should have helped the industry better than what we are now having, where for 10 years now the legislation is on hold, it’s dragging on. The industry is declining because investors are hesitant in investing, as there’s no clear cash-flow they can see because of fiscal measures that are not clearly spelt out; this does not help the development of the industry.

   “In fact for now, I don’t know who has an idea of the bill’s exact intentions. What is in the legislation, it’s content? Really, what does it contain? What are its provisions? What are the fiscal measures? So, until the document comes out will we really know what it contains”?

   The trio agrees PIB is another faulty policy formulation method, as it did not enjoy wide consultation among stakeholders. Adetinju notes, “Do we really need to go the PIB route to achieve our goal? But maybe it’s too late for that now because PIB is already on its way. We also propose that even our policy formulation method is faulty, and this cuts across the whole economy. You see, there is no wide consultation. It was part of what affected PIB; there was no wide consultation. By the time government came out with what it wanted to do, a number of stakeholders were not pleased, and they started complaining. But if there had been wide consultation, of course, there would have been compromises with various stakeholders.

   “That is one aspect we’re concerned with. We are saying, ‘look, our policy formulation method must get wider perspective of consultation’. Also, policy must have periodic review. Policy comes up to deal with certain situation, and that situation would not be there forever. That situation will change, circumstances will change, and factors will change, and yet the policy would remain. That is the kind that has bedeviled some of our policies.”

   Adetunji states that the much vilified oil subsidy is one clear example of lack of policy review in the public sector of the oil and gas industry. He argues, “Like we are having in oil subsidy issue today. When the policy of petroleum equalization was introduced, it had no subsidy. It was to be a zero, self-equating system. That was why it was called petroleum equalization fund. It equalizes itself, but then because the factors that were there then when the policy came out were never reviewed; one, crude price was so low it was $8 per barrel, and naira-dollar parity was in favour of naira. The naira was stronger than the dollar.

   “At that time the bulk of petroleum product that was consumed locally was refined locally. So, we didn’t have to deal with imported inflation at all. But now those factors were never reviewed even as we cannot refine locally. So what was self-equalising became self-negating. Now because government has to sustain the same price it has to find more money from elsewhere to equalize it; that is why we are having this problem.”

   Although it started on the path of a lofty mission as Nigerian National Oil Corporation (NNOC) in 1971 before transforming into NNPC, it has since become an agency achieving far below its set mission. It is the concern of these three former employees of NNPC, who say their book is designed to stimulate debate in the public sector of Nigeria’s oil and gas mono-economy.

   According to Olorunfemi, “Our focus is on the public sector of the oil and gas industry. We have almost 100 years of combined industry experience at NNPC. The public sector started as a modest effort when it used to import petroleum products.

   “But when oil was discovered in large quantities it put Nigeria on the international map; then it began to interest international players to come and prospect. It attracted the Americans more because we had the singular luck that the geology of the Niger Delta is similar to that of the Gulf of Mexico, where Americans were already operating.

   “What we look at is, ‘how did policy start emanating? What are the achievements attained in comparison with other third world countries? What are the challenges? And how do we put issues in the sector in perspective? What we did wrongly in the past that we mustn’t repeat and what we need to be doing now to get things right? And what is the road for the future for us to realise success for our collective survival as a nation?’”

   Continuing, Adetunji gives a historical narrative of NNPC’s set mission, “When NNOC started in 1971, it was at a time when Nigeria joined OPEC, and OPEC put out a resolution that every member country should have their own national oil companies to be able to derive the gains of the oil industry, to be able to participate and to be involved in the exploitation of their own strategic resource and that it should not just be left in the hands of multinational oil companies alone.

   “So, these were the ideas that government had in mind. Instead of just regulating and issuing licenses, which NNOC had been doing before, it should participate, acquire the technology and at the same time be able to understand the industry.

   “And so from the initial time, the stage was set for NNOC to be a company that really will be an international oil company, a profitable oil company, and a company that will be able to establish its rights with other third world companies being established at the time. So NNOC was created to be involved in direct exploration and production. And this was what it did; it’s in the records. NNOC found a number of oil fields because of the competent people it had.”

   Like all government establishments, things soon began to fall apart. A clear lack of vision on the part of government and those managing affairs crept in, and as he posits, “NNOC was not able to develop those discoveries; they were then given out to other companies.

   “Government did not give NNOC the financial wherewithal to do what it should be able to do. It was not capitalized and it could not borrow from outside; it was only involved in discoveries alone, and not in production, which is one major problem. Most other companies formed like NNOC in other countries are everywhere. This is what has happened to any company government has put its hands – railway, shipping, airways. So we ask, “what is wrong? Why can’t we move forward? We have beautiful ideas, but when it comes to implementation, we run into problems.”

   For them, the book is “Intended to generate further debate in the public sector of Nigeria’s oil and gas. It is to throw challenge to other people to be able also to act, and have other opinion on how things are being run. It is to convey a message.”