Although the economies of all oil exporting countries are suffering during the current sharp drop in the price per barrel, the immediate consequences are the severest in countries that rely most heavily on the oil business. Nigeria is amongst the five countries most affected by the fall in oil prices and consequently is at the forefront of countries facing particularly difficult economic challenges. With oil accounting for over 96% of Nigeria’s export revenue earnings and 75% of government revenue the recently elected Buhari Government is already facing huge economic challenges.
Yet, conversely, the deteriorating oil price can be utilised to address fundamental weaknesses within the oil sector which would accord with Buhari’s political mandate. His electoral success was arguably built around his two main reputational strengths, security and anti-corruption. Delivering electoral promises on security has resulted in directed military campaigns against Boko Haram. Against this backdrop Buhari’s recent decision to appoint himself as Oil Minister reflects how reforming energy and addressing endemic corruption is as fundamental, if not more so, to Nigeria’s future as defeating Boko Haram.
The reasoning behind Buhari’s focus on oil and corruption is not new. There have been long standing accountability and transparency issues at all levels of government and industry. An example is the failure of the Nigerian National Petroleum Corporation (NNPC) to account for billions of dollars owed to the federal government over the last few years. The subsequent drop in the oil price, shortly after Buhari’s inauguration in May 2015, means that addressing such corruption has become even more urgent. Moreover, the huge decrease in revenue has also been compounded by the major blow to the Nigerian economy when the US shale gas boom reduced oil imports from Nigeria.
Consequently, the dependency on diminished oil and gas revenue, allied to high levels of inefficiencies and corruption throughout the supply chain, threatens the country’s economic sustainability. The Deutsche Bank estimated Nigeria’s budget would break-even with 2015’s oil price of $122. However, the recent downturn in oil price has forced the federal government to adjust its budgets twice to accommodate an estimated $65 a barrel and reduce capital spending plans by less than 10% of the 2015 budget. The oil price has now dropped to under $50 a barrel and on-going over-production could see further decline.
Furthermore, the naira fell to under one-third against the dollar, highlighting the inability of the Nigerian government to balance its budget. This has adversely affected the Nigerian banking sector, where approximately 20% of loans are granted to local oil and gas companies. The central bank has had to devaluate the naira to accommodate the fall in oil price; thus, Nigerian oil and gas companies that rely on foreign loans will either have to pay more in naira to offset the borrowing or will be unable to pay back.
Against this bleak political and economic setting, Buhari has taken personal control to reform the oil industry, utilising the political goodwill that was generated during the election campaign. However, given the volatile nature of Nigerian politics and the unrest caused by last week’s ministerial nominees, that goodwill is already dissipating and prompt actions are required if the government is to maintain widespread support.
To this end there have been a number of changes introduced. For instance, the federal government has introduced various austerity measures, which includes federal government securing an external loan of $5.7bn to finance infrastructural projects, and the introduction of fiscal consolidation to cut public expenditures for 2015.
To control the devaluation of the Nigerian currency, the Central Bank of Nigeria sold its foreign exchange reserve and raised the interest rate. The resulting exchange rate depreciation affected many cost parameters, which is in itself a new hurdle for local oil and gas companies in Nigeria. This challenge has been exacerbated by demands made by the International Oil Companies (IOCs) for a discount on existing contracts undertaken with local Nigerian companies, to cushion the blow of falling oil prices. Although the Nigerian government has indicated that the local content requirements would be maintained, the growing success of the Nigerian local content policy has been put into jeopardy due to the IOCs demands. However, agreeing to the discount demands is not financially sustainable for most local companies, yet these companies are unwilling to take legal action for fear of losing any future contracts. The only logical approach local companies can take is to negotiate their way to reduced discounts, though this would be entirely dependent on the negotiation powers held by these companies. This would mean that the discount requests from IOCs would be settled at different levels across the Nigerian oil and gas sector.
The current situation should provide further stimulus to the Nigerian government and be seen as an opportunity for industry reform. With considerably less oil revenues for the foreseeable future, the government has economic, as well as moral and political, reasons for ensuring that public revenues are not diverted into private, overseas bank accounts. Similarly the vast amount of oil that is lost through a failing infrastructure or looted from upstream and downstream needs to be better retained in order to improve revenue.
Indeed, the government’s key priorities should be strengthening the local content requirements to safeguard the interests of local companies as well as investing further in building local capacity, to ensure that greater revenue generated from the oil and gas industry is retained within the country. This would stimulate investment in petroleum refineries and the petrochemical industry, thus reducing oil importation expenditures and boosting the country’s economy. A neglected, yet fundamentally vital, question for the short to medium term future of oil and gas in Nigeria is whether the local content policy, and therefore the local companies, can meet and balance the aforementioned accountability and transparency issues, discount requests of the IOCs, as well as the impacts of the devalued currency as a result of the falling oil prices.
Stakeholders in the oil and gas industry have called on the President to close all the loopholes in the local content policy and requested that competence is given priority among local companies that are to be protected by this policy. The recent decision made by Buhari’s new government to exclude 15 local companies from lifting crude oil could be seen as an appropriate response to this plea, or a step too far that would hinder the progress of the local content agenda. Nevertheless, there is light at the end of the tunnel. Buhari’s intention to restructure the Nigerian National Petroleum Commission might improve accountability and transparency in the industry. However, the time and effort it would take to tackle the accountability and transparency issues would be a hindrance to the investors’ need for expedited decision-making by the government.
In these challenging times to revive the Nigerian oil and gas industry and in the process the Nigerian economy, President Buhari has to ensure that the money lost in the price downturn is at least partly offset both by more monies and oil being retained by the government. Moreover with around 60% of the population living below the poverty line when the barrel price was high, the government must ensure that the remaining benefits of being one of the world’s largest oil producers is spread more equally and effectively across more extensive supply chains, if this administration is to enhance its prospects of avoiding an ending similar to that of its predecessor.
This work was partly supported by the Petroleum Technology Development Fund (PTDF).
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