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How OPEC’s Oil Production Cut Would Improve Nigeria’s Economy

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The global financial implosion occasioned by COVID-19 which crashed prices of crude oil by 50 per cent, significantly threatened overall performance of Nigeria’s fragile economy. This was until a deal by the Organisation of Petroleum Exporting Countries, OPEC and allies agreed to end the price war that further imperiled price recovery, writes CHIKA IZUORA.  

There is no better time for Nigeria to begin to implement measures that will help transform the oil and gas industry to create value for a sector that has sustained its economy over decades.

Deregulation of the downstream subsector of the industry would have provided the impetus to stimulate economic growth and development.

Though the country missed this opportunity, but the COVID-19 pandemic that saw oil prices crash to almost unbearable levels according to industry experts, provide fresh opportunities to take such steps.

All of Nigeria’s 2020 budget indicators; an oil production volume of 2.18 million barrel per day, oil benchmark of $57, N305 exchange rate to the US dollar, GDP growth rate of 2.93 per cent and inflation rate of 10.81 per cent now appear out of reach, and will most likely result in a downsizing of expenditure plans in 2020.

Global investment bank Goldman Sachs has lowered its Brent oil forecasts to $30 a barrel for Q2 and Q3, and by most estimates, the rest of the year will be gloomy. Demand is weak and dwindling, with cargos of West African crude blends from Nigeria other African countries now heavily discounted to buyers mostly in Europe or remaining unsold.

There are no quick fixes for Nigeria, but this may be a good time to plug some of the wastage. Nigeria needs to deregulate the downstream energy with a focus on gasoline subsidies, which promotes rent seeking and has fueled several inefficiencies within the downstream oil network.

Nigeria spent approximately $28 billion on subsidies between 2006 and 2018 alone, a financial burden that hampers development in other crucial sectors. Deregulation before the end of 2020, would at least give the current administration the opportunity to demonstrate the longer-term benefits of a liberalized oil market, without the political pressure of high petrol prices.

Norway has built a $1.1 trillion oil fund, while Russia’s current bravado and confidence in the face of the oil price war with OPEC, is largely hinged on its ability to dip into the $170bn national wealth fund it has built from excess oil revenues.

Nigeria has no such luxury as the country’s excess crude account (ECA) which had a balance of $20 billion in January 2009, stands at balance of approximately $70 million at present.

There is a need to reform the ECA’s governance structure and prioritize the types of drawdowns that have long term economic and infrastructure benefits such as investments made into the Nigeria Sovereign Investment Authority (NSIA).

The Lagos Chamber of commerce and Industry, LCCI has also given its backing to the decision of government to fully deregulate the petroleum downstream sector of the economy.

 

Dealing With Budget Implementation Uncertainties

Responding to the exponential crash in oil prices, the federal government quickly revised its 2020 budget estimates by cutting the planned spending by as much as N1.5 trillion.

It also announced a cut in crude oil benchmark price down to $30, against the $57 proposed in the budget while crude oil production remains at 2.18 million barrels per day as earlier stated in the budget estimates.

Minister of Finance, Budget and National Planning, Zainab Ahmed, said government was embarking on a number of expenditure cuts in Customs revenue to reduce, and a 50 per cent cut on revenue from privatization proceeds.

The minister who announced this while briefing journalists after the Federal Executive Council meeting presided over by President Muhammadu Buhari, said FEC approved reductions in capital budget by 20 per cent and 25 per cent cut in recurrent expenditures.

The proposal which will likely reduce the N10.59 trillion 2020 budget by as much as N1.5 trillion was also expected to increase deficit to over N3 trillion. The Minister revealed that government had written to all the MDAs to submit their positions and forwards same to the Cabinet office. FEC also approved stoppage of recruitments except in the areas of security, including Armed Forces and the other security agencies.

Other measures include review in tax policies, while it hopes that reduction in recurrent expenditures will allow for operational surplus increase that should help increase government revenue.

Ahmed stated that Presidency would be engaging the National Assembly as soon as possible to give legal backing that will enhance the new policies. “We have written to every Ministry to make their inputs ahead of the proposed engagements with the National Assembly.

“Government said the cut in the downstream sector expenditures might rise to as much as N457m, adding that “details were being expected from the Nigeria National Petroleum Corporation, NNPC”. Ahmed also revealed that States would be expected to take similar measures, as the reforms will affect revenue shared amongst the three tiers of government.

On the tax policy, the Minister disclosed that fiscal authorities were already working on fiscal incentives. On jobs and recruitments, she revealed that government would not cut jobs but had ordered a stoppage of replacement which is being suspended because of high wage bill.

“We are not looking at job cuts, but while the recurrent expenditure is being reduced by 25 per cent job replacements will be put on hold, except for security agencies

The President had earlier summoned officials of Federal government Ministries, Departments and Agencies (MDAs), including officials of government parastatals, considered critical to the execution of the 2020 budget to the meeting of the Federal Executive Council.

LEADERSHIP Sunday reports that the President has asked the Presidential Economic team established to review the impact of Coronavirus and crash of Crude oil price, headed by the Minister of Finance to regularly update the cabinet of measures to tackle the effects of Crude Oil prices falls as experts projects that oil prices could go to as low as $20 per barrel.

The Presidential Economic Advisory Council PEAC, led by Dr. Doyin Salami also expressed concern over possible slow growth occasioned by the negative impact of Coronavirus and recommended the revision of the 2020 budget to prioritize spending on health care, infrastructure and basic needs.

 

Deregulation As Another Option

In a palliative proposals sent to federal government for quick economic recovery, the director-general of the Chamber Muda Yusuf, said the measure would ultimately reduce importation of petroleum products and ease the pressure on the foreign exchange market as well as the burden on our foreign reserves.

This is also coming as the group managing director of the Nigerian National Petroleum Corporation, NNPC, Mele Kyari, previously said Nigeria’s ailing refineries will no longer be managed by the corporation after rehabilitation.

According to a press release by the corporation’s spokesperson, Kennie Obateru, Kyari who spoke in an interview on Arise TV breakfast programme, The Morning Show, stated that a company would be engaged to manage the plants on an Operations and Maintenance (O&M) basis upon the completion of the rehabilitation exercise.

The rehabilitation of the four refineries in the country have gulped billions of naira since 1999 but none of them is yet to operate at full capacity. “We are going to get an O&M contract, NNPC won’t run it.

We are going to get a firm that will guarantee that this plant would run for some time. We want to try a different model of getting this refinery to run. And we are going to apply this process for the running of the other two refineries”, he said.

He explained that the plan, ultimately, is to get private partners to invest in the refineries and get them to run on the NLNG model where the shareholders would be free to decide the fate of the refineries going forward. Kyari said this model, which is totally different from the previous approach, would guarantee the desired outcome for the refineries.

Being one of the cardinal programmes on his agenda when he assumed office in July 2019, Kyari said the rehabilitation process was to be in progress in January and to be delivered by 2022. Kyari’s announcement of private management of the refineries after repairs comes two days after he said the government would no longer subsidise petrol.

 

The NNPC has been subsidising petrol and spent over N700 billion on subsidy in 2018. None of Nigeria’s four refineries works optimally and the country imports virtually all its petrol needs.

Also, Kyari, has expressed the corporation’s readiness to strategically put in place measures that would reduce the cost of crude oil production in Nigeria to create a market for Nigeria’s crude and make the country a choice destination for Foreign Direct Investment (FDI), to support upstream sector growth.

In the proposal, the LCCI boss said for the deregulation to work, complementary legal framework should be expeditiously put in place to avoid a truncation of the process. The chamber according to him, believes that the economy would profit immensely from this very significant reform.

The DG, was confident that it will free resources for investment in critical infrastructures such as power, roads, the rail systems, health sector, education sector etc. “The deficit in all these infrastructure areas are phenomenal.

Fixing infrastructure will greatly improve productivity and efficiency in the economy and impact positively on the welfare of the people. It will unlock the huge private investment potentials in the downstream oil sector especially in petroleum product refining.” he envisaged.

Further, Yusuf said if well implemented it will eliminate the patronage, rent seeking activities and corruption that currently characterize the downstream oil sector and create more jobs for the teeming youths of the country in the downstream oil sector as investment in the sector improves.

Similarly, the Major Oil Marketers Association of Nigeria (MOMAN), says the present situation gives the government an opportunity to deregulate the market.

With oil prices relatively unstable and foreign exchange presently scarce, especially for the importation of fuel by marketers, the impact of the monthly price review might not be felt immediately till the lockdown ends, and demand for PMS rises, it said.

Also speaking, the Executive Secretary, Depot and Petroleum Products Marketers Association of Nigeria, (DAPPMAN), Mr Olufemi Adewole, said that rise in the landing cost of petroleum products has renewed the calls for the full deregulation of the downstream subsector of the nation’s oil and gas industry.

Also, the National President of the Independent Petroleum Marketers Association of Nigeria (IPMAN), Mr. Chinedu Okoronkwo said total deregulation of the downstream sector would also attract more investment, generate more jobs and reduce the pressure on foreign reserves.

 

Addressing High Cost Of Production

The NNPC is also worried that the pandemic is taking toll on Nigeria’s oil sector because of current cost of production. To deal with this, the Corporation says it is strategically putting in place measures to alleviate the cost of crude oil production in Nigeria to create market for Nigeria’s crude.

At some point due to the Coronavirus pandemic, Nigeria had about 50 cargoes of crude oil that have not found landing, according to Kyari, which implies that there are no off-takers for them for now due to drop in demand.

He said in the face of the Coronavirus global pandemic, countries like Saudi Arabia have given discount of $8 and Iraq $5 to their off-takers in some locations meaning that when crude oil sells at $30 per barrel, countries like Saudi Arabia is selling at $22 per barrel and Iraq selling their crude at $25 per barrel.

According to him, the oil price crash signified the importance of oil to the global economy. He added that oil price will continue to shape activities in the global economy. “We used to say when the financial sector collapses, everything collapse. But certainly, it is the other way round. When the oil market collapses, everything collapses. So oil is the only commodity that the beneficiaries panic when the price goes up,” Kyari said.

He predicted that fossil fuel would remain significant contributor to energy need in the next 40 years. “But what would not be there in the next 40 years would be inefficient producers because as we speak today, we are getting production from the least expected places. Nearly every country now produces oil and that means that the best of people who would remain are the people who would produce oil at the cheapest cost.

 

Revenue Generation And Historic OPEC Deal

The federal government last weekend said crude oil price would rebound by at least $15 per barrel in the short term following the latest intervention of the Organisation of Petroleum Exporting Countries and its allies, jointly referred to as OPEC+.

Timipre Sylva, minister of state for petroleum resource, said the rebound could translate to additional revenue of $2.8 billion for Nigeria. “It is expected that this historic intervention when concluded will see crude oil prices rebound by at least $15 per barrel in the short term, thereby enhancing the prospect of exceeding Nigeria’s adjusted budget estimate that is currently rebased at $30 per barrel and crude oil production of 1.7 million barrels per day,’ he said.

Sylva said, “The price rebound may translate to additional revenues of not less than $2.8bn for the federation.” Sylva, who disclosed this in a speech he personally signed, stated that Nigeria joined OPEC+ to cut crude oil supply by up to 10 million barrels per day between May and June 2020, eight million bpd between July and December 2020, and six million bpd from January 2021 to April 2022.

Nigeria’s expectation and hope was raised as OPEC, Russia and other oil-producing nations finalized an unprecedented production cut of nearly 10 million barrels, or a tenth of global supply, in hopes of boosting crashing prices amid the coronavirus pandemic and a price war, officials said.

The cartel and other nations agreed to allow Mexico to cut only 100,000 barrels a month, a sticking point for an accord initially reached Friday after a marathon video conference between 23 nations.  They reached the deal just hours before Asian markets reopened Monday as international benchmark Brent crude traded at just over $31 a barrel and American shale producers struggle.

However, before then, the federal government had allayed fears of an economic crisis in view of the effects of the crash in global oil prices and the Coronavirus epidemic on the nation’s economy. Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, called on Nigerians not to panic as the drastic fall in global oil price threatens the country’s 2020 budget as well as its macroeconomic stability.

She gave the assurance just as the Central Bank of Bank of Nigeria (CBN) Governor, Mr. Godwin Emefiele, said the CBN had already embarked on measures to significantly reduce lending rates, which have resulted in total banking credit rising to over N17.4 trillion as of January.

Ahmed explained: “For us it was a shock and unexpected; we didn’t think the price of oil would go as low as $30 per barrel. So, it came to us as a great surprise. These are very strong headwinds and these headwinds reinforce a wake-up call for us as a country to look towards a life without oil and the time to do that is now.

“We are working as a government to strengthen our macroeconomic fundamentals, which some sectors of the economy were already dished before the crisis and so the crisis is only exacerbating the situation and we knew about that.

“There is no doubt that the combination of crude oil price crash and coronavirus will put severe strain on our budget revenue, forex and many sectors. We are drastically reviewing the budget as well as redoubling our efforts to raise revenue and plug the leakages and intensify engagement and support of sub-national entities and the private sector in our economic recovery and growth programmes,” she said.

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