Nigeria at 61: Energy sector positioned for rapid growth with PIA

 

.As the nation should optimise, diversify its oil resources

UGO AMADI

 

As the nation clocks 61, one of the major development that has happened in the Nigerian Oil and Gas Industry is the assenting of the long awaited Petroleum Industry Bill 2020 (now Petroleum Industry Act 2021 “PIA”) by President Muhammadu Buhari administration.

This is actually after more than a decade of various attempts. For many years, the Federal Government sought to overhaul the Industry by introducing a new legal, regulatory and fiscal regime for the Industry.

The first major attempt was in 2008 when the first Petroleum Industry Bill was introduced. Since 2008, there have been other unsuccessful attempts at reforming the Industry through reworked drafts of the PIB in 2012 and 2018.

In 2020, the FGN reintroduced the PIB 2020 to the current National Assembly and after months of deliberations, both arms of the National Assembly passed the PIB 2020 in July 2021.

The President has since assented to the PIB 2020 even though the bill was greeted with opposition because of three per cent oil companies operating expense to host communities and  30 per cent of profit  oil and gas for frontier exploration.

Nonetheless, Industry experts noted that the present administration and the 9th National Assembly have demonstrated unparalleled commitment to passing the bill. They understand the importance of passing a bill that is competitive, balanced, fair, reasonable and realistic

Also, the pundits are of the opinion that the PIA could be a game changer, stressing that it is work in progress and the most important thing is to get the industry fast moving bearing in mind the future of the industry which is Energy transition to cleaner energy.

In fact ,one of the great achievements that will be highlighted in October 1 this year’s independence message by Mr. President will be the PIA , on  a  day  Nigerians all over the world have always revered. It was the day Nigeria had its independence from Britain. Remarkably, it has become the basis for subsequent independence celebrations.

However, an objective review of the nation’s 61 years journey shows both perfidies of opportunities of greatness and the irony of the nation. Even with the profusion of human and material resources, Nigeria remains an embryonic country with clearly more than half of its population living below the poverty line. It is also overwhelmed by myriads of challenges that continue to undermine its potentials.

Interestingly, in the 1960s, Nigeria’s economy boomed. This was accredited to the earnings from agriculture. The agricultural sector was the focus of interest, with food self-sufficiency as the goal.

 

However, in 1956, oil was discovered in Olobiri in the Niger Delta. That was the beginning of another era of boom until prices came crashing. Undoubtedly, oil plays a vital role in Nigeria’s economy as energy resources gotten from it include oil, gas and water.

 

Meanwhile, with its discovery, it has dominated the economy since the early 1970s and today. Nigeria is the largest oil producer in sub-Saharan Africa and since 1971 a member of OPEC, with an estimated production volume of 2.413 million barrel/day (2005). This makes it the world’s sixth-largest producer. Since 1960, Nigeria has reaped an estimated US$600 billion and more in oil revenue.

 

The first quarter GDP data  in 2020 shows that the non-oil sector accounts for 90.9% of the GDP while the oil sector accounts for 9.1%.  The paradox is that the oil sector accounts for over 50% of the nation’s revenue, and over 80% of the foreign exchange earnings.

 

But, regardless of the era of the boom, exactly 61 years later, this question reverberates: is there anything to celebrate about this nation? Blessed with abundant  resources, her future looked so positive and promising.

Her early years were so eventful. Everyone worked diligently and industriously to secure her fortune. Fascinatingly, she was named the giant of Africa.

 

Nonetheless, In recent years the Nigerian government  has found itself in stormy waters with  the collapse of crude oil prices ,  which triggered unpleasant memories of the 2015 and 2020 crash in the world oil prices,

It continues to struggle to revive the economy amidst dwindling oil revenues compounded by unemployment, poverty, insurgency, insecurity, kidnapping for ransom,  mass murders, suicide bombings, militancy, killer herdsmen, armed robbery, car snatching, terrorism, abduction of school kids, piracy, pipeline vandalism, etc.

Nigeria has one of the world’s highest economic growth rates, averaging 7.4% according to the Nigeria economic report released on July 2019 by the World Bank. Poverty still remains significant at 33.1% in Africa’s biggest economy.

Global poverty projections released by The Brookings Institute in 2018, based on data from the World Poverty Clock, shows that Nigeria has overtaken India as home to the largest population of people living in extreme poverty, with 87 million citizens living on less than $1.90 a day compared to India’s 73 million

Based on the recent world poverty projections, the signs of Nigeria’s leadership failures are now even more glaring as nearly 100 million Nigerians are in danger of falling into extreme poverty by 2022. This startling revelation implies that despite been the largest oil producer in Africa, Nigeria is unable to translate its oil wealth into raising living standards for its growing population.

Arguably, the growth in the non-oil sector has not translated to improvements in the living standard of Nigerians due to high unemployment rates.

For example, data from the National Bureau of Statistics, NBS show that the total number of Nigerians classified as unemployed, meaning they have no job at all or worked less than 20 hours a week.

 

As Africa’s largest crude oil exporter, with an output of almost 2 million barrels per day, global investors and business leaders are urging Nigeria to optimise and diversify its oil resources, especially considering the oil price volatility caused by the COVID -19 pandemic.

McKinsey Global Institute (MGI) identified Africa as the next frontier for growth and opportunity, highlighting the need for Nigeria to incentivise investors into its oil and gas industry.

In Nigeria, almost two-thirds of production comes from shallow-water and onshore fields, creating demand for investments that will improve production and create additional reservoirs. Yet, despite this, it remains largely unclear what the future holds for oil production in Nigeria. But with harnessing the good potentials of the PIA, the future can look better.

It was reported that Nigeria’s oil and gas industry recorded heavy drop in investments for many years and in the last five years ,the sector has suffered more inactivity as over $30 billion projects are still awaiting Final Investment Decisions (FIDs) to take off.

Also, Oil majors in Nigeria have hinged their investment decisions on the outcome of the Petroleum Industry Bill (PIB), and other fiscal frameworks by the Federal Government.

According to them, the country did not take any major investment decision in deepwater between 2015 and 2019, despite a number of available potentially viable projects. But with PIA things are likely to change.

Also, Oil, accounts for 90% of Nigeria’s foreign currency earnings. Compounding this lack of diversity in revenue sources, is the sub-optimal utilisation of gas, resulting in significant gas flaring and value destruction to the nation.

According to Nigeria’s Minister of State for Petroleum Resources, Timipre Sylva, approximately 90.9 billion cubic feet of natural gas valued at $230 million, was lost to gas flaring in the first five months of 2020.

Although an 8% reduction in gas flaring was recorded in 2021, the increasing importance of gas as a lower carbon energy source presents a new reality for all players.

The key infrastructure deficit in the sector is primarily on the gas transmission network. Not enough attention is given to transmission. Stakeholders’ approach to this challenge has been to invest in improved oil production models, with the private sector leading new and promising interventions.

More investors are becoming strategically attuned to the demand for business models that will minimise gas flaring while remaining profitable.

Beyond oil production, indigenous players in Nigeria’s oil and gas industry are in a position to reform the consumption of power and improve the standard of living for Nigerians by way of employment opportunities and improved collaboration with host communities.

Obviously, despite the energy transition challenges , there is still hope for the nation as the Organisation of Petroleum Exporting Countries  recently released   its World Oil Outlook, WOO 2021 and declared that crude oil would retain its number one position in the global energy mix up till 2045.

OPEC also disclosed  that Africa’s refining outlook had improved, with Dangote project accounting for half of the 1.2 million barrels per day of new capacity expected by 2026.

OPEC Secretary-General, Mohammad Barkindo disclosed this  during the unveiling of the WOO 2021, stated that global energy demand would expand by 28 per cent by 2045. He said energy would be needed to power more homes, more services, more businesses, more cars, more planes, more ships, among others. “This will require the use of all forms of energy to support the post-pandemic recovery, the energy transition and address long-term energy needs,” Barkindo stated.

According to OPEC, one of the ways to finance  projects  in Africa could be for governments to seek financial partnerships with the private sector for the expansion of their refining and petrochemical industries.

It said, “Africa’s medium-term outlook looks more optimistic relative to the WOO 2020, with 1.2 mb/d of new capacity expected by 2026. Half of this is accounted for by the 650 tb/d Dangote project in Nigeria, which is likely to come on line in 2022. In addition, there are several smaller projects in West Africa, mostly located in Nigeria, Angola and Ghana

However, looking at how the nation has performed so far being an oil-dependent economy, an economic expert and Managing Director of Asset Management Limited, Mr. Johnson Chukwu in an exclusive interview with Daily Champion stated that the economy has not done quite well, and that the country has not just developed like the ones that got independent with her

 

According to him ‘’ the Southeast Asia countries have done much better than Nigeria today. Even some African countries like Ghana, Rwanda, and Batswana, those much smaller than Nigeria have done better than us, it looks like Nigeria is suffering from what we call ‘Arrested development” in the sense that Nigeria continued to developed up till the early 1970s and the development was stalled and since then we seem to be retrogressing virtually in all facets of human lives.

 

Chukwu posited that for the nation to build a vibrant real sector, it is necessary to have good infrastructure in place to support the real sector and economic activities.

 

He also said that the second factor that can catalyze the economy is the development of the entire value chain of the oil and gas sector such that our earnings will not be dependent on the export of crude oil. He affirmed that the coming of the PIA can also help in catalyzing the economy.

 

Chukwu noted that the major or minimal infrastructures that are needed for us to compete are one power and energy infrastructure, which is electricity supply. The supply of electricity should be efficient and come at a reasonable cost. The second aspect is the transport infrastructure. We have a very weak transport system that one can hardly move raw materials and finished goods at an efficient cost.

 

 Also, Muda Yusuf,  former Director General, Lagos Chamber Of Commerce and Industry (LCCI)said “Nigeria must streamline the foreign exchange management to reduce the cost of stabilizing the exchange rate, boost supply of the forex into the economy, prioritize the unification of the multiple exchange rates, eliminate multiple windows in the forex market and broaden the scope for a market driven exchange rate.

“All of these are essential to reduce the systemic distortions and disruptions resulting from the current model of foreign exchange management.  It is important as well to deemphasize demand management and scale up strategies to support the supply side of the forex make.’’

 

He noted the urgent need for strategic responses to the looming fiscal viability and solvency crisis at all levels of governments, stressing that acute revenue challenges are becoming an increasingly disturbing scenario at all levels of government.

‘’We need to urgently deal with the escalating cost of governance, fiscal leakages and revenue optimization issues.

‘’Absolutely, there is need to reduce the emphasis of attracting and retaining portfolio inflows with high interest rate to the detriment of domestic investment.  We should prioritize attraction of foreign direct investments by addressing the key investment environment issues to inspire investors’ confidence.  FDIs have much bigger potential impact on job creation, poverty reduction and economic inclusion”, he stated

Nevertheless, the PWC in its projection said  that  Nigeria  as the largest economy in Africa and 22nd globally, its economy could rise through the world rankings to top 10 in 2050 with a projected GDP of US$6.4 trillion, surpassing Germany, the United Kingdom, France and Saudi Arabia. To achieve this however,  they noted diversification from the economic over dependence on crude oil is required.

According to them,  “Nigeria’s intrinsic potential lies beyond oil; harnessing this potential has become an imperative given the expectations of lower for longer oil prices. Based on recent trends, our report reviews the impact of low oil prices on key economic indicators and the real sector through an industry survey. Our analysis identifies Agriculture, Petroleum (Petrochemical and Refining), Retail, and ICT as priority sectors with the most dominant transmission links to the overall economy.

“These sectors in the medium-to-long term are key to boosting other sectors like manufacturing. Forward linkages to agroprocessing and other services such as logistics as well as backward integration to input supply sectors could improve farm incomes, increase employment and improve domestic food security”.

Potentially, Nigeria’s global agriculture exports could take-off at a rate similar to Brazil’s, with US$59 billion in export revenues by 2030. Similarly, value added to Oil and Gas output needs to urgently improve by implementing diversification within the sector.

This requires investments across the downstream sector to develop petrochemicals, fertilisers, methanol and refining, industries relevant in both industrial and consumer products which Nigeria currently imports.

As many of us who want to see Nigeria thrive again, our aspirations are quite simple- provision of basic amenities, infrastructure, and security. The emphasis on security is because there is a correlation between it and economic growth. A nation that battles with insecurity will certainly have its fortunes declined as it’s practically a turn-off for would-be investors.