Oil

Diversification of Nigeria’s Economy Through Oil- Professor Iledare

Professor Wumi Iledare

 

…An estimated 36-37 billion barrels of oil in Nigeria with 202tcf of proven natural gas

…Proceeds from oil not well utilized

…Reform key to diversification of economy

…Agriculture plays major role in diversification

 

-By Olufunke Afolami

 

Professor Omowumi Iledare is a Petroleum Engineer and has been in the petroleum industry for several years. He has contributed tremendously to the advancement of petroleum engineering and petroleum economics in Nigeria.

Due to his advocacy in the industry, he was given the Emmanuel Egbogah Petroleum Industry Advocacy Award.

At present, Professor Iledare is the International Petroleum Chair in Petroleum Commerce at University of Cape Coast, Oil and Gas Institute, Ghana.

Professor Iledare was a guest in a virtual conference that was held by the Emmanuel Egbogah Foundation, University of Port Harcourt in Rivers State. He spoke on the ‘Diversification of Nigeria’s Economy’ and reforming the oil industry which is key to diversify Nigeria’s economy, he said, “if we are going to diversify this economy, oil and gas must act as a catalyst and we don’t have the time. We have waited 60 years without thinking of how to diversify the economy.”

Nigeria is among the top 20 nations in terms of crude oil reserves and top 10 in crude natural gas reserves which simply means the country is 90% certain ceteris paribus that is it is not going to produce or record anything less than what is recorded.

At present, there is an estimated 36-37 billion barrels of oil in Nigeria and 202 trillion cubic feet (tcf) of natural gas proven in the country. This 202 cannot be explored and mostly discovered by accident. “Imagine what will happen if we are actually looking for gas. We have to lean on transition fuel before we get this fuel to power our economy.”

Professor Iledare was of the opinion that the oil and gas industry literarily created a fundamental change to the structural configuration and fiscal architecture for the Nigerian federation.

He observed that oil has created a value system that has not been erased since 1970. “If you look at democratic governance in Nigeria since 1999 and the amount of money that have been made including things that ought to have been done, I want to state categorically that it leaves much to be desired.” It is not about the incumbent government but collective governance of the oil and gas industry since 1999. Proceeds from oil have not been well used but there is still time for adjustment.

Basically, Nigeria’s production is declining, the crude oil production has declined since 2005, the country attempted to raise it up after the collapse of oil in 2008 and has not been able to get to the of peak 2.5 million barrels per day in 2005. Nigeria is still struggling.

In fact, the present status of production in Nigeria is supposed to be 4 million barrels per day in 2020 and about 40 billion barrels of proven oil reserve. Hence diversification may be difficult than we think unless we reform the industry.

   THE DEEPWATER RESCUE

Nigeria oil industry would have been in trouble if not for the Deepwater. It is the Deepwater that rescues the country otherwise production would have been below 1.2 million barrels per day. Deepwater estimate was done in 1993, since then oil production has been declining. While the industry performance has been sub-optimal since 2005.

Again, the country moved from low production formation to focus formation. “We have lost our market share over this same period with serious funding gaps while increasingly loosing competitiveness.” Resource base is deepening and exploration effort is not increasing coupled with insecurity of assets and crude theft while companies are also reducing workforce, depending more on contract staff.

The Petroleum Engineer bemoaned the current status of Nigeria oil industry that the type of training and confidence he got when he joined Shell in 1980 has winded up. “All of those things are disappearing and that is what is going to make diversification more difficult if we don’t do something about the industry.”

   FAILURE OF REFORMS

In comparing happenings in the industry from 2011 to 2015, and 2015 to 2019, Nigeria missed the opportunity in the early 2000 to reform the oil industry. The country should have reformed the industry between 2011 to 2015. But it failed to do it. Failure to use the opportunity in its disposal to reform the industry from 2000 to 2010 created some of the problems it had in early 2010.  Inability to reform it in 2011 to 2015 brought issues in 2015 to 2019. Reform is the key to diversification of Nigerian economy because the oil and gas industry create bulk of the money that can be used as platform to progress in 2030 to 2040.

Professor Iledare said he was not passing bulk or blaming any government, but because 2011 to 2015 administration failed to reform the industry, the resultant effect is what was seen in 2015 to 2019. If necessary reforms are not carried out from 2019 to 2023 the industry will still be enmeshed with the same indicators. It will retrogress instead of progressing.

  GAS IMPROVEMENT

Professor Iledare explained that in the previous five years number of rigs were 198 but in the current five years, it has decreased to only 93 which is more than 50% decline. Notwithstanding, the price of oil fell from $97 to $57 but placement of reserve is still the same, Nigeria only did well in gas . The positive change within the period of 2011 to 2015 was gas reserves. This was where there was increase in reserves by 9trillion cubic feet and that production remained constant within the period.

Authoritatively, if the industry had been reformed between 2011 and 2015 present indicators will not be what they are despite the price of oil. “If this government does not do what it supposed to do quickly by reforming the industry, diversification will be difficult.” Presently, the country will be faced with context of low-price dynamic between 2020 and 2023, it has to act fast. Considering cumulative change from 2015 to 2019 and 2020 to 2023, only gas reserves and production have positive impact while oil reserves did not change. These indicators must reverse before diversification can be a reality.

    OIL AND GAS AS A MEANS OF REFORM

The oil and gas industry remains the engine that will catapult the country to diversification, hence if the sector is not reformed, it becomes a hellacious task.

Professor Iledare asserted that if the price of oil falls and cost is increasing, tax base will decrease while the government will have less revenue. This will worsen the situation because production will be low and it culminates to insecurity and lack of investment.

Viewing the industry from 2010 to 2019, minuscule drilling intensity is affecting production and reserve because they are down. Gas to power drops and jobs in the industry are down. Unfortunately, nearly 50% of Nigerian engineers who studied petroleum engineering are not employed because performance in the industry is sub-optimal.

    THE ECONOMY

There is no argument when it comes to the micro economic climate in Nigeria,  it highly depended on oil and gas. Unfortunately, it contributes less than 10% of the Gross Domestic Product (GDP). It is more or less a measure of the quantity of the economy as perceived in the industry. Oil is to add a lot of impact to economy and in the life of the people. Petroleum contributes immensely in terms of foreign exchange earnings in Nigeria which is about 90% to 98.9% of entire earnings is tied to ability to export crude oil. This has to be reversed.

Oil cannot be killed or jettisoned but revenue from it should be used to diversify the economy.

Professor Iledare submitted that petroleum products account for nearly 50% demand for dollars. This is why exchange rate is so high. Another purpose of diversification is to move away from being a rent seeker and a rent sharer. In fact, Nigeria’s constitution is written to share proceeds of petroleum.

However, there is correlation between the price of oil and change in GDP which means if the price of oil falls GDP growth goes down and diversification means a country should not depend on a single sector to drive its economy. This is the concept of diversification from a petroleum dependent economy.

How can the economy of Nigeria be handled in such a way that one particular sector cannot be the determinant of where the economy goes? Diversification is the answer.

The price of oil collapse in 2008, it affected the economy and it was almost the same experience in 2015, it affected the GDP but the country recovered because the price was significantly stable at that time.

Therefore, the simple equation is; when price of oil falls, GDP goes down. If GDP drops, the entire economy of Nigeria suffers. GDP is equal to household consumption plus private investment plus government spending plus net export.

Nigerian economy is dominated by government spending and it is highly dependent on the price of oil. This must change going forward. Government should not clout private investment but encourage household spending in order to grow the economy.

Government has to desist from depending on the price of oil for the economy to survive.

Continuous dependent on oil makes price so significant, and to balance budget means oil price must be $139 per barrel. Survival is difficult because it is not predictable. It means government will borrow consistently to meet its obligations. The only solution is to reform the industry.

     SOCIAL WELFARE LOSS

The misuse of petroleum fund has taken its toll on social welfare and infrastructure. Schools and hospitals are impacted while roads across the country are in ruins. Indeed, a paradox of a depended economy. Non-reform of the industry portends a gloomy picture for future generation.

Professor Iledare advised that only an independent institution like the National Assembly with public interest working alongside the executive can reform the industry not those that are benefitting from the existing structure.

    MOVING AWAY FROM OIL

It is absolutely impossible for Nigeria to move away from oil dependency without reforms because this is the only way value can be added. The industry will not attract foreign investors if the business environment is not conducive.

Apart from oil, the most dominant contributor to the economy of Nigeria is agriculture, wholesales and service. Although Covid-19 will affect the country because there should have been progression in quarter 3 of 2019 but quarter 1 of 2020 scuttled plans due to the pandemic. Therefore, Covid-19 is a warning signal for the country that it cannot depend on one domestic commodity to drive its economy.

The volatility in non-oil contribution to GDP is almost stable, it reveals that the oil sector is not making positive impact otherwise growth would have reflected in non-oil sector.

One of the key ingredients of reform to diversify Nigerian economy from oil is Petroleum Industry Governance Bill. It was at the verge of being passed into law but has been put on hold due to political gray. The industry is also shrouded with amorphous confused and overlap governance, nearly every agency of government intends to regulate the industry.

This has created administrative burden and increase cost of production per barrel. With reform in place, there will be clear cut separation. Separation in terms of responsibility and accountability.

CLEAR PRINCIPLE

Separating regulation from policy and supervision from commercial, the delivery will be efficient, effective and equitable. There will be full coverage of the value chain with minimum interference. Everybody knows who is in charge without playing god or acting as boss. Supervision does not mean anyone is superior. Priority and accountability will be utmost without any avenue for corruption. Diversification begins with governance and institutional reforms. The Nigerian National Petroleum Corporation (NNPC) will not be a regulator but a commercial entity that depends on the regulation of Department of Petroleum Resources (DPR) whose policy is being formulated by the Ministry of Petroleum Resources. Every institution works together with collective responsibility.

There is need for fiscal system reform so that the industry will be competitive. The legislators have roles to play in the aspect. There should be cordial relationship among the government, community, indigenous operators and international company to forge ahead. Reform of fiscal system is governed by the principle of mutuality of interest.

    THE NEW THINKING

Professor Iledare emphasised on the new thinking. There are three classical instruments for reforming fiscal structure; royalty, tax and incentive. With regards to the oil industry, what Nigeria practices is single royal tax system of which investment is based on spending.

The Professor of Energy Economics advocated for multiple royalty system that is flexible, efficient and less regressive. Thus, separating hydro carbon tax from corporate income tax which every registered company must adhered. Moving away from incentive based on effort rather reward output and performance. Fiscal system must focus on value addition not rent seeking. Rent seeking must not dominate the purpose of fiscal reform.

As part of diversifying the economy, revenue management should be reformed. State and local governments should be discouraged from getting money in the centre which will be shared without accountability. Such money has not been properly utilized but it rather breeds corruption and ends in the hands of people who have access to benefit from the loosed administrative system.

Tax system should be restructured in such that money uncollected will be recovered by the state with a trustworthy agency as custodian.

Sovereign Wealth Fund which is known as Sovereign Wealth Power in some countries must be enhanced by the government to keep fund for exigencies. Proceeds from oil is to be used to grow the economy while focusing on infrastructure, education, energy and committing certain portion of the money for specific future  activity. The government should not accede to pressure for such fund to be spent indiscriminately while existing petroleum policy is due for reform which must be done fast.

 

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