Dr. Carole Nakhle, CEO Crystol Energy
…Nigeria’s economy poorly diversified
…Massive slashing of capital and expenditures
…Reserves growth decline
By-Olufunke Afolami
Nigeria still has huge potentials in oil and gas resources, viewing its current fiscal regime, the country is evidently below expectation in terms of fiscal structure. The system is complicated and does not meet standard for simplicity, progressivity and sustainability.
To design a new fiscal regime, there is need to build a system that puts checks on simplicity, progressivity and competitiveness which will recognise the unique position of the country. Government revenue is low, it needs fund, but established basins are maturing hence significant investments are required to maintain production.
For the past seven to eight years, investment level in the sector has been 2.5 million barrels per day, at present production level is less than 2 million. Nigeria has about 200tcf of proven gas but what fiscal regime should be put in place to enable development of resources before they become obsolete?
These are the questions industry practitioners are asking. How can the nation monitise its resources and equally finds new ones? Investments in the industry are not growing.
Apparently concerned about this development in Nigeria’s oil industry, the Facility For Oil Sector Transformation (FOSTER), an advocacy organization with interest in the oil and gas industry, partnered with Energy Institute, Nigeria branch to organised a webinar to deliberate on the present state of the industry in Nigeria. These two energy institutions have array of seasoned professionals in the industry and they have been projecting positive ideas on how to forge ahead.
Dr. Carole Nakhle, Chief Executive Officer (CEO), Crystol Energy was an invited guest and she spoke on the subject ‘Nigeria’s Oil Investment Climate and Existing Market conditions. Carole opined that taking a look at the situation in the oil industry globally, the International Monetary Fund (IMF), has made it known that 2020 will be impacted because of Covid-19 while the oil industry will be worse hit with uncertainty in the future if the pandemic does not come under control.
She said, the crisis has collapsed economic activity with a drastic implication for oil and gas market because transport sector which is a core aspect of the industry has been impacted negatively.
There was an unprecedented collapse in oil with maximum of $1 billion and about 8 to 9 million barrels lost in volume of oil demand compared to previous years. This is because people stop driving, travelling, and economies around the globe entered into coma. It resulted into a weak in demand while prices collapsed.
April was the worst in the history of the industry and for the first time WTI prices went negative while there was partial recovery, but since May, the market is stack because oil prices are hovering around $40 a barrel despite massive production decline voluntarily from OPEC including Nigeria and other oil producing nations outside the organization such as the US.
“The collapse in prices had drastic economic implication on major oil exporters around the world, but of course not all oil exporters are in the same basket because some have diversified their economy elsewhere. Nigeria is unfortunately one the countries that is poorly diversified, economy is heavily depended on oil revenues and as a result, the country needs an oil price of $130 per barrel to balance its budget whereas oil prices is at $40 and may move downwards around $30 per barrel. So, there is a lot of acute pain happening in many oil producing and exporting countries particularly countries such as Nigeria, Dr. Carole declared.”
The precipitation is not only on the side of government that suffers the brunt, investment in the oil and gas industry is also hit. Across the downstream and upstream, there are massive slashing of capital and operating expenditures with companies across the globe cutting down on their investment and throughout the supply chain.
Dr. Carole asserted that investment might result to less supplies of production in the future. As regards fiscal regime, regulations, and legislative balance, government should revisit fiscal terms to make investments more attractive.
“The reserves growth is not being achieved anymore and we have also seen decline in reserve growth. Does it mean that Nigeria is running out of oil and gas on the contrary? The country is sitting on massive potentials particularly in Deepwater, but the key is to unlock those potentials.”
According to Dr. Carole, the perception index on how investors rank Nigeria, the country did not do well in terms of investment when prices were high. This does not augur well for an oil exploration country.
“What makes fiscal regime attractive and other several principles? chief among them is stability. stability does not mean the fiscal regime is scarce because you need to allow some flexibility and occasional modification of the fiscal regime.” Therefore, in order not to negatively affect investment confidence and fiscal regime, government policy must reflect simplicity. Fiscal regime should not be complicated.
Notwithstanding, energy fiscal regime is simple with an element of progressivity. Progressivity means the government takes increase if price profitability increases and, on the opposite, it takes decrease as profitability decreases. Another significant element is neutrality. A neutral tax should not distort final investment decision.
So, taking these very basic principles, if we look at the Nigeria fiscal regime, we find that, it does not do well in any of these principles.
Fiscal regime of Nigeria lacks progressivity because the country relies heavily on royalty including other regressive instruments such as signature bonuses.
Besides, if the fiscal term is linked to the oil price, it leads to volatility which is the opposite of stability.
Dr. Carole emphasised on the circumspection by some industry experts in Nigeria comparing the system of operation in the country with Angola, that the Southern African country cost recovery is lower than Nigeria. The fact is that Angola does not impose royalty like Nigeria.
“Thus, these are things we need to bear in mind when we are making international comparison not to single out one fiscal instrument or one rate and compared with elsewhere.”
However, Dr. Carole expressed optimism that Nigeria is on the right path in terms of reforming its petroleum fiscal regime. The country should not create uncertainties and further delays because it has negatively affected the investment planet. Any move in fiscal changes should take into consideration not only the immediate government needs.
“I can understand the huge need for government to raise revenue due to collapse of oil prices and because of economic diversification, but we have to take into consideration what is happening in global oil market and other competing provinces, because international oil market is going to get tougher, not easier, she avowed.”
The Crystol Energy CEO, averred that fiscal regime is really about establishing a delicate Act to achieve government needs and monitising potentials of oil and gas resources especially the Deepwater. Situations in the oil industry are not the same as they were twenty years ago.
She cautioned about peak oil supply that countries are increasingly focusing on peak oil demand as the world fights against climate change, but opportunities for these assets to be developed are infinitesimal in value.
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