Saudi’s show urgency with Aramco as Nigeria oil reforms stall

Saudi Arabia which produces about five times Nigeria’s crude oil output is showing remarkably more urgency in reforming its economy, amid tumbling oil prices, even as Nigeria dithers.
Saudi Arabia has slashed the tax rate for state energy company, Saudi Aramco, as it tries to woo private investors and seek the highest possible valuation, ahead of its planned initial public offering (IPO) in 2018.
A royal decree last week, reset the income tax rates for producers of hydrocarbons in the kingdom. The rate for the largest ones, including Saudi Aramco, fell to 50 per cent from 85 per cent. The tax change is retroactive to January 1.
Meanwhile, Nigeria’s plan to reform the opaque Nigerian National Petroleum Corporation (NNPC) – its national oil company – through a new Petroleum Industry Bill (PIB) is still stuck in parliament, amid bickering between legislators and the Presidency.
Maikanti Baru, NNPC Group Managing Director, said the corporation has split the PIB into four, to allow the National Assembly deliver on the promise of “speedy passage.
“With the proposed oil bid round in the near future, it is important the PIB be passed, as it will give a direction for players to bring investment into the sector,” SBM Intelligence analysts said in a March 31 note.
Saudi Arabia, which like Nigeria, relies on oil sales to fund more than 70 percent of government spending, has also cut fuel subsidies, moved quickly to enable the private sector play a bigger role in the economy and announced plans to introduce sales taxes on consumer goods.
By comparison, Nigeria has restricted access to dollars, which has scared off foreign investors and hurt local businesses, stalled plans to privatise power/refining assets and continues to subsidise fuel by maintaining a de-facto cap on prices, despite the country’s increasingly dire fiscal position.
Nigeria’s total debt rose 37 percent to N17.36 trillion ($56 billion) as of Dec. 2016 from N12.60 trillion a year earlier, the Debt Management Office said on March 09.
While the country’s debt to GDP ratio of 17.02 percent is below the acceptable Emerging Markets (EM) threshold of 50 percent, economists are warning about rising interest costs.
The Federal Government budgeted N1.66 trillion for debt service payments in 2017, equivalent to 33 percent of total revenues and up from the N1.48 trillion budgeted for 2016.
Analysts say Nigeria’s appetite for loans is rising but the nation is failing to enact reforms to unleash productivity needed to ensure that future generations have the resources to pay up the loans.
“Nigeria has smoothed the inevitable depreciation of the currency, but only by restricting supply of dollars which has hurt the private sector and encouraged corruption. By avoiding the volatility, Nigeria has delayed any bounce back,” Charles Robertson, global chief economist at investment firm Renaissance Capital said.
Saudi Arabia is one of the top resource (oil) holders in the world and its favourable geology and huge economies of scale make it have the industry’s lowest costs per barrel of around $7 per barrel.
Nigeria’s cost of production, by comparison, is at about $31 per barrel across all areas of production (onshore and offshore), according to the NNPC.
Oil companies operating in Nigeria have to deal with issues like militancy in the oil-rich Niger Delta, slow approvals and a tax rate at 85 percent.
Nigeria’s gross foreign exchange reserves are down to $30.29 billion as at March 29.
Saudi-Arabia, by comparison, has $523 billion of foreign currency reserves or 17 times Nigeria’s holdings.
The plunge in Brent oil prices, from $110 a barrel in 2014 to about $48 today, has pushed most oil producers to enact reforms to help cushion the shock.
In Nigeria however legislative and executive gridlock threaten to increase economic distortions.
The unemployment rate in Africa’s most populous nation jumped to 13.9 percent in the third quarter (Q3) of 2016 up from 13.3 percent in Q2 as the economy contracted for the first time in more than two decades.
Nigeria’s economy contracted by 1.5 percent in 2016 as inflation remains high at 17.78 percent.
The benchmark stock index is down 5 percent so far in 2017, after the -6.1 percent return or 2016.
Total transactions by foreign investors decreased by 49.51 percent to N517.55 billion at the end of 2016 from N1.025 trillion recorded at the end of 2015, according to data from the bourse.
The rate of reserve replacement in Nigeria is around 75 percent and the country may hold far less than the often mentioned 30 billion barrels in proven reserves, due to a lack of investments in exploration, industry sources say.
“Nigeria needs to focus on maximising production and not on increasing government take, which appears to be the focus of what we have seen coming from the Ministry of Petroleum Resources,” an oil industry source said.