Persistent oil sector contraction exposes years of mismanagement

Nigeria, Africa’s biggest economy and oil producer has experienced yet another contraction in its oil and gas sector, the sixth in the last eight quarters, on account of significant underfunding and mishandling by government and the resulting uncertainty from policy flip-flops, according to BusinessDay investigations.

The sector has witnessed unprecedented delays in contract approvals and production from Nigeria’s JV ventures has fallen 53% since 2005 with the most drop recorded in the last five years, according to industry data.

The National Bureau of Statistics (NBS) reported last week that the oil sector declined by 8.1 percent in Q1 2015, wiping out a 1.2 percent growth recorded in Q4 2014, to mark the seventh in a series of quarterly declines if records of 2013 are considered.

Experts have said these declines speak to a legacy of mismanagement by government, failed policies, production losses and corruption hitting the sector hard, as divestments and embargoes on new investments in the face of an unpassed Petroleum Industry Bill (PIB) are further compounded by the recent plunge in international oil prices.

The government has consistently cut budgets for the Joint Ventures submitted by its partners and even when budgets are finally agreed, they are well below request and even then, government has consistently failed to fund its own share of agreed budgets, industry watchers say.

As at the last count a week ago, the FG was owing Nigeria’s joint venture partners commonly called IOCs a staggering $8 billion in unpaid cash call arrears, resulting in a squeeze that has virtually frozen activity in the sector, making nonsense of the so called Nigeria content programme meant to benefit indigenous firms.

Nigeria, where a rebasing of the GDP last year, saw the size of the economy doubling to N89 trillion ($445 billion), earns roughly $6 in revenues for every $1 it invests in the oil industry, a 640 percent on spend, according to the chief financial officer of  a leading IOC.

Evidence available to BusinessDay also shows that the government takes a whopping 97 percent of the gross margin from JV operations and with an oil price of $100 a barrel, government’s take is broken down as follows – $51 petroleum profit tax, $19 in royalties to government, $5 as NNPC profit tax and $2 as NDDC levy, which is mandatory for all oil companies. The balance is accounted for $20 production cost and $3 as profit to the IOCs.

This huge government take has left many wondering why the government has consistently failed to make the required investment.

One oil and gas expert who requested anonymity said, “even the uninitiated knows that for this persistent decline to happen, it is as a result of poor management and massive corruption in the oil sector in Nigeria.

“Nigeria’s oil sector decline can be traced to poor ethical conduct and massive corruption by the government of the industry.

“And as long as this bad ethical behaviour which led to explosion in petroleum subsidy, illegal kerosene subsidy payment, hostility towards oil companies and other unethical practices persists, the decline in Nigeria’s oil sector will continue.” 

Analysts at FBN Capital explain that the oil sector contraction is a “reminder that without a current legal and structural framework, the industry’s future is bleak.

“The issues responsible for the decline in the oil sector are clear … and it has to do with the PIB and other associated issues,” said a Lagos-based energy consultant who also requested anonymity.

“The PIB has been stuck and there is no clear policy framework on the ground today, making it difficult for people to make investment in new projects and once there are no new investments, the industry cannot grow.”

The bogus PIB proposes a complete overhaul of the structural and fiscal terms of Nigeria’s petroleum industry; yet remains unpassed till date, despite several promises to expedite the legislative process.

Production losses in the sector have also impacted the economy negatively.

According to the NBS, “Oil production stood at 2.18 million barrels per day (mbpd) in Q1 of 2015, remaining at the same level as it had done in the preceding quarter, and 0.08mbpd lower than the 2.24mbpd recorded in Q1 of 2014,” the NBS noted in its Q1 2015 GDP report released last week.

In the best of times (2010), production peaked at about 2.9mbpd but an estimated 150,000 barrels are lost daily to leakages, pipeline vandalism and outright theft, which have gone largely unchecked in the sector.

The outlook for the oil sector in 2015 is bleak and the outgoing government has been criticised for wasting the huge revenues and resources in the sector that accrued over a period of peak oil prices.

A recently published audit report by PricewaterHouseCoopers, revealed that the operating structure and finances of the state oil corporation (NNPC) were unsustainable, saying the corporation had failed to remit up to $1.48 billion to the Federation Account, among other unauthorised activities.

The incoming Buhari administration will be faced with revamping a major sector of the economy in recession, relied upon for at least 75 percent of the revenues available to the entire nation.

“The way out is to have a clear policy framework and that can come by passing the PIB” says a Lagos-based energy consultant.

“Once there is a clear cut policy framework, investors will come and the decline in the sector will be reversed.”

According to leading economist, Ayo Teriba, “the main reason oil-GDP has been declining is that global oil price has been falling mildly since 2011, but only dropped steeply in the second half of 2014. Supply disruption and crude oil theft may be additional factors.”

•TOMORROW – Nigeria loses oil investment to Angola

Akin-Olusoji Akinyele & Frank Uzuegbunam