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Declining oil production signals more trouble for Nigerian economy

Nigeria’s oil rig count, a measurement of the level of oil production activity, has hit the lowest level in six years, a situation that demonstrates a troubling decline in production.

Data obtained from Baker Hughes Incorporated and Organisation of Petroleum Exporting Countries (OPEC) show Nigeria’s oil rig count has reduced to six rigs as of March 2021, a sharp decline from a three-year high of 30 rigs count recorded in 2015.

The rig count is largely a reflection of the level of exploration, development and production activities occurring in the oil and gas sector.

OPEC’s data also show Nigeria’s oil production has slumped to an average of 1.58 million barrels per day (bpd) in the last six years. From an oil production of 1.7 million bpd in 2015, Africa’s biggest oil-producing country now produces an average of 1.4 million as of March 2021.

This is troubling as revenue is falling due to lower oil revenues, and a difficult environment that is reducing the capacity of businesses to pay more taxes.

The consistent decline in rig counts has exposed the sorry state of the industry, the main revenue earner of the country and worsened the growth prospects of an economy wallowing in its second recession in five years.

Analysts say the government’s slow pace at reforming the fiscal and regulatory terms in the oil and gas sector is stalling new investments.

“The logic is straightforward, new investors have become impatient with an energy system that lacks clarity,” said Edward Koki, managing director, Alliance Capital Management Limited.

According to OPEC’s report, Africa’s biggest oil-producing country recorded 11 oil rigs in 2020, which was five rigs less of what was obtained in 2019 (16).

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Nigeria’s oil rigs slumped from 32 in 2018 to 13 in 2017, while 2016 and 2015 figures stood at 9 and 29, respectively.

“From my interactions with most investors, it is a real headache trying to predict Nigeria’s business environment when policies keep changing at a heartbeat,” Joe Nwakwue, chairman, Society of Petroleum Engineers (SPE), told BusinessDay.

While Nigeria seems to be losing investors’ confidence, a host of new finds from Uganda, Tanzania, Algeria and Senegal are looking very attractive for foreign direct investors who are willing to explore new frontiers in the oil business.

This week, France’s Total and China’s National Offshore Oil Corporation announced plans to exploit oil reserves in Lake Albert in Uganda and construct a $3.5 billion East African Crude Oil Pipeline (EACOP) to neighbouring Tanzania for export.

The project will unlock billions of dollars of investment in Uganda’s oil and gas sector and set off rivalry with major African oil producers, including Nigeria and Angola.

Algerian state oil and gas firm Sonatrach is also planning to invest $40 billion over the next five years to develop the country’s existing oil fields.

Tanzania’s new President Samia Hassan has spoken of her desire to get the country’s LNG projects moving.

Tanzania has the fastest-growing economy among its oil and gas-producing peers in the region and the second-largest natural gas resources.

While production is low, the discovery of new offshore fields has the potential to transform the economy. Its close location to Asian markets gives Tanzania a geographical edge over peers, which makes it favourable for foreign investment.

“It makes economic sense for oil majors and leading independents, comprised of a group of the world’s largest oil companies, to pursue opportunities within the African economies with clearer fiscals,” Nwakwue said.

For a frontier market with over 200 million people, the dearth of investments from oil majors is troubling as oil production and sales impact social welfare and economic growth.

According to a global investment trends monitor report released by the United Nations Conference on Trade and Development (UNCTAD), Foreign Direct Investment (FDI) inflows to Nigeria dropped from $3.3 billion in 2019 to $2.6 billion in 2020.

Nigeria’s low FDI is partly responsible for the country’s acute shortage of jobs, tepid economic growth and government’s undiversified revenues.

On Wednesday, Nigeria Extractive Industries Transparency Initiative (NEITI) said it was regrettable that out of the $75 billion FDI flowing into Africa, Nigeria has a meagre share of just $3 billion.

Ogbonnaya Orji, executive secretary of NEITI, said the situation underscored why all hands must be on deck to eliminate all bottlenecks in the country’s business environment.

FDIs catalyse economic growth for poor countries by enabling infrastructure development, jobs, and skills and integrate the domestic economy better with the global economy.

Delay in passing the Petroleum Industry Bill (PIB) into law has been blamed for fleeing capital, but there is no sufficient confidence now that the current attempt will provide the needed fillip for investment.

Two decades in the making, the PIB seeks to streamline how Nigeria’s energy assets are operated, regulated, taxed and funded.

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