Guyana’s $1.4bn oil savings avoid Nigeria’s folly

The tiny South American oil producer Guyana set up a Sovereign Wealth Fund in 2021 to avoid the mistake Nigeria made by eating all its oil income; now that fund has garnered over $1.4 billion while Nigeria’s, set up in 2004, has about $473 million.

As Nigeria is set to record improved oil earnings from rising output and policies like the removal of subsidies and floating the naira, providing better fiscals, experts are urging the President Bola Tinubu government to begin saving for the rainy day.

The same counsel applies to state governor who when flush with cash, but due to a lack of intellectual capacity, start building airports, flyovers, and cathedrals in states where children learn under mango trees.

Shortly after international oil companies led by ExxonMobil began the exploration of 10 billion barrels of oil and gas discovered in Guyana, the country’s parliament approved local content rules for oil producers and a sovereign wealth fund to oversee the country’s earnings.

This avoids the mistake African countries like Nigeria and Angola made achieving notoriety for squandering their oil proceeds on frivolous spending and rampant corruption. This has given rise to widespread poverty in the midst of stunning wealth.

The Nigerian Extractive Industries Transparency Initiative (NIETI) has consistently warned that constant oil price volatility exposes oil-dependent countries like Nigeria to regular economic crises.

One way to address this limitation is to set up a rainy day fund. “A healthy minerals savings fund, the size of which should reflect not only the volume of revenues from mineral resources but also the size of the national economy, is usually recommended for resource-rich countries,” said NEITI in a recent policy brief.

In 2004, former President Olusegun Obasanjo created the Excess Crude Account (ECA) to save oil incomes above budget benchmarks, despite the vociferous opposition of state governors who voted to share the money.

However, the fund, which at a time held over $20 billion, has shrunk to a mere $473 million as previous governments between 2004 and 2022 withdraw over $200 billion from the account. Former President Muhammadu Buhari met $2.1 billion and by 2021, barely $60 million was left in the kitty.

According to NEITI policy review document, the problem with Nigeria’s ECA is that the funds are inadequately ring-fenced and are too tiny to fully serve the intended purpose. As oil income dwindles and any hope of windfall dims to a flicker, the fund has become increasingly smaller.

During the lockdown in 2020, Nigeria’s three ‘rainy day’ funds – Stabilisation Fund, ECA, and Nigeria Sovereign Investment Authority -held about $2.25 billion, and were able to fund about 7.7 percent of the revised 2020 federal budget.

This compared poorly with Norway, with a sovereign wealth fund worth more than $1 trillion. To assuage the impact of COVID-19 on the government’s earning, Nigeria withdrew $150 million to help its over 200 million citizens, while Norway cashed $37 billion for its 5.4 million population.

The Petroleum Industry Act (PIA) has no provision to compel government agencies to deepen funding for these funds or ring-fence them against abuse.

“While the PIA has some commendable provisions, a few issues such as financial savings are not dealt with,” Ayodele Oni, an energy lawyer, told BusinessDay.

Worse still, this set of lawmakers, like their predecessors, have not shown that fiscal discipline ranks high in their priorities with the billions they seek to corner as palliatives. This means it’s up to the executive, led by Tinubu, to lead the charge.

NEITI has severally called for amendment of Section 162 (1) of the 1999 Constitution which prescribes that government income, apart from personal income tax, should be placed in the Federation Account and shared among the federal, state, and local governments. This has all but removed any incentive to save for a rainy day.

Read also: As Nigeria mulls separate gas ministry, oil companies want better fiscal terms

In 2015, Guyana’s first commercial petroleum discovery was announced by ExxonMobil, the operator of a large offshore block. Soon thereafter, the company began preparations for production with a first oil target of 2020.

It set up sovereign wealth fund to effectively manage the economy and the expected revenue windfall ahead of first oil. The country’s wealth fund which stood at $534 million in 2021 has risen to $1.4 billion as of January 2023.

The South American nation of 800,000 became a crude oil exporter in early 2020, thanks to Exxon’s huge discoveries offshore Guyana. Over the past two years, the US supermajor and Hess Corp, its partner in the prolific Stabroek Block, have made a dozen more discoveries, while the Liza Phase 1 project is very profitable for oil corporations and for Guyana.

Guyana is leveraging its oil and gas discoveries to build up an economy powered by its own energy resources. Once dependent on agriculture and mining, the country is using its oil wealth to diversify its economy and create wealth for its people.