The pervasive influence of Government in the oil industry is leading to delay in oil contracting time, which is costing Nigerian companies operating in the sector up to $700 million a year.
The average contract cycle in Nigeria’s oil industry has been estimated to be six times longer than in peer countries like Angola.
BussinessDay gathered that it takes 36 months (three years) to get an oil contract signed in Nigeria, as against six months in Angola.
The delay in contracting time is mainly caused by overwhelming operational and bureaucratic bottlenecks, fuelled by government involvement in the sector, industry stakeholders speaking to BusinessDay said.
“There are numerous instances of Nigerian oil companies borrowing money to buy or lease oil rigs, who are then often subjected to delays of up to 6 months before the regulators (NAPIMS and DPR) inspect it,” said a source.
“Meanwhile the companies have Bank loans they are servicing and losses from lost production piling up.”
To this end, sector watchers say that for the industry to be competitive, the Petroleum Industry Bill (PIB) should minimize the Government influence on the oil sector or it risks becoming a failed reform effort.
The 200-plus page PIB currently before federal legislators includes plans to partly privatise and list the state oil firm (NNPC), tax oil company profits at up to 50 percent for deep offshore, and give the oil minister supervisory powers over all institutions in the industry.
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“The NNPC as it is currently constituted has a non-commercial mind-set, which must be changed” said an ex-oil company executive, who spoke to BusinessDay off record.
“The PIB before the National Assembly still says the petroleum minister must sign off every assignment, merger and acquisition, as well as determine rentals and royalties, leaving a key revenue source subject to political manipulation.”
The evidence of government suffocating the growth of the oil sector can be seen in the declining crude production, low capacity utilisation of government owned refineries, moribund products pipeline infrastructure, shortage of gas for power plants and industries, and poor Joint Venture (JV) funding.
The country produced an estimated 2.1 million barrels per day of oil (bpd) in 2012, a 42 percent shortfall from its production target of 3.6 million (bpd). There has also been an estimated loss of over $100 bn in government revenues since 2008.
The PIB uncertainty has also affected the private sector, with lost opportunities for investment and job creation, resulting in a loss of $37 bn in capital expenditure in the sector since 2006, six less active rigs and 30,000 less employed oil workers.
Government’s interference in the pricing of gas has also led to its shortage, which is putting the power sector reform at risk, stakeholders say.
In 2012 the amount of gas required for power plants in the western axis of Nigeria, amounted to 1.1 billion cubic feet (BCF) a day, compared to the 600 million BCF supplied.
“You cannot have low pricing and a high fiscal regime and expect to have gas,” Austin Avuru, MD Seplat Petroleum Development Ltd., said in a presentation made at the Kuramo conference in Lagos last year.
“Unfortunately, the current draft of the PIB falls short of this critical requirement.”
Stakeholders say that Nigeria’s aspiration to produce 3 – 4 billion cubic feet (BCF) a day by 2015 (from under 1 BCF today) will require a significant infrastructure spend of $30 billion, and it is unlikely the government alone can raise such an amount, meaning the private sector must play a significant role.
The complaint that the PIB as it is, does not establish a progressive fiscal framework that encourages further investment, may actually be the least of Nigeria’s problems, said another stakeholder. “If we get the fiscal part wrong, it can always be changed in the near future, when investments dry up, or oil prices fall,” he said.
“However the PIB as a whole, presents us with a rare opportunity to transform the Nigerian economy by removing government constraints and promoting competition.This may be a once-in-a-lifetime opportunity to rescue our nation.”
