Oil can rescue the naira but drilling more isn’t enough

Between 1999 and 2020, the federal government earned $741.48 billion from oil and gas sales, according to data from the Nigerian Extractive Industries Transparency Initiative (NEITI) but this hasn’t translated into much value for over 100 million poor Nigerians, indicating that the current emphasis to ramp up drilling must be backed by spending reforms.

Nigeria is richly endowed with oil, gas, and mineral resources. The government estimates that it has about 38 billion barrels of crude oil reserves, 160 trillion cubic meters of gas reserves while each of the 36 states and the Federal Capital Territory has one form of mineral deposit in commercial quantities.

So Nigeria’s poverty is not a product of natural disadvantages but an inability to harness its resources. As the country’s currency, the naira, falters, losing nearly a third of its value since the Tinubu government stopped artificially propping its value, crude oil can provide the much-needed supply that will lift the naira.

The Tinubu government has ambitions to raise output to 2 million barrels per day but this must be backed with reforms that will curb oil theft as well as end communal agitations and sabotage of oil and gas infrastructure.

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According to the latest NEITI report, a total 29 companies suffered crude losses from theft and sabotage, amounting to 37.57 million barrels. The decline in crude oil losses due to theft and sabotage, from 39.08 million barrels in 2020 to 37.57 million barrels in 2021, was generally due to the decline in crude oil production during this period.

The involvement of private security to assist government security officers has achieved modest benefits, and experts say this ought to be sustained.

“Sustained effort by the security agencies to ensure zero crude oil theft is required,” said Jide Pratt, country manager of Trade Grid.

Analysts also said Nigeria must deal with critical issues affecting fiscal and monetary policies.

“The primary reason oil has become more of a curse than a blessing to Nigeria is because post-2015, the government embarked on an expansionary monetary policy that raised deficit financing in the budget from 16.78 percent to 43.8 percent within a decade, depleting the external reserves, raising debt by 611 percent and leading to an expansionary monetary policy that led to a 79.5 percent drop in the value of the naira against the USD,” said Kelvin Emmanuel, CEO of Dairy Hills Ltd.

He said that rather than raise oil output, and checkmate the fraud in petrol subsidy, petrol subsidy rose from 33 million litres per day to 66 million litres per day, then the government used the $3 billion it was getting per month in oil receipts to pay down on subsidy through a crude oil swap programme with government-approved contractors.

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“Despite oil reaching all-time highs of $145 per barrel in 2022, a level not seen since 2008, the government had non-oil revenue stuck at 7.9 percent and was recording 96.3 percent in debt servicing cost to government revenue ratio,” he said.

To break free from the challenges, Muyiwa Adekoya, an energy professional, Nigeria must refine and transform a major part of its consumed products across the economy in order to reduce its reliance on imported goods. “This will strengthen the naira and bulk up our forex reserves.”

“We must shift our focus from just being an oil production-based economy to a unified energy-focused economy. We should own and master the process from oil and gas production, to their refining and exports, to electricity generation for local consumption and exports for regional consumption, to technology creation and transfer. We have to hone in on the complete energy cycle and stop grasping at the lines within,” he said.

The recent report released by NEITI highlights spending gaps that continued to erode Nigeria’s oil revenues. This includes government agencies making extra-budgetary expenditures, unremitted funds, and refineries that cost billions to maintain, even when they produce nothing.

Therefore to extract value from its oil, analysts say Nigeria must not only drill more but put to productive use income from oil and manage its taxes effectively.

This also involves cutting the cost of governance, making the national oil company transparent and accountable, and cutting official corruption by implementing best practices in government procurement.