First quarter gross domestic product report has presented evidence that Nigeria’s oil sector is contracting and experts have blamed this on lack of new investments and capital inflows to the sector, slower growth challenges some assumptions underlying the country’s 2019 budget.
Data from the National Bureau of Statistics, Nigeria’s statistical agency showed that in the three months ending March, 2019 real GDP growth in the oil sector contracted by -2.40 percent (year-on-year) indicating a decrease by 16.43 percent points relative to the rate recorded in the corresponding quarter of 2018.
Growth decreased by -0.79 percent points when compared to the three months ending December in 2018 which was -1.62 percent. Quarter-on-Quarter, the oil sector recorded a growth rate of 11.60 percent in Q1 2019. The sector contributed 9.14 percent to total real GDP in Q1 2019, down from figures recorded in the corresponding period of 2018 but up compared to the preceding quarter, where it contributed 9.55 percent and 7.06 percent respectively.
The Nigerian oil and gas industry is currently experiencing declining reserves owing to reduced exploration due to the absence of clear fiscal policy, experts have continually said. This has retarded investments flows into the sector. Militancy in the Niger Delta, Nigeria’s major oil producing area has caused much concern also. The sector suffers from an investment gap of $100 billion and in the last two years, according to Ibe Kachikwu, Nigeria’s minister of state for petroleum resources, the sector has drawn in $40 billion, which represents 40 percent of the total gap.
How the oil and gas sector performs matters because slightly over 50 percent of revenue projections for the 2019 fiscal year is predicated on strong growth in the sector. The proposed federal government budget is anchored around revenue projections of N6.97 trillion for the 2019 fiscal year. From the oil sector, the federal government is expecting revenue of about N3.73 trillion, while N710 billion will come from the proceeds of government equity in Joint Ventures. A shrinking oil sector will pose more difficulties to the federal government’s ability to spend. And government still remains the largest spender in Nigeria’s economy.
“Banks are sceptical about lending to the oil sector because of the large volume of non-performing loans on their balance sheets due to previous lending to the sector. This has also affected commencement of new projects”, Ayodele Oni, energy partner at Bloomfield Law Practice said. “It is also a no-brainer that investors are sitting on the fence because the Petroleum Industry Governance Bill has not become law, no clarity in the sector yet.”
The federal government projected N3.73 trillion as oil revenues figure was derived from two presumptions; first, that in the year, oil will sell at a projected US$60 per barrel; second, that oil production will hit 2.3 million barrels per day. Daily crude oil production estimate of 2.3 million barrels per day is the same amount as budgeted for the 2018 fiscal year.
But average daily oil production, according the first quarter GDP report stood at 1.96million barrels per day (mbpd), lower than the average daily production of 1.98mbpd recorded in the same quarter of 2018 by -0.02mbpd but higher than the fourth quarter 2018 production volume by 0.05mbpd. The level of oil output during the quarter was the highest recorded over the past one year and the second highest since mid-2017.
Lack of exploration and production has made the sector to stagnate. Nigeria’s African oil producing peers, such as Angola, Uganda and Ghana have clear plans regarding oil licensing and bid rounds but not Nigeria. In Nigeria, stakeholders in oil and gas industry are still left guessing about when a major licensing round or at least a marginal fields bid round will be held amid a lull in exploration activities.
Luqman Agboola head of infrastructure at Sofidam Capital Limited does not expect any successful bid happening in Nigeria until the next five years as the country needs to clear a backlog of mess that have occurred in the sector in time past.
“When you look at the market the feeling is that the money is not there so who will bid for those fields?” Agboola asked.
Agboola noted that the main aim for having bidding rounds is to make money and allow efficiency because oil blocks have gone beyond political patronage which occurred in time past.
Similarly, Oni has said the government loses a huge amount of revenue daily by not conducting a licensing bid round but this loss is not truly only accountable to the protraction in conducting a bid round.
“Nigeria has lost more from non-producing marginal field licences which it has estimated could cumulatively produce an average of 90,000 bpd of crude,” Oni, energy partner at Bloomfield Law Practice said.
Some of the factors militating against producing marginal fields range from inappropriate due diligence to technical or financial challenges and it is pertinent that these challenges be addressed before conducting another bid round, experts have said.
