• Saturday, May 25, 2024
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Four oil policy shifts that can lift Nigeria’s economy in era of low prices


The outbreak of coronavirus, which has ravaged over 31 countries, infected some 121,061 people and caused low crude oil demand from China, has led to oil prices falling below Nigeria’s federal budget benchmark of $57 per barrel.

Brent crude, the international benchmark, fell by about 8.3 percent to $34.15 per barrel as at 8pm Friday, according to Bloomberg data.

Although the global slide in oil prices is bad news for the government, which would lose a sizeable fraction of estimated oil revenue as a result, it could also be a good time to make major policy shifts that could help lift its struggling economy.

Analysts say Africa’s biggest oil producing economy can embark on four major policy shifts to stay afloat.

JV divestment

A major policy shift such as Joint Venture (JV) divestment will see the government slash its equity in upstream operations significantly to possibly as low as 40 percent, a decision private oil firms, particularly multinationals, are anxiously warming up to.

The Nigerian upstream operational structure is essentially divided between JV onshore and shallow water with local oil firms and multinationals. It also entails Production Sharing Contract (PSC) between both parties in deep water offshore, which has attracted enormous interests and massive involvement of International Oil Companies (IOC) over the years.

If the deal works out, the upstream sector of the oil and gas industry will have more power to operate with less government interference.

Also, investors will be attracted to put their money in the lucrative oil and gas business, giving them a platform to leverage key opportunities while unlocking other latent opportunities in the exploration business.

Unbundling NNPC
Unbundling NNPC will mean replacing the NNPC Act with the much-talked-about Petroleum Industry Governance Bill (PIGB), a development which will see the corporation metamorphose into commercially oriented and profit-driven petroleum companies.

“The NNPC needs to be unbundled first. The refineries need to be put in a competition mode,” Ode Ojowu, professor of economics and former head of National Planning Commission, said.

In effect, the assets and liabilities of the NNPC will be split between two new companies, namely, National Petroleum Company (NPC) and National Petroleum Assets Management Company.

The decision might be tough, but for Nigeria, unbundling the NNPC will not only drive huge capital accumulation in Nigeria but also means the country is going for market forces to determine oil production, retail price for products and proper deregulation of the oil sector.

Expansion of gas infrastructure
Period of lower oil price is also the best time to leverage on its huge gas assets reserves for which the country has been described as a gas province with a sprinkling of oil.

According to data from the NNPC, the country has around 202 trillion cubic feet (TCF) of proven gas reserves plus about 600 TCF unproven gas reserves.

A policy shift to gas infrastructure is expected to create thousands of new jobs, spur domestic gas demand, generate electricity, create an opportunity to diversify revenue of the Nigerian government, strengthen the country’s revenue base and turn Nigeria into a dominant geopolitical player in Africa, using its gas resources, just like Australia, Russia or Qatar.

“Significant opportunities exist in the gas value chain either in upstream, midstream and downstream with incentive already codify into law,” KPMG said in its Nigeria oil and gas outlook content.

Subsidy removal
With oil prices down some 22 percent this year alone, the cost of importing petroleum products has dipped, translating into an opportunity for the cash-strapped Federal Government to save billions in potential subsidy payments.

Every time oil prices rise, the subsidy bill grows, creating a headache for the government which should be cheering higher government revenue as a result of high oil prices.

If Nigeria had announced an end to fuel subsidy programme, the pump of price of fuel would have seen only a marginal increase as crude oil has fallen.

Over the years, Federal Government has reported it incurred more costs to subsidise the importation of refined petroleum products. Refined petroleum products, which are understandably in high demand by millions of Nigerians, are typically imported because Nigeria’s state-run refineries are not functional.