Nigeria’s idling oil fields and depleting Excess Crude Account (ECA) are dampening hopes of a bright future for the country’s economy.
Despite Nigeria’s position as the largest producer and exporter of petroleum in Africa and one of the 10 largest producers in the world, the country is not maximising the potential in its oil sector while its ECA continues to suffer serial abuse without commensurate economic growth or infrastructure development.
In some countries like Norway, the government is toiling night and day to protect its unborn generation by maximising potentials in oil sector, reducing aggregate risk to oil price, or insulating its rainy-day fund from political pressure which has promoted fiscal prudence. It doesn’t seem the message is reaching home.
The Excess Crude Account (ECA) was created to retain excess revenues from the prevailing crude oil price in the international market. Income generated above the approved crude oil benchmark price in the annual budget is saved in the account as some sort of buffer.
But persistent demand by states to fund various programmes and the inability of the Federal Government to generate adequate revenue to fund its operation had put pressure on the government to draw down the account.
In recent years, the Ministry of Finance has failed to proactively disclose detailed withdrawals from and accruals to the ECA, making it difficult to track budget spending and ascertain the periodic status of the nation’s treasury.
The ECA rose from $5.1 billion in 2005 to more than $20 billion in January 2009, but during the last meeting of the National Economic Council in December 2019, Zainab Ahmed, minister of finance, budget and national planning, reportedly disclosed that the balance as of November 19, 2019 was $324.98 million.
In its Nigeria Economic Update (NEU) report released in Abuja, the World Bank warned that a ‘moderate’ decline in oil price could trigger another recession, noting that the exhaustion of the ECA had made the country more vulnerable.
“Fiscal buffers in the Excess Crude Account have been exhausted, rendering Nigeria more vulnerable to shocks,” the bank said.
The report said the ECA was mismanaged, noting that it has rarely operated as envisaged. When it was established in 2004, the report said, the ECA was to be drawn on only when the actual crude oil price falls below the budget benchmark price for three consecutive months.
“Save for the Obasanjo administration, the abuse of the ECA has become serial. It is deeply disturbing that the Buhari government has not demonstrated a better way of handling Nigeria’s ECA,” Charles Akinbobola, a financial analyst at Creditville Limited, said.
Between 2005 and 2009, the ECA grew from $5.1 billion to over $20 billion, accounting for more than one-third of Nigeria’s external reserves at the time, but it suffered massive decline during the administration of former President Goodluck Jonathan. From nearly $20 billion when Jonathan took office in 2009, it declined to a paltry $2 billion when he left office in 2015.
“Poor levels of transparency exhibited by various agencies and officials of government charged with managing the funds over the years have compounded the problems faced by this fund even further,” Akinbobola said.
Established in 2004, the ECA demonstrates how to normalise an aberration. Without constitutional backing, the ECA was created to protect Nigeria’s planned budgets against shortfalls caused by the volatility of crude oil prices. In this way, it would insulate the economy from external shocks.
Unfortunately, Nigeria has failed to transform decades of oil earnings into sustainable development, despite being the largest producer and exporter of petroleum in Africa and one of the 10 largest producers in the world.
While Nigeria seems to be nonchalant about saving for the rainy day, other countries seem to be preparing earnestly for it. Norges Bank Investment Management oversees Norway’s $1 trillion sovereign wealth fund while United Arab Emirates has nearly $1 trillion capital pool in two Abu Dhabi Investment Authority (ADIA) and Mubadala that is funded by excess oil and gas income.
United States’ Alaska Permanent Fund has one of the savviest SWFs in the world; the $65.3 billion fund is financed by oil and gas revenue for the benefit of future generations of Alaskans.
Singapore has two accounts called Singapore Investment Corporation (GIC) and Temasek splitting over $800 billion between them. Each has its own goals and ways of operating, but both invest in the future with an expectation of paying out in the near term.
Considering Nigeria’s reliance on the oil and gas industry, one would expect that the Federal Government would do everything to ensure 100 percent productivity in the sector. However, the reverse has been the case, with the situation getting worse with each passing year.
Nigeria has seven basins, namely Anambra, Benin, Benue, Bida, Chad, Niger Delta, and Sokoto, all with a total of 390 oil blocks. 211 of these blocks are yet to be allocated by the Federal Government. 2019 marked the 11th year since the last oil licensing round was conducted in the country, and this has shut the door against investment and expansion in the downstream sector.
In Anambra, 12 out of 19 blocks have not been allocated; in Benin, 39 out of 50 are idle; in Benue, 41 out of 43 have remained inactive, while none of the 17 blocks in Bida has been allocated.
In Chad basin, 40 out of 46 blocks are open; in the oil-rich Niger Delta, 34 out of 187 blocks are still idle, while Sokoto’s 28 blocks remain unallocated.
“Some of the fields are idle because the funding is not in place to develop them, especially the government’s part of the funding,” Agboola said.
Ayodele Oni, energy partner at Bloomfield Law Practice, said apart from the uncertainty and lack of legal framework scaring away investors, many oil fields went into wrong partnerships because there was also no strong consultant that understood the sector.
“Many of these fields are either at war with their technical partners because there were no good agreements,” Oni told BusinessDay.
For instance, the Owowo oil reserve field discovered in October 2012 by US oil giant, ExxonMobil Corporation, with about one billion barrels of oil in the Owowo field offshore Nigeria, capable of spinning whopping oil revenue has been abandoned.
The field would have boosted Nigeria’s effort to increase its crude oil reserves from the current 36 billion barrels to 40 billion barrels target. The target was set for 2010 but could not be achieved as a result of lack of investment in exploratory activities.
The only other significant investment in the pipeline is the Zabazaba development project by Eni, an Italian multinational oil and gas company. The project would add 150,000 barrels/day if it comes online, but a Final Investment Decision (FID) has not been reached on the project.
The Nigerian Association of Petroleum Explorationists (NAPE) recently alerted the nation about the risk of low exploration activities in the petroleum industry as well as the continuous depletion of the country’s crude reserve.
NAPE had then warned that the reduction in hydrocarbon exploration and steady depletion of the oil reserves could drive Nigeria into the risk of long-term disruption to oil and gas supplies, power generation, the collapse of industries and significant loss of revenue.
Ajibola Oyebamiji, outgoing president of NAPE, in a pre-annual conference meeting with energy correspondents in Lagos, said the nation’s oil and gas business was being hampered by several factors, including long procurement and contracting cycles, insecurity, oil theft and illegal refining, saying the latter even poses a bigger threat to the sector than the fall in oil price.
“Nigeria is at risk of long-term disruption to oil and gas supplies, power generation, a collapse of industries and significant loss of revenue due to the continuing reduction in hydrocarbon exploration activities. Reduction in hydrocarbon exploration and exploitation has dire consequences for a country like Nigeria with a mono-economy hinged on crude oil,” he said.
