I have read opinions of many writers over the persistent decline in the global price of crude oil, its global commercial effect and in particular, its effects on the Nigerian economy. Whilst I share some of these views, it is my considered opinion that it is incorrect to suggest that the ‘worst has come’. On the contrary, at times such as this, one should see opportunities.
It is interesting to note that crude oil price fluctuation (for those familiar with the oil industry) is nothing new. That perhaps underscores the philosophy of a benchmark price of crude in our budget. Indeed, a brief historical analysis of the movement of the price of oil from 1980 to 2015 will further confirm my views.
From the mid-1980s to September 2003, the inflation adjusted price of a barrel of crude oil on the New York Mercantile Exchange (NYMC) was under $25/barrel. In 2004, the price rose above $40, and then $50. On August 11, 2005, the price of crude exceeded the $60 mark when it berthed at $75/barrel by the middle of 2006. Prices then dropped back to $60/barrel by the early part of 2007 before skyrocketing to $92/barrel by October 2007, and $99.29/barrel for December futures.
Indeed, for the most part of Q1 and Q2 2008, the price of crude transitioned from $103.05/barrel in February, $110.20/ per barrel by March, 2008 and $141.71/barrel by June. Although this price hike was unprecedented, the price rose yet again and peaked at $147.02/barrel by July, 2008.
With the same velocity, the price fell to $100 to pick up again in late September when it rose by over $25 to $130 before settling again at $120.92. By October, prices had dropped below $70, and closed below at $60 on November 6 . This trend continued from 2009 till 2011 and for most part of 2012. From the later part of 2013, the oil price fell below the $100 mark and now hovers between $41-$45/barrel with predictions that the price may no longer gain traction again as it did post summer of 2014.
The reality therefore is that crude oil price fluctuates (like the traditional ‘Yo-Yo”) and any producing country like as Nigeria who depends predominantly on its earnings from the sale of crude oil in the international market, must plan its economy with this volatility in mind. In other words, an oil-dependent economy such as ours should be properly positioned to deal with the vagaries of the industry.
The above notwithstanding, this is about the best time to invest in oil & gas assets around the world when they (oil & gas) assets may be traded very cheaply as crude oil producers are all now in the process of wooing consumer nations to buy from them on the ‘best-rated’ deals. This situation will also obviously affect the negotiating power of a proposed investor whilst discussing a reasonably reduced Signature Bonus/farm-in fees for the purchase of an oil asset or interest in an existing field.
At times like this, the Government should spend more time “cleaning up” the industry such that it becomes attractive for investments in the not too distant future. There is no better place to start than facilitating the introduction of a clear legal and regulatory regime for the sector; the Petroleum Industry Bill.
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The Petroleum Industry Bill
The Petroleum Industry Bill (PIB) was conceived in 2007 on the basis of the recommendations of a Presidential Committee set up to undertake oil and gas sector reforms in Nigeria. It is the consolidation of about 16 existing legislations in the Nigerian Oil & Gas Sector.
Whilst the Bill is currently undergoing legislative review in both houses of the National Assembly, however, having regard to the pace of the review and the issues that have arisen with respect to some of its provisions, it is becoming increasingly unlikely that the Bill will be passed into law by this 7th Assembly.
Some of the issues of concern are:
Fiscal:
A significant increase in royalty rate from 0-8% to 20% post PIB;
Increase in tax rates e.g. Gas Tax rates is increased from 30% to 80%;
The introduction of 10% Petroleum Host Community Fund Tax
Non-Fiscal:
A capped 10 year period for lease renewals. This, it is argued will not enhance the maximization of production from reserves.
early relinquishment of up to 100% of acreage which would not allow for optimization of the blocks
Non-recourse to established and internationally acceptable dispute resolution mechanisms.
Provision for Domestic Gas Obligations (DGO) not supported by gas supply infrastructure and market maturity.
Finally, having regard to the need to maintain our relevance within the comity of nations as a major oil producer, there is no better time from prompt resolution of the issues that have frustrated the passage of the Bill till now. Indeed, passing this Bill into law in the shortest possible time will not only create transparency within the sector, it will no doubt become the catalyst for the much desired foreign direct investment after this storm.
