There is understandable concern in the country about the drop in crude oil prices over the last several weeks. From a figure of $104 per barrel on August 1, 2014, the OPEC basket of prices collapsed to about $82 per barrel on October 28, 2014. The basket of prices used by the Organisation of Petroleum Exporting Countries (OPEC) is the average price of all the varieties of crude sold in the international market.
The drop of over $20 per barrel in the three months between August and October has raised justifiable fear given our overwhelming dependence on oil and gas exports for over 90% of our country’s foreign exchange earnings. At a Senate committee session on Monday October 27on the Medium Term Economic Framework (MTEF), which serves as a basis for the preparation of the estimates of revenue and expenditure for the annual budget, Dr. (Mrs) Ngozi Okonjo-Iweala, Finance Minister and Coordinating Minister for the Economy, told the committee that the Nigerian economy was facing some challenge on account of the oil price drop. She stated that The Excess Crude Account was created to cushion the economy at difficult times like this. The Minister stated however that the Excess Crude Account had been depleted to the tune of $4.1 billion, down from $9 billion. Speaking further on the Excess Crude Account as reported in the Vanguard newspaper of Tuesday October 28, 2014 the Minister said: “… and you know we went down to $2 billion last year and then we built it up to $9 billion, and there was insistence we must share, and it came down to $2 billion, and then we built it back to $5 billion. Right now we are at $4.1 billion.” Nigeria had much more funds in the Excess Crude Account the last time the world oil price tumbled dropping from a high of $140 per barrel in July 2008 to a low of $37 in December 2008. The funds in the Excess Crude Account in 2008 helped the country weather the storm during that difficult period.
In an earlier interview published in the Financial Times of Sunday October 26, the Finance minister said other measures would have to be put in place if prices fall further, adding that, “We will have to look very hard at recurrent expenditure, and identify overlapping agencies…”
Oil prices have been falling due to slowing global demand, the rise in US shale oil production and other factors. Further price drops may result in further difficulties, considering that our 2014 national budget is predicated on a benchmark of $77.50 a barrel and daily production of 2.39million barrels. The MTEF document submitted to the National Assembly in October 2014 reports that our actual oil production averaged 2.25 million barrels per day (below the budget figure of 2.39 million barrels) due to a number of factors including “the activities of crude oil thieves and oil pipeline vandals’’
The United States of America (US) was Nigeria’s principal buyer until some months back. Nigeria’s sweet crude, Bonny Light, is sought in the US for its ease of processing, but with the massive exploitation of Shale Oil, lighter crude, in the US, the demand for Nigeria’s crude has bottomed out. Data from the Energy Information Administration division of the US Department of Energy shows that as against a peak demand of 41.76 million barrels of Nigerian crude by the US in March 2007, only 1.48 million barrels was bought by the US from Nigeria in August this year. More importantly, the drop has been drastic in the last year since the US applied the fracking drilling technique to exploit shale oil. Today, the US is producing almost nine million barrels per day and there is talk that it may export by next year.
There is still demand for Nigeria’s crude from Asian economies like China but the outlook is worrisome. What if the economies of Asia, with their heavy investment in R&D, discover cheaper sources of energy in their backyards?
Nigeria is in a typical Catch-22 situation: the demand for our crude is shifting at a fast pace to new buyers who may not have the capacity for large volumes; and we do not have significant refining capacity in our country. So, whatever is earned from crude oil sale, a significant proportion goes out to import processed petroleum products. Also, our reserves are not growing. OPEC’s 2014 Annual Statistical Bulletin reports that between 2009 and 2011 Nigeria’s proven crude oil reserves stood at 37.20 billion. It dropped to 37.14 billion in 2012 and further dropped to 37.07 billion in 2013.
The drop in global oil prices makes it imperative for Nigeria to urgently diversify its revenue base.
The country is spending heavily on the importation of oil products. Our state-owned refineries are not in a position to meet our local demand for petroleum products. Licences for private refineries were first issued by President Olusegun Obasanjo’s government in 2002 but they have not translated to projects on ground partly because the ground rules have not been properly defined for the sector. The Petroleum Industry Bill (PIB), which provides for the establishment of the legal and regulatory framework and comprehensive guidelines for the operation of the upstream and downstream sectors of the Nigerian Petroleum Industry, is stuck in the national assembly. The national assembly committees looking into the legislation have assured that they will attend to the bill; they need to do so quickly, especially as the current National Assembly lapses in a few months’ time.
Clearly, the necessary incentives need to be activated to facilitate the much needed private sector investments in the oil and gas sector and there is precious little time to delay action in these matters. For instance, while the Dangote Group has announced plans for its refinery project, other large projects in Saudi Arabia, United Arab Emirates and Venezuela are already coming on stream. A number of oil producing countries are exporting finished derivatives of crude oil. Nigeria is not.
A number of stakeholders have canvassed the removal of subsidies on petroleum products by government to save the country billions of dollars currently being expended to sustain the subsidies. Removing subsidy, where it exists, may be an option. However, such a decision, if it is to be implemented, needs to be accompanied with measures that provide some social security for low income groups. Additionally, government should simultaneously discourage further importation of petroleum products by providing incentives for investors who go ahead to establish private refineries to produce products locally in order to minimize our foreign exchange outflow.
We also need to unlock the potential of agriculture. With over 84 million hectares of arable land, Nigeria ought to be a net exporter of food which should enable us earn substantial revenue outside our oil revenue. Clearly, Nigeria has no business being a net food importing country. Although our food import bill is currently down to an annual average of about N700 billion from about N1.4 trillion previously, we must continue to drive this down until we become a net food exporting country. Therefore, the current initiatives being implemented by the federal government to reduce our food import bill and encourage local production needs to be vigorously pursued and sustained. Government needs to continue to implement necessary fiscal policies and agricultural incentives to curtail imports and encourage production of food for local consumption and export in order to boost our foreign exchange earnings.
Our country has had painful experiences in the past arising from crude oil price swings resulting in revenue shortfalls. We must do everything to urgently implement measures to free ourselves from this cycle by diversifying our economy in order to enhance our non-oil export revenue.
Chief Bernard Okumagba is a former Delta State Commissioner for Finance.
