Energy
Opinion: Urgent reforms needed to stem revenue losses in oil and gas sector
By KELECHI DECA
The American government is worried about the overall impact of the Boeing certification scandal. Lender J.P Morgan warns that the Boeing 737 Max crisis could drag down the entire United States economy. There is no doubt about that because Boeing is America’s biggest export by volume, thus any issue that negatively affects that industry is handled with the dispatch it requires.
However, that is not the case in Nigeria. The petroleum sector hardly gets the attention it deserves, and for a country that has been on a borrowing spree in the last few years to fund its national budget, one would have expected the government to guard jealously, its major source of income.
Despite the fact that the oil and gas sector accounts for about 90 percent of foreign exchange earnings and 80 percent of government’s revenue, making the country’s economy heavily reliant on the sector, the level of official recalcitrance over the need to protect this Goose that lays the golden egg is worrying. In spite of the importance of the petroleum sector to national life, the federal government has continued to treat the sector as if it is only a piggy bank. Over the years, the issue of lost revenues in the sector has been of great concern to stakeholders in the industry, necessitating calls for reforms to put the Nigerian oil and gas industry at par with what obtains internationally.
These and many more are reasons behind calls by the Nigeria Natural Resource Charter (NNRC) on the need to reform Nigeria’s oil and gas industry to embrace international best practices. Oil sector reforms, according to the NNRC, will not only improve earnings for the government, its resultant effect across the petroleum sector decision chain will help the country to be on the right part to economic diversification. The NNRC, a policy institute which focuses on reforms of the Nigerian oil and gas industry to engender profitability, transparency and accountability across value chains, decries the looming dangers in Nigeria’s obvious obstinacy in embarking on reforms within the sector as the country faces emerging severe competitions not from the gulf region, or from north African nations, but from many sub-Saharan African countries.
In recent times, Ghana, Uganda, Mozambique and Tanzania are learning fast from Nigeria’s failure by putting their houses in order. The group, which launched its Benchmarking Exercise Report (BER) in 2018, provided an updated assessment of petroleum sector governance in Nigeria. Despite continued reports of visible weaknesses in governance framework over the past five years, only minimal changes have been recorded, thus Nigeria continues to underperform on the effective management of oil and gas revenues.
For example, while Nigeria has been foot-dragging on the issue of Petroleum Industry Bill (PIB), Ghana, Tanzania, and recently Kenya have gone ahead to do the needful by pushing through the necessary legislations to reform their petroleum sectors. The rate at which fellow African countries are discovering crude oil in the last two decades with heightened competitions for investment promoted provides the need for Nigeria to enhance its competitiveness for sustainable value creation in the industry.
Furthermore, the dynamics of the industry and recent developments across the world have led to growing decrease in the purchase of Nigeria’s crude oil, and could spell doom for the country because of its dependence on oil as the major source of revenue. The United States cut its imports of the Nigerian crude oil by 48.87 million barrels or 43 per cent in 2018, according to the latest data released by the Energy Information Administration (EIA). The US imports of Nigeria crude fell to 64.06 million barrels in 2018 from a five-year high of 112.92 million barrels in 2017.
The EIA data showed that the US imported 75.81 million barrels of Nigerian oil in 2016, up from 19.85 million barrels in 2015, but its imports of Nigerian crude fell from 148.48 million barrels in 2012 to 87.40 million barrels in 2013 on the back of the shale oil boom. One major reason behind this is that the Light sweet Nigerian crude is very similar to the light oil produced in US shale. As US shale production grows, the appetite for Nigerian crude in the US drops dramatically.
The Financial Times reported in January that the US supplied the equivalent of almost one in every four barrels of crude processed by UK oil refineries, or 264,000 barrels per day, illustrating the outsized role American oil now has in Britain’s energy mix. That level was more than Norway, Russia, Nigeria or Algeria, according to data from the cargo-tracking company, Kpler, which have all been major suppliers to the UK in recent years.
Nigeria’s inability to update the laws guiding crude oil exploration in the country has led to huge losses in revenue. A clear example is the issue of Production Sharing Contracts (PSC’s). Over the years, Nigeria has been at the receiving end of poor monitoring and execution of these contracts. Consequently, the NNRC has been calling for a review of the existing fiscal terms which presents a challenge that led to this loss of revenue’s to the government’s coffers.
The NNRC in its BER highlighted the consequences of the persistent failure to review the Deep Offshore and Inland Basin Production Sharing Contracts Act. The organization pointed out that significantly, Section 16(1) and (2) of the Deep Offshore and Inland Basin Production Sharing Contracts Act provides that if the prices of crude oil at any time exceeds $20 per barrel, the share of government shall be renegotiated to such extent that the production sharing contracts shall be economically beneficial to the government of the federation.
This has not been adhered to over the years due to poor monitoring and lack of compliance.
In addition, the law is subject to be reviewed after a period of 15 years from the date of commencement (January 1, 1993) and every five years thereafter. Sadly, it has not been reviewed since its commencement. Despite the court case by Bayelsa, Akwa Ibom and Rivers adjudged in October 2018, nothing has been done to review that law governing PSCs and the petroleum industry fiscal bill set to address this was never passed by the National Assembly. In its recent report, which this newspaper published, the Nigeria Extractive Industry Transparency Initiative (NEITI) claimed that for a period spanning over 10 years, 2008 to 2017, Nigeria lost as much as $28 billion due to outdated Production Sharing Contracts (PSCs) it signed with international oil companies (IOCs) operating in the country.
On how it arrived at the figure, NEITI pointed out that revenue would have increased from $73.78 billion to $89.81 billion if the review had simply been done using the 2005 fiscal regime. This implies a difference in revenue of $16.03 billion. Also, revenue would have increased from $73.78 billion to $102.39 billion if the review had been done using the 2005 fiscal regime and government share in profit oil in OML 127 and OML 130 (PSA). This implies a difference of $28.61 billion.
For a country that has resorted to unbridled borrowing to fund a substantial part of its budget, this $28.61 billion could have funded 99 per cent of the proposed Federal Government budget for 2019. The need to reform the entire petroleum sector cannot be overestimated, and the BER has provided the best platform to kick start the process through its adoption for policy formulations, monitoring and reviews.
Kelechi Deca, a journalist writes from Lagos.
