On his fourth attempt, Muhammadu Buhari was elected President of Nigeria earlier this year. Needing his attention was a litany of problems, not least of which was the economy. With the prolonged drop in oil prices, Nigeria – which relies on crude exports for 70% of government revenues – has had to contend with a big hole in its budget.
Nigeria needs to stop haemorrhaging what money it has if it is to repair the economy and fulfil its potential. As President Buhari has said: “Given the previous levels of waste and corruption, if we spend what we have more wisely and effectively, we can achieve a great deal more.”
The oil industry is a good place to start. Three areas appear to be the current focus: NNPC, the national oil company; illegal crude theft; and the fiscal terms under which the industry operates.
President Buhari’s appetite to reform NNPC is clear. He set the tone by firing the NNPC board and appointing an outsider as its head. Splitting NNPC into two separate entities – a regulator and an investment vehicle – is another welcome move that should improve transparency and governance. A partial sale of NNPC’s interests is trickier to achieve, but could raise over US$30 billion.
Crude theft is a chronic and endemic problem in Nigeria. It remains a major source of lost revenue for the government and the oil companies. Since 2008, more than US$100 billion has disappeared through illegal bunkering and outages from damaged pipeline. Indeed, a resurgence of violence in the Niger Delta could still follow Buhari’s decision, soon after being sworn in, to revoke surveillance contracts from local militias, while those profiting from illegal crude theft will not go quietly.
That leaves the government with revising fiscal terms as its other target to boost its revenues from the industry. NNPC has stated it “…is set to revisit the fiscal terms of the existing PSCs entered into by the Corporation with some International Oil and Gas Companies with a view to seeking favourable benefits to Nigeria based on prevailing realities in the industry.”
The IOCs won’t accept any changes without a fight. Lengthy legal arguments, against a backdrop of low oil prices and Nigeria’s high cost reputation, are likely to result in difficult negotiations lasting years. As we’ve seen with shallow water licence negotiations, NNPC can extract concessions from the IOCs. It can offer the 1993 PSCs to other investors when they expire in around a decade. But both sides have so much at stake that we believe an agreement will ultimately be reached.
Longer term, Nigeria’s continued success as an oil and gas producer depends on its ability to replenish produced reserves. Exploration activity in the past decade has been worryingly low and success rates very disappointing. Even when discoveries have been made, bureaucracy leads to cost escalation and many projects struggle to break even in a US$60 oil price world.
President Buhari’s aim of doing more with what Nigeria has is laudable, and he is targeting the right areas to achieve this. Getting results is another matter altogether.
Africa Oil Week 2015
Wood Mackenzie will be exhibiting at Africa Oil Week 2015, at the Cape Town International Convention Centre in South Africa, from Monday 26th – Friday 30th October, find out more here
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