The proposals by CBN Governor, Godwin Emefiele, and Seplat Petroleum’s Chairman, Dr. ABC Orjiakor, for President Mohammed Buhari to further divest Nigeria’s oil and gas assets in order to raise take-off funds ride against the tide of industry opinions.
Mounting pressure on the new government of President Mohammed Buhari to divest state oil and gas equity assets held by the Nigerian National Petroleum Corporation (NNPC) in joint ventures operated by private firms in the country might turn out to be the poison for the economy. Central Bank Governor, Mr. Godwin Emefiele, had in an interview published by a foreign media proposed to the incoming government to further divest the 60 percent equity held by government in oil and gas exploration and production joint ventures operated by oil companies.
Mr. Emefiele’s advice came as measure to help the government raise a huge cash volume to pursue its highly hyped fast-track economic recovery programme on the promise of which the ruling party gained popularity and support in the last polls. Later last week, the Chairman of Seplat Petroleum Development Company, Dr. Bryant Orjiakor, also advised President Buhari to divest NNPC’s equity stakes in the joint ventures for the same reason of raising funds for government’s development programmes.
According to the publications, Mr. Emefiele, advised President-elect, General Muhammadu Buhari, to auction off about half of Nigeria’s Joint Venture equity with multinational oil companies to fund developmental projects. With the plan, according to Mr. Emefiele who is quoted as speaking to Financial Times of London, private equity companies could be encouraged to take over the relinquished government stakes and compete with the oil companies to contribute to the development of the industry.
He explained that the auction would fill Gen. Buhari’s hands with three years’ worth of the country’s annual budgets and provide him with adequate funds to finance massive infrastructural development in the period. In a separate development, chairman of Seplat, Dr. Orjiakor also advised the new government to sell its stakes in joint ventures currently controlled by the NNPC in the petroleum industry.
The measure, according to him, would limit government to collection of financial rent in the industry while leveraging strong private sector in the industry to spur economic growth. Dr. Orjiakor who was quoted as speaking at an investment conference argued that the assets would help grow private firms in the country and also enable them create jobs for the local people.
In taking the same line of thinking with the CBN governor, Dr. Orjiakor pointed out that private firms would be better positioned to optimize economic value from the assets is given the opportunity of robust asset base. Whereas, the CBN Governor’s proposal comes from the realms of government technocracy, that of Dr. Orjiakor could be properly placed in the balance of industry support to the CBN advise with a hint of a business advantage to his company which, according to the report, would take advantage of the opportunity to grab more assets.
Dr. Orjiakor had in a chat with The UNION stated that Seplat growth strategy focuses on accretive asset acquisition. The company which was established on assets acquired from Shell and partners has also driven successful acquisitions that include two more JV assets from Chevron. Seplat is focusing heavily on gas investment, drilling and acquisitions, aiming to increase gross output from around 120 million standard cubit feet (scuf) per day to 400 million scuf by 2017.
The advice from the two eminent technocrats entails further cut in public interests in the joint venture assets by additional 25 percent from 55 percent to about 30 percent for the NNPC/Shell/Total/ Eni joint venture; and by the same proportion from 60 percent to 35 percent for the NNPC/Chevron joint venture, NNPC/Mobil joint venture and NNPC/Agip joint venture respectively.
By similar proportion, NNPC would also lose significant equity stakes in numerous joint ventures operated by indigenous and multinational independents in the country, thus cutting the corporations gross equity in vast majority of operations in the industry. From official calculations, the new government stands to rake-in some $75 billion or N14.9 trillion in lump cash and also inherits another $30 billion (N6.0 trillion) in external reserves.
If the proposal sells, then the new president would have assembled princely $105 billion or about N21 trillion, the biggest cash haul at the table of a government that is yet to settle down or evolve any workable economic plan. But the equity downgrade is to also cut overall government’s stake in the joint venture by 70 percent in the case of the NNPC/ Shell joint venture and 65 percent in others, translating to overall 32.5 percent state equity stake in the entire petroleum industry.
The proposal concedes average of 77.5 percent of Nigeria’s daily average oil production of 2.3 million barrels per day to private hands, including the accruing revenues and associated asset control. In Production Sharing Arrangements (PSAs) which account for half of the nation’s daily oil and gas output mainly from the deepwater, government’s interest is limited to taxes and royalty.
Meanwhile, the industry provides over 90 percent funding support to government’s annual fiscal proposals, 95 percent of total foreign exchange receipts as well as some 40 percent of gross domestic product. The overall concept of [piling cash for the new government means that the country equity oil in the joint ventures would plummet proportionately while associated revenue accruals would follow suit.
Therefore, divesting the major sources of regular income and economic growth propulsion is seen in the wider industry as mortgaging the future of the country and entrusting collective fate of Nigerians in the hands of a fleeting administrative regime. According to Dr. Sina Malomo of Ministry of Solid Minerals, a country’s natural resources belong to past generation of citizens, the present generation and future generation.
He pointed out that exploitation of mineral resources, including hydrocarbon resources must be managed in a manner that guarantees value for every generation of the citizens, including preservation of revenue derivatives for needs of the future.
Analysts believe that selling the nation’s equity for immediate financial need of a government that has not been tested might be too naive and catastrophic for the future of the country. And failure of the incoming administration to deliver transparently on the targets of the funds might spark off bloody agitations for resource control.
Promoter of the global Initiative for Policy Dialogue (IPD), Professor Joseph Stieglitz, had on a visit to Nigeria declared that piling huge lumps of money for public service lay compelling allure for stealing and associated corrupt practices. According to him, the best option for resource countries is to evolve a development plan that is insulated from vagaries of political power scramble, protected by the constitution and mandatorily funded from a trust fund.
The model of sustainable development fund advocated by Professor Stieglitz was similarly introduced by the Coordinating Minister of the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala, in the form of Sovereign Wealth Fund (SWF) and Economic Stabilization Account (ESA) also called Excess Crude Account (ECA) but the traditional scramble for resource wealth among different tiers of government in the country resulted in persistent pressure that led to depletion of the funds.
Before handing over the reign of government to the new administration of President Mohammed Buhari, Dr. Okonjp-Iweala had explained that constant cash demand pressure from state governments led to depletion of the account by N6.21 tillion, leaving the country with little buffer when the oil price crash set in 2014.
According to a statement from her office, a total of N6.21 trillion was shared from the account by the federal and state governments between 2011 and 2014. The minister said that in addition to their constitutionally approved receipts from the Federation Account, the Federal Government received the sum of N3.29 trillion, while the 36 states got a total of N2.92 trillion from the ECA within the four-year period. A further breakdown of the ECA disbursement showed that the 36 states received N966.6bn in 2011; N816.3 billion in 2012; N859.4 billion in 2013 and N282.8 billion in 2014.
“Therefore, divesting the major sources of regular income and economic growth propulsion is seen in the wider industry as mortgaging the future of the country and entrusting collective fate of Nigerians in the hands of a fleeting administrative regime.”
Akwa Ibom, with N265 billion, got the highest allocation from the ECA; while Rivers and Delta states followed with N230.4 billion and N216.7 billion, respectively. Other states with highest allocations, according to the document, are Bayelsa, N176.3 billion; Kano, N106.5 billion; and Lagos, N82.9 billion. On the other hand, Kwara (N52.8 billion), Enugu (N51.6 billion), Gombe (N47.7 billion), Nasarawa (N46.9 billion), Ekiti (N46.8 billion) and Ebonyi (N44.3 billion) received the least amounts. The summary of the inflows and outflows from the account indicated that the opening balance was $4.56 billion in 2011 and reached a peak the following year at $8.7 billion before declining to $2.3 billion in 2013.
The document put the balance as of May 2015 at $2.07 billion, noting that “the fluctuation in the ECA reflects the sharing of the proceeds usually requested by state governors as well as the practice of augmentation.” Former minister and deputy chairman of the National Planning Commission, Abubakar Sulaiman, also declared former President Goodluck Jonathan’s administration as at May 29, left behind $30 billion, adding that the sum would have been higher had the governors not insisted on sharing the fund.
While debunking the empty treasury alarm by the administration, Sulaiman, stressed that the past government “left behind close to $30 billion. Government can’t tell us that there is no Excess Crude Account (ECA), Sovereign Wealth Fund (SWF) or are we saying the Federal Inland Revenue Service (FIRS) and related agencies had not in the last one month been generating revenue? Until they are able to prove they had no receipts from these government agencies in the last one month before Nigerians can now buy into Mr. President’s claims of an empty treasury.”
He said: “Money made by government is meant to be spent, and this the immediate past administration did that responsibly. Every government operates on deficit even in the so-called western world, including the US which today remains one of the largest debtor nations in the world. “Is it not on record that President Obama inherited $3 trillion debt, a collapsed banking sector and mortgage industry, yet he never raised any alarm.
None of these has happened in Nigeria under Jonathan. At the 2015 edition of the annual Oloibiri Lecture Series hosted by the Nigerian Council of the Society of Petroleum Engineers (SPE) in Abuja, experts had, instead of shopping funds, called on government to adopt efficient and transparent fiscal measures that would reorder the country’s economic priorities in the face of declining oil price in the international market.
They said Nigeria must adopt measures deployed by other oil producing nations to minimize the impact of oil prices, listing the measures to include budget cuts, subsidy removals, liquidation of assets etc. Chairman of the Nigerian Council of SPE, Mr. Emeka Ene, called on government to adopt policies and programmes that would drive the nation’s economy through the prevailing oil price adversity. Mr. Ene who is also the Chairman of the Petroleum Technology Association of Nigeria (PETAN) declared that “It has become imperative for energy commodity-dependent countries such as Nigeria to implement strategies to grow their economies in the face of these ongoing uncertainties.”
Such measures, according to Dr. Tim Okon of the Nigerian National Petroleum Corporation (NNPC) who also spoke at the event, involves comprehensive fiscal review that focuses on lean public spending, removal of subsidies in the domestic fuel market and adoption of efficient processes in public service. “Iran cut its budget by $3 billion and is still facing a $20 billion deficit; Russia hit by sanctions as well as lower prices, has cut government expenditure by 10 percent and its central bank is forecasting GDP to contract 4 percent this year; Venezuela which loses approximately $700 million in revenue for every $1 drop in the oil price has started liquidating assets and is seeking financial support from China.
“Saudi Arabia just passed their 2015 federal budget, which contains a $35 billion budget deficit, the first for many years; Indonesia new president Joko Widogo announced at the end of December that diesel subsidies will be reduced and gasoline subsidies will be removed, effective January 1st 2015; and Egypt announced in the summer of 2014 that overall fuel subsidies, which totaled $20 billion in the previous fiscal year, would be reduced.” Nigeria must follow suit, he said, adding that the oil and gas industry must adopt to new realities affecting project break evens and company cash flow.
Economic strategies advanced by speakers include Passage of the Petroleum Industry Bill (PIB), restructure public finances, subsidy removal on petroleum products and focus on profitable public enterprises. The PIB which has lingered in the National Assembly for a decade prescribes far reaching reforms in the petroleum sector including transformation of NNPC to a major global player like its peers such as Saudi Aramco, Norwegian Statoil, Malaysian Petronas and Brazil’s Petrobras. The process is conceived to transform the corporation from a revenue interest in joint ventures to an International National Oil Company (INOC), a model currently operated by China, Korea, Russia and South Africa.
The recommendations Mr. Emefiele and Dr. Orjiakor thus run into direct conflict with wider industry opinion on options before the new government. Cash haul at the table of President Buhari obviously works against prevailing globally tested principle currently consolidating state grip on assets in a competitive and efficient process that encourages local participation and technology transfer. Dr. Okon, who is Group Coordinator, Corporate Planning & Strategy at NNPC, pointed out that many governments and oil companies are re-strategizing to ensure continual survival given the continued decline in global oil price and long term low price projections.
He said many national and international oil companies such as Saudi Aramco, Chevron, Shell, Conoco Philips, BP Gazprom and others have taken a suit of measures in order to guarantee their global survival. According to him, Shell is to dispose $15 billion assets over the next 3 years, reviewing spending on 40 projects; BP’s 2015 CAPEX will be 20 percent lower than initially planned; ConocoPhillips will reduce by 32 percent.
Saudi Aramco will also reduce its CAPEX by 20 percent. “BP and ConocoPhillips both announced they would be shedding around 500 jobs in the North Sea. Suncor has announced job cuts of about 1,000, whereas Gazprom, which is hit both by lower prices and by sanctions against Russia, is planning to lay off a quarter of its staff. Schlumberger announced in January 2015 that it will cut approximately 9,000 employees – around 7.5 percent of its workforce around the globe.
Baker Hughes has announced 7,000 layoffs.” “Many oil companies are driving the renegotiation of supplier agreements hard, seeking to find 20-40 percent reduction in service and equipment rates from an oilfield services industry that has escalated cost for many years, Dr. Okon stated. Finally, the proposal by the CBN Governor has disruptive implications for Nigeria’s commitments at multilateral economic groups Like the Organization of Petroleum Exporting Countries (OPEC) which actually evolved the joint venture model to enable its members to understudy multinational oil firms and maintain grip on state hydrocarbon assets. It was at the recommendation of OPEC that state oil firms were formed by members.
It was also by the group’s initiative that joint ventures were mandated among member states to protect them from the commercial interest of foreign firms. Target of joint ventures according the OPEC charter is to eventually empower state oil firms to take over operatorship and ultimate control of state petroleum assets from multinational firms upon development of full industry capacity.
This strategy has encouraged the Nigerian Petroleum Development Company (NPDC) of NNPC to grow operated production to current 130, 000 barrels per day after years of service contract with Italian Agip. In fact equity sale at the period of prevailing low oil price posts a guarantee of suboptimal asset valorization, a situation that might erase gains mustered in decades of efforts to derive maximum benefit from hydrocarbon resources for national economic development.
In sum, long term economic projections of the industry and guarantee of sustainable income flow for government in the medium to long term form solid arguments against opinions for further decimation of state held equities in the joint ventures that guarantee sustainable income flow for present and future citizens of the country. The equities under debate are needed to provide the important buffer for sustainable growth.