ECONOMY - 07 AUG 2015

Energy Lessons From the Gulf

Energy Lessons From the Gulf
Oil rig

UAE Subsidy Surprise

The recent decision by the UAE to remove fuel subsidies in the country might have been met with a touch of envy by Nigerians. Unsurprisingly, the Gulf nation referenced falling oil prices as the main reason for deregulating petroleum products.

The UAE has taken decisive action, seizing the opportunity created by low oil prices to address the fiscal consequences of the price slump and also, set off on the path towards diversification of both government revenues and the economy. If this sounds familiar, it is because these are similar to the objectives set out by the Nigerian government for 2015.

Nigerian inertia

Despite the parallel conditions and objectives in Nigeria, government response has been slow. The fiscal plight of state governments has been well documented and the issue of diversification has remained a narrative, rather than reality.

Like Saudi Arabia, the Gulf counter-example to the UAE, subsidy removal remains a sensitive political issue in Nigeria. Despite the problems created by subsidising non-renewable energy and consumption, the economic case against subsidies has failed to generate the necessary public support.

The issue is further complicated by the fact that many Nigerians do not pay the regulated price at filling stations. This, added to the uncertainty surrounding the new administration’s plans for the Nigerian National Petroleum Company (NNPC) and the Petroleum Industry Bill (PIB), contribute to the conclusion that Nigeria will not be emulating the UAE anytime soon.

Iran’s Nuclear Deal

In the background of all this, Iran’s recent nuclear agreement, the biggest global diplomatic story in recent times, throws another spanner in the works. The agreement, as well as a thawing of the US cold shoulder to Cuba, paves the way for the return of two prodigal nations to the global market. Investors all over the developed world are already entering a mini-frenzy as they deliberate the appropriate response to the news.

OPEC reverberations

Iran’s oil reserves (the fourth largest in the world) and its negotiating experience indicate it will now be a stronger force both within OPEC and the wider oil market. The immediate impact of the Iran deal will be felt in this sector, and it’s likely to be bad news for Nigeria. The nuclear agreement should encourage Iran to increase efforts to increase daily oil production which currently stands at roughly 3 million barrels per day.

Increased supply should keep oil prices low for the foreseeable future and compound the challenges facing many oil exporting nations. For Nigeria, falling demand for Bonny Light could put greater strain on public finances going into the next fiscal year. Iran’s greater international presence could also lead to more uncertainty in future OPEC negotiations.

Investment destinations

Within a short space of time, the dynamics of the Nigerian oil & gas industry have changed significantly. The greater presence of indigenous firms has complemented the trend of international oil companies (IOCs) divesting away from onshore activities. The full economic effects of this natural experiment are yet to be seen but there is a worry that the indigenous players lack the experience and technical expertise to drive growth in this sector.

Indigenous firms will have to draw on all their reserves of local knowledge and goodwill to rehabilitate a sector in serious need of reform. Apart from efficiently utilising refinery capacity to increase domestic production, the challenges posed by oil bunkering, subsidy fraud and infrastructural deficits must be overcome.

Coupled with the trend of IOC divestment, the Iran deal increases the likelihood that international energy investment will be channeled away from Nigeria and into Iran as it now looks like an attractive destination for foreign direct investment (FDI). The positive is that this is unlikely to happen too soon as it will take some time for the initial euphoria of the deal to solidify into actual investor confidence.

Responding to the Gulf

The recent activity of these Gulf States puts greater scrutiny on Nigeria’s energy sector. Against the backdrop of low oil prices, a greater indigenous presence and the push for economic diversification, there is a worry that the challenges facing this crucial sector will remain unaddressed.

Iran’s return forces Nigeria to look inwardly for investment even as the UAE gives a template for pushing towards the goal of reducing the economy’s oil dependency. Nigeria differs greatly from these Gulf nations in crucial socioeconomic ways but as a player in the global market, it must be ready to respond to the actions of its fellow OPEC members.

 

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Kitan Williams

Kitan Williams

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