ECONOMY - 29 SEP 2015

Oil for diversification

Oil for diversification
Oil workers

The harrowing effects of the crash in global oil prices on Nigeria’s public finances and the wider economy have accelerated a significant shift in economic planning in Nigeria. The folly of oil dependence has been belatedly recognised and in its place, economic diversification has come to the fore. So what new challenges lie in store?

There is one old challenge that remains in a different form – the danger of seeing our economic plan as a binary choice between oil and other industries. This false dichotomy is what caused the initial reliance on oil but the lingering worry is that while striving for diversification now, not enough attention will be given to the oil & gas industry in Nigeria. This is a concern as the industry is still fairly underdeveloped and continues to offer significant potential for economic development in the country. Better still, a stronger oil & gas industry will help accelerate Nigeria's diversification efforts.

Despite the fear over Dutch disease, oil should have been good for Nigeria. It should have provided Nigeria with the economic cushion needed to eventually diversify its economy. This was the experience of Canada, the fifth largest oil producing country in the world as they leveraged the boom in their energy sector to develop a more robust economy. Unfortunately, Nigeria took a different path as oil & gas investment crowded out investment in other sectors. Now, there is a risk that the reverse scenario occurs and the oil & gas industry is hastily abandoned.

This is the point stressed by Ildar Davletshin, Head of oil & gas research at Renaissance Capital, who argues for the continued importance of oil & gas in driving the development and diversification of the Nigerian economy. Going further, he highlighted pipeline security, the structure of the NNPC and fiscal reform as key prerequisites for progress in the industry.

In light of this, how successful have our efforts been?

In terms of pipeline security, steps have been taken to engage more closely with local communities as winning their trust has proven very effective at safeguarding local production. Meanwhile, the Nigerian military earlier pledged military personnel to help protect pipelines. While this is a welcome development, there is a worry that it sends a contradictory signal to engaging with local communities. It is important to strike the right balance between force and diplomacy as local communities remain sensitive to the hazards of oil production. 

Meanwhile, as this article explains, the NNPC is much-changed since the Buhari administration took over. The appointment of Dr Emmanuel Ibe Kachikwu as Group Managing Director, following the dissolution of the previous board, has precipitated a raft of other changes. The NNPC needs much more reform before it can work efficienty and transparently – how well the three distinct parts of the Pipelines and Products Marketing Company (PPMC) will work together is open for debate – but these signs indicate that the Buhari administration is aware of the need to address the management challenges that distort the oil & gas industry in Nigeria.

Similarly, the announcement of President Buhari’s cabinet and the disclosure of the initial 2016 budget should usher in fiscal clarity. Furthermore, it is expected that tax policy will change to account for revenue shortfalls. On this front, Mr Daveltshin points out that finding the right tax approach in the energy sector is key for growth – too unfavourable taxes will drive away investment but an overly lenient tax regime would attract investment away from more productive sectors in the economy.

But we need to do more to bolster the oil & gas industry in the country.

Local refineries in particular, need more attention. So far, the Port-Harcourt has resumed operations while the Warri refinery has stalled, causing a drag on local production. Meanwhile, the worry remains that graft in the sector would prevent any extra domestically refined products from reaching Nigerian consumers. Beneficiaries of the subsidy regime (which makes importing petroleum products very lucrative) are expected to persist in their efforts to depress local production.

Finally, reforms in this sector should be entrenched in legislature. This will ensure longterm clarity, stability and accountability for all those involved in the sector, starting from the NNPC. Even as the Petroleum Industry Bill has remained marooned in the legislative abyss for six years, the case for legislative reform in the sector grows clearer.

Current economic conditions make focusing on the oil & gas industry difficult. Low oil prices, a slowdown in the China at a time when interest rates in developed economies are expected to rise and a more diverse range of energy investment possibilities means that international energy firms are unlikely to escalate investment in Nigeria. This makes it more pertinent that the oil & gas industry is a critical part of Nigeria's diversification agenda, as perverse as it sounds.

We find ourselves in this position because in the past, we put all our eggs in one basket. Put simply, ignoring the oil & gas industry at this juncture would be repeating the sins of the past.

 

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Kitan Williams

Kitan Williams

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