Nigeria s Petroleum Industry:

Transcription

1 NRG FO Nigeria s Petroleum Industry: Striving to rise above challenges Nigeria s petroleum sector, has faced severe challenges in recent times. Nonetheless, the inherent potentials of the sector need be unlocked through timely implementation of reform initiatives to allow for infrastructural development, attraction of foreign investments and aid involvement of indigenous players. - Fola Onasanya September 2011 Emerged with significant economic impact For several decades, Nigeria s petroleum sector has provided essential commodities that play the crucial role of fuelling the nation s economy. Prior to the emergence of the industry in the late-50s, commodities such as cocoa, groundnut and rubber were major export products. Within five years (1961 to 1965), crude oil rose from 7.1per cent to 13.5 per cent of the nation s export earnings. By 1970, it had become the leading source of foreign exchange, accounting for 63.9 percent. In the early-1980s, falling oil outputs and prices led to the decline in its contribution to gross domestic product (GDP) 1, which continued until oil prices began to rise in 1990, reaching a record high of 48 per cent in now faced with challenging situations In recent years, the industry has faced severe challenges. There have been major set-backs that undermine the sector s contribution to the nation s economy such as the destructive activities of militants that aggravated already existing infrastructural deficiencies and the unavailability of funds for petroleum businesses. 1

2 However, through efforts by the Ministry of Petroleum Resources and the Figure 1: Nigerian Petroleum Industry - % Contribution to GDP ( ) Nigerian National Petroleum Corporation (NNPC), the Federal Government of Nigeria is taking steps towards overcoming these challenges. There is some optimism, that through the implementation of reform initiatives and the active participation of other key stakeholders, the industry will rise above its current challenges Source: CBN - Changing Structure of the Nigerian Economy (2000), NBS (2010) Exposure to Militant Attacks Over the years, Nigeria s petroleum industry has suffered immensely from the damaging activities of militants. This situation has been predominant in the Niger Delta region of the country, where the vandalising of pipelines and other petroleum production facilities has weakened the productivity of the sector. In 1999, a youth group was reported to have shut down five flow-stations in Delta state. With the establishment of The Movement for the Emancipation of the Niger Delta (MEND) and the Niger Delta People s Volunteer Force (NDPVF) two renowned militant groups, such militant actions have increased immensely within the last decade. An article by Parker 5 on the Niger Delta crisis, reported that, since the establishment of militant groups, well over 200 oil workers had been held hostage. It also stated that crude oil production had reduced to 1.5 million barrels per day (bpd) from its erstwhile 2.1 million bpd in 2

3 2008. Mauowad 3 reports that a quarter of the nation s oil production about 600,000 bpd had been cut for nearly two years due to violence in the Delta. The attacks by militants on the nation s petroleum infrastructure were, however, not without a cause. In the past years, the Niger Delta region has suffered considerable social and economic under-development. Although the region accounts for about a quarter of the nation s total petroleum output, the people of the Niger Delta perceived the Federal Government and other international oil operators to be insensitive to the local communities needs for benefits from oil revenue. This perception triggered conflicts which escalated into militant protests. With a view to resolving the crisis, the nation s government is presently employing a consultation tactic that appears to be succeeding. The government has instituted a Ministry of the Niger Delta that is mandated to promote the integration of the Niger Delta into mainstream policy-making and also granted amnesty to all militants. A recent Government report suggests that more than 8,000 militants have disarmed and taken the amnesty offer since it began in August Though the amnesty program has achieved considerable success in curtailing militant activities, there are growing concerns about its sustainability. Since it offers ex-militants attractive opportunities and favors, the program stands the risk of being exploited as it could be regarded as a reward for miscreant behavior. Also, as beneficiaries acquire technical skills in areas such as under-water welding, Seafaring, Marine Engineering, ICT, Boat Building and Piloting, the need to develop industries that would enable their gainful employment (or self-employment) becomes all the more critical. The key point being made is that for sustainable socio-economic impact, there is a foundational need to build up the country s infrastructural and industrial base. Significant Infrastructure Deficiencies Although Nigeria s petroleum industry currently has four refineries with a combined installed capacity of 445,000 bpd, the refineries currently operate at 3

4 about 40% capacity a situation that can be attributed to the poor management and inadequate maintenance of the facilities. The power sector, which is now closely related to the petroleum industry, also suffers from huge capacity inadequacies. Reduced efficiencies of power facilities and the under-utilisation of alternative energy sources have left the nation with about 4000MW currently in supply. As socio-economic activities increase, the demand for energy and petroleum products also rise, making the petroleum and energy sectors largely dependent on imports to meet these local demands. This, according to a former Minister of State for Petroleum Resources, is not sustainable taking into account that over N650 billion was spent in a year as subsidies on the importation of refined products. Consequently, the Nigerian government is looking to implement a new Petroleum Industry Bill, which involves the strategic deregulation of the downstream sector - a move aimed at reducing regulatory controls and increasing the participation of the private sector in the petroleum industry. As implemented in other countries, deregulation holds the potential of providing new opportunities in Nigeria s petroleum industry. The expected outcomes of a well-implemented reform process include: Dismantling the monopoly and control of the Nigerian National Petroleum Corporation through privatizing price controls Creating competition in the downstream sector by encouraging private sector participation Reducing the costs of subsidising oil prices hitherto incurred by the government; consequently enabling the diversion of funds towards meeting other socio-economic needs Increasing the Foreign Direct Investments required to grow the nation s economy While the industry awaits deregulation and other reform initiatives, there are 4

5 promising signs of better days ahead. In May 2011, the NNPC and China State Construction Engineering Corporation agreed to seek about $29 billion in funding to build three new oil refineries and a petrochemical plant in Nigeria. Such moves to expand the industry s infrastructure base will provide a significant boost in capacity to meet export and domestic market demands. However, to fully activate the potentials of the domestic market, private enterprises in the sector need to have increased access to favorable funding arrangements and other government incentives. Restricted Access to Funds Following the reform of the nation s financial institutions in 2009, many financial institutions have become more reluctant to provide loans and other credit services to the petroleum businesses. This restraint is not unrelated to bad loan portfolios and credit ratings revealed by the Central Bank of Nigeria the country s apex bank. The assessment of the petroleum sector by the Central Bank of Nigeria (CBN) disclosed risk exposures up to N487 billion - the highest when compared to other sectors. In a recent interview, a downstream business owner said Banks are shying away from financing the downstream petroleum industry because when we have an agreement to pay within 45 days, we often go into 180 days before we are able to pay back. Funding for downstream businesses is a huge necessity, and we would always need to rely on the banks for letters of credit to enable us purchase products from refineries, another business owner commented. Downstream marketing companies have faced the challenge of a huge debt overhang caused by the collapse in oil prices that characterised the global economic recession. A recent industry survey further revealed that most of the nation s petroleum product tank farms have run dry as their owners have been unable to maintain their supplies. With the global economy s gradual recovery and the increase in current crude oil prices, the severity of market player s debt situation is gradually improving. The recuperation of private businesses can be accelerated through government interventions in facilitating the availability of credit services and offering of incentives and concessions. By exploring such 5

6 options, private businesses will be better equipped to increase industry capacity and ultimately create value that builds the nation s economy..there is a need to shape the Industry s future. Although with current challenges, Nigeria s Petroleum Industry has remarkably high prospects. However, this potential needs to be unlocked through the timely implementation of reform initiatives that will drive infrastructural development within the industry, attract foreign direct investments as well as support the active involvement of indigenous industry players. References 1. Adrian Gonzalez (2010), Petroleum and its Impact on Three Wars in Africa: Angola, Nigeria and Sudan. 2. Kaduna, PH Refineries refuse operations, Thisday Newspaper - Feb. 2, Mauowad, Angola, one of the poorest places on Earth, is an oil industry darling. 4. Nigerian Petroleum Marketing Sector, BGL Research and Strategy Publication (2008). 5. Parker, War on Water: A Clash over Oil, Power and Poverty in the Niger Delta. 6. Reginald Stanley (July, 2009), Petroleum Industry Bill (PIB) and the deregulation of the downstream sector. 6