Nigeria’s energy policy – shadows versus vistas
Hearing Nigeria’s energy policy makers’ talk, you would think everything was going well for the country in the current global resource context. Nigeria seems to be preoccupied at the moment with demanding higher OPEC quotas, heckling operators with new taxes and quotas, auctioning marginal fields and the like, all peripheral issues premised on the assumption that prices and profits will remain high, production will continue to grow and there will always be more reserves, more demand for Nigeria’s oil and new investors, whatever we do. In reality, nothing could be farther from the truth. In the last half decade, particularly between 2007 and 2010, so much has changed in the world of energy that you can hardly recognize the landscape anymore.
It is vital to ask the question
In the world of 2010 and immediately ahead, what should really matter to Nigeria regarding energy policy? Let us look around at what has changed in the world of energy lately, and consider how far removed Nigeria’s current energy policy seems to be from it all. But first: Are oil and gas still important in the world?
By most informed projections, resource will remain the engine of growth for most of the world for a long time to come. For Africa, 50 per cent of the continent’s revenue source is still oil; the key to growth in emerging economies as fuel or as revenue source. For Nigeria, we all know the familiar figures – almost all of our foreign earnings and about a quarter of our GDP. But that’s about where the assumptions end.
To start with, oil prices have come off the cliff. The euphoria of the nearly $150 per barrel crude is long over; prices have stayed at half that level for over a year and projections are that they will stay stable for a quite sometime – and for many reasons, some of which are traceable to Nigeria itself. So, the audacity of a three digit price has to now be tempered. In any case, the sad irony of Nigeria is that it always manages to fritter away the bumper, as it just did again. As we speak, the foreign reserves built up on the cusp of high oil prices have been hugely depleted. Energy policy needs to link up with the rest of economic policy on how to reverse this precarious position. You will soon see why this is urgent.
The BP disaster happened
The April 2010 drilling disaster soiled more than just the Gulf of Mexico waters. It changed the way big budget exploration happens the world over. Big players, advance planning, bigger spend and preference for larger projects will mark the new terrain. Out will go speculative exploration; projects not yet sanctioned will have to be re-screened and decisions on marginal opportunities will simply fall into the long grass. Majors will consolidate, risk aversion will take hold and margins must rise to justify higher costs. Where does that leave an entity like Nigeria where country risk is larger-than-life, and where big unknowns like Petroleum Industry Bill lurk?
China changed the story. In the last half decade, China fully took centre stage in world affairs for its monumental growth and hunger for resource to fuel it. Nigeria’s policy makers caught a whiff of this and have remained intoxicated ever since. Rather than articulate a long-term strategy for locking down Nigeria’s wider infrastructural needs with China’s appetite for resources, Nigeria’s policy advisers have been content with second-guessing China, and generating dissonance which only helps to dislodge in-place investment opportunities.
US oil policy turned homeward
In the meantime, US energy policy changed beyond recognition. Chastened by the oil price spike, Nigeria’s largest crude customer, at some 40 percent, actualized her second thoughts and opened new exploration vistas at home, while continuing her strategic stockpile. Despite the Gulf of Mexico misfortune, it should be instructive, indeed, it should alarm Nigeria, that the US has essentially pushed ahead with freeing more players to domestic exploration in pursuit of the long- term philosophy of weaning itself from dependency on oil from risky and distant corners like the Niger Delta. Who would have thought that today, the US would be thinking of re-fitting its import terminals for possible export, even building new ones? For this reason and more, not least the reality that the US economy, hence demand, may stay low, Nigeria’s smugness about its traditional market anchor may be in for a test.
Demand from Europe shrank
The other Western source of demand for Nigeria’s oil and gas, Europe, has since taken a beating. Most European economies have shrunk majorly with the last recession. Budgets have been cut and with it the demand for imported fuels. Yet, Europe and Atlantic markets are where Nigeria has the competitive advantages of vintage relationships and proximity. Asia, where Nigeria stands only a distant chance, is now the centre of gravity, both for new resource supply and for demand; so much for the assumption that there will always be demand.
The global recession happened
One of the strong footings of the capital intensive energy industry is financing. That is exactly what the global recession has upset. Worldwide scarcity of project capital has hurt Nigeria in far more ways than the policy makers realize or admit. Besides shrinking available funds for direct investing in oil and gas projects, it has also eroded the foundations of fledgling growth in key non-oil sectors, like finance and telecoms, which employ large numbers. This has hurt GDP, and put further pressure on the oil and gas sector as the main revenue earner, hence easiest prey to government panic spending and public anger. A country like Nigeria can ill afford this vicious cycle, certainly not at this time.
Nigeria’s energy policy – Shadows versus Vistas by Dozie Arinze (doziearinze@yahoo.com) was first published by Nigeria Energy Intelligence in 2010 and is hereby reproduced by permission due to its relevance to the ongoing reforms in the oil and gas sector.
DOZIE ARINZE