Oil prices, politics and the voting public: Connecting through finance
The economics of the tumbling oil prices are perhaps best understood from the perspective of ‘energy producers’ and ‘energy importers’; a standpoint where dwindling revenues threaten incomes in the former group; where lower fuel prices, improved incomes, etc, are the gains to importer nations. Nigeria is within the former grouping.
World demand for energy is projected to continue to increase. Most if not all of the oil majors have set out their projections to at least 2035; nearly all show demand moving upward, both in developed and emerging markets; including an increased LNG demand. In its “The Outlook for Energy: A view to 2040” Exxon Mobil for instance forecasts the demand for LNG as tripling in that period; driven majorly by gas for electricity generation. In fact with gas projected to become the second most favored energy source after oil, its prospects are very bright indeed.
Ordinarily, like any other producer an increase in energy demand ought to portend positives for Nigeria; in other words, a boost to GDP growth. However our position is rather opaque. The expression ‘Nigeria is more of a gas province with some oil’ is well worn in energy circles. Apart from gas for export purposes however, the resource has fared less favorably overall in the country’s economic profile; obscured almost completely by oil production.
In the meantime, on account of external pressures, the gas export market is itself taking some hits. Nigeria’s contributions to global LNG while still in the order of 22MMTPA, representing around 8% of the total world LNG market, going by the views of industry experts that position is under threat. “Externally, the shale phenomenon …poses[s] significant competition and threat to our business”; are the comments of Mr Babs Omotowa; address at the Transcorp Hilton Abuja March 13, 2014 on the occasion of his company’s 3000th cargo.
Hydrocarbons remain Nigeria’s main income earner and that being so fluctuations in prices have immediate consequences. As one of a handful of countries whose economies are tied almost exclusively to oil revenues, the consequences of the downward spiral in price are felt here more than anywhere. Russia and Venezuela are among the countries similarly exposed. In fact, with some experts predicting that prices could touch as low as between $35-$40, the threats to income receipts are all the more vivid.
The factors precipitating the price slump are not the focus of this paper. That said though, appreciating the changing dynamic helps grasp an equally pressing issue: the urgent need to diversify the nation’s income portfolio. Not so much a focus on the non-oil sectors of the economy; rather, a combine of falling prices, a shrinking international market share, the coming on stream of new suppliers, etc, the writer’s submission is that developing the nation’s domestic gas sub-sector must become the new challenge; for the investment opportunities it presents and its potential to achieve real and lasting growth. Gas can no longer be ignored as a minor resource.
In recent times ‘diversification’ has become a mantra of sorts. Indeed, if the comments attributed to the coordinating Minister of the Economy Ngozi Okonjo-Iweala that “Nigerians henceforth ought to view Nigeria as a non-oil producing nation” are anything to go by, a submission that government policy has turned full circle is credible; both the public and private sectors are exploring opportunities outside of oil & gas. Agriculture, ICT, SME’s are among the sectors identified as holding promise. The Federal Government’s recent Nigeria Agricultural Transformation Agenda Support Programme approved in October 2014, tasked with the objective to boost local food production is mentioned by way of example; it confirms the administration’s determination in so far as Agriculture is concerned.
Diversification however will not be achieved overnight. The opportunities to reshape our economic profile are numerous; however the investment climate has to be conducive and the ready opportunities in the domestic gas sub-sector must not to be missed. Local demand for gas currently at around 3000 mscfd and projected to rise significantly beyond that figure, the issue is whether we are positioned to meet it.
The title of Ejiofor Alike’s article in the Thisday Newspaper December 16, 2014, ‘Gas as a fall back for falling oil prices’, states the issue remarkably well. It is a submission with which this writer wholeheartedly agrees. In fact, recalling an earlier write up also touching on gas development and its comment that “…Nigeria’s response lies in developing its domestic gas markets. The Government is enjoined to focus more in that direction; to pursue the GMP objectives more aggressively, deepen domestic gas utilization, secure new markets and ultimately, diversification of the nation’s revenue base”, this writer is now more fortified in his views as to where the opportunities lie.
LNG in Nigeria was an agenda to reduce gas flaring and to harness gas potentials. Although the NLNG Limited is the only such project to have taken off, no one is in doubt about its success. NLNG presently generates in the order of $12billion annually to government coffers.
While investments in domestic gas have grown in recent years, many of the problems that have bedeviled the sector are still present. The 2013 power sector privatization in some ways underscores the point. The unbundling was very successful. The ultimate success of that exercise however is tied to an availability of gas to power the plants; most of which are thermal. The gaps are as regards the pipelines, processing plants, storage, etc.
Writing in the Businessday October 28, 2014, the MD of Nigeria LNG Limited, Mr. Babs Omotowa, assessing the economy sequel to the GDP rebasing in earlier in 2014, described the nation’s fundamentals as strong. In truth he is among those positioned to make the more accurate of assessments; such has been his company’s success. Tracing the history of NLNG from inception, to the growth anticipated from the long awaited train 7, he invited Nigeria to take a cue from NLNG. The writer hopes the administration will take heed. The explosion of shale gas in the US, changing its fortunes almost overnight is another example of the opportunities potentially open to us given the vastness of our gas resources.
The sector however will not develop itself; investment and finance is the key. It is trite saying that gas projects are capital intensive; project thresholds run into millions of dollars; the proposed Trans-Nigeria gas pipeline at $5b is one example; to deliver gas to Northern and Eastern parts of the country. In Nigeria oil & gas developments have traditionally been funded from local banks; a source often limited by capacity challenges, where loan tenures are typically between 3-5 years. Although there are signs of an improved appetite for upstream finance, compared to lending enjoyed by foreign competitors, typically for periods of between 10 and 20 years, Nigerian banks have some catching up to do.
It is curious that notwithstanding local challenges, project promoters are yet to embrace some of the more sophisticated options now the hallmark of long term financing elsewhere such as asset backed securitization; a model where finance is structured based on an entity’s projected receivables. And although securitization is not without some contractual complexities, the more immediate hurdle is the willingness of the nation’s financial regulators, in particular the Central Bank (CBN), to embrace it as a model and ground the requisite framework.
As the 2015 elections draw closer, it is evident the falling oil prices are redefining the issues. ‘Power’ is at the forefront. Campaign speeches are replete with assurances of gas and power sector developments; each promising to outdo the others. What seems to be missing however, are the financing details; in other words the specifics as to how the nation will achieve and sustain power generation in excess of the hitherto erratic MW4500 maximum.
Domestic gas development is indeed a fall back for the falling prices, offering an immediate option to secure Nigeria’s economic/energy future; its gas and power sector goals and wider diversification agenda.
As the parties continue on the campaign trail, and as the public prepares to cast its vote, accepting the inability of budget allocations to achieve desired growth, and appreciating the limits of the existing financial framework to entice private sector participation into the gas sector, the responsibility falls to the public to ask those clamouring for our votes to speak directly on how they intend to meet their promises; especially the financing of domestic gas developments. It also calls for the regulators to appreciate that financing of capital projects is the missing link; the framework has to be shored up.
“Gas business doesn’t only position us as a serious contributor to the energy economy; it is a stable source of revenue too” are the comments of Austin Avuru, the CEO of Nigeria’s foremost indigenous oil producer, SEPLAT in an interview given to the Guardian Newspaper January 25, 2015; another cue for Nigeria perhaps?
Olawale Adebambo; Partner Perchstone & Graeys, Solicitors & Advocates