Home Latest News Nigerian Petroleum Sector: the Way Out, By Ahmed Adamu‎

Nigerian Petroleum Sector: the Way Out, By Ahmed Adamu‎

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Energy diversification, operational refineries, and adequate supply of gas to power turbines will help revive industries and cure the country from its Dutch disease. This will entice investors to come and invest in the country, as the costs of production will be cheaper, while the Naira as a currency is equally cheap (courtesy of the recent devaluation of the currency). However, with the continuous flowing of foreign investments into the country, the demand for the Naira will ultimately increase, and as the Nigerian foreign reserves increase, the value of the Naira will eventually appreciate and normalise.

Nigeria is the 12th largest crude oil producer in the world, contributing about three percent of the global crude oil production, which make it the largest crude oil producer in Africa. It is also the ninth country, in terms of gas reserves in the world, making it have the largest gas reserve in Africa and also contribute about eight percent of the global liquefied natural gas supply.

However, Nigeria is ranked as the 185th country in terms of electricity per capita, with one Nigerian having an average access to electricity of 149kWh (averagely three hours of electricity per day depending on the appliances and manner of usage).

Despite its crude oil reserves profile and its installed refining capacity of 445,000 barrels per day, yet 70% of its domestic petroleum products demand are met through importation. This cost the country about $62 billion in 2014, an amount sufficient to meet the initial investment requirement for building four refinery plants, each with the operating capacity of the combined capacities of the existing dilapidating refineries in the country. This amount is also higher than what the country received (averagely around $56 billion) from crude oil exports in the same year.

As at 2014, Nigeria imported 886 million barrels of petroleum products, making it the 13th largest petroleum importer in the world. For each barrel of petrol imported, the Nigerian government paid at least $8 per barrel, which tallied the total fuel subsidy payment to about $7 billion in 2014.

These elephantine figures sound outrageous to so many developing countries that wish if they had that much, they could have used it a lot better. The wealth competition between nations is partly motivated to improve the wellbeing and development of citizens, but in Nigeria, the country’s oil and gas resources have caused more harms than benefits to the people.

Recently, hundreds were on fuel queues ready to pay any price for fuel. Millions lack access to potable water, talk less of electricity, as mentioned above.

The corruption and mismanagement of petroleum funds are responsible for these plights, and it appears obvious that Nigeria cannot afford to continue with the petroleum subsidy.

It is only when the price of crude oil is at a price below $40 that the Nigerian government cannot afford to pay for subsidy, and because Nigeria is exposed to petroleum price volatilities and market uncertainties, petroleum subsidy can never be sustainable.

With the increasing demand for petroleum products signalling more subsidy payments, such cannot be feasible as the expectation on the government is at the highest level ever. The pending austerity measure will have to scrap all subsidy payments.

However, with immediate effect, savings from the total removal of subsidy has to be invested in reviving and building the sufficient refining capacity required to meet the average 33 million barrels of petrol demand in the country, so that the petrol market price per litre can still be within an affordable price range within the country, devoid of subsidy.

If subsidy is removed without corresponding sufficient refining capacities, then Nigerians should be ready to pay N200 per litre of petrol on the average, or even more depending on market fluctuations.

With shale oil and gas discoveries, Nigerian oil and gas may no longer be the favoured products they used to be, meaning a significant decline in national revenue resulting from the fall of crude oil prices. This will also mean that the government will no longer have sufficient income to meet up with skyrocketing subsidy payments. Thank God, this year there is no provision for fuel subsidy in the country’s budget.

The only feasible option is to refine enough of what we require and utilise other petroleum reserves domestically to meet residential, commercial, industrial and transport sector demands, thereby propelling the economy, boosting export and maintain a reasonable level of export earnings.

Though, Nigeria’s existing oil reserves will be exhausted by 2068 (at the current level of production and reserves), we have to start thinking about alternatives and new discoveries.

Natural gas reserves are 90 times more than the oil reserves in the country, but the required infrastructure to make the natural gas useful are not there; hence, it is flared away, making the country the second worst in terms of gas flaring in the world. If more gas infrastructures are put in place and the gas-power turbines (including the new ones) are supplied with sufficient gas feeds, then electricity access will increase, jobs will be created, the costs of production of goods and services will reduce, the wellbeing of the people will increase, and the economy would thrive.

Energy diversification, operational refineries, and adequate supply of gas to power turbines will help revive industries and cure the country from its Dutch disease. This will entice investors to come and invest in the country, as the costs of production will be cheaper, while the Naira as a currency is equally cheap (courtesy of the recent devaluation of the currency). However, with the continuous flowing of foreign investments into the country, the demand for the Naira will ultimately increase, and as the Nigerian foreign reserves increase, the value of the Naira will eventually appreciate and normalise.

As we prepare for a new Nigeria, we have to be extra cautious and decisive about important decisions to be made, especially those relating to the petroleum and energy sector.

Nigerians must be ready to adapt to some difficult times for a while and wait for the benefits of the resulting effects of these difficult decisions. All existing refineries must be made to start operating at above 70 percent of their capacities (which is currently at 16 percent), whilst new ones must be built, the subsidy of petrol totally removed, the industrial sector bailed out, and the economy diversified.

Ahmed Adamu is a petroleum economist and President of the Commonwealth Youth Council.

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