… Budgets must downscale oil income
Government should begin deemphasizing the role of petroleum resources in the funding the nation’s annual fiscal projections and instead apply the commodity in catalyzing domestic industrial activities to broaden the nation’s tax base or sustainable revenue.
Re-evaluation of the role of petroleum in the domestic economy has also become urgent in the face of energy transition, falling global demand for petroleum energy and the attendant pull on prices.
The Oracle Today reports that the price of crude oil in the international market has plunged from the peak of $148 per barrel in 2008 to current price of about $40 per barrel, imposing financial pressure on oil dependent economies mainly hosted in the Organization of Petroleum Exporting Countries (OPEC).
The prevailing financial squeeze resulting from drop in oil revenue has also stirred cost dispute in the domestic petroleum industry, with the Nigerian National Petroleum corporation (NNPC) attacking its partners over operating cost and low returns from ventures.
But one of Nigeria’s eminent industry analysts and petroleum industry investor, Mr Austin Avuru, thinks that the revenue crisis currently plaguing the country transcends operating cost templates in the oil and gas sector to the pressing need for the government to switch the country from rental to industrial economy.
He said in an exclusive chat with The Oracle Today that it is already very late for the country to continue relying on falling rental income from natural resources to fund ever increasing government expenditure.
Mr Avuru stated that oil and gas would have to become a catalyst for generating a much larger economic base for manufacturing, heavy industries, agriculture, electricity generation and sundery commercial activities.
“Summary of what I am saying is that we have done 50 years of primary oil and gas export purely for revenue. We are now moving into the next 50 years where oil and gas would have to become a catalyst for generating a much larger economic base for manufacturing, heavy industries, agriculture, electricity generation and others in that direction.
“So, anybody investing or coming into the Nigerian oil and gas sector now should know that the real opportunities are in midstream processing and gas to the domestic market; infrastructure to deliver petroleum products from refineries to end users; infrastructure to deliver gas to end users; infrastructure to deliver electricity to everybody. And every time I talking about domestic users I am referring to the entire West African region as one domestic market.”
In capturing Nigeria’s economic progression across decades, Mr Avuru regretted that the country has not been able to utilize her raw materials for industrial production, pointing out that successive governments of the federation have focused on export revenue in preference to domestic manufacturing.
The funding model that draws export revenue from commodity, he said, has made the country dependent on rental income rather than developing efficient economic model that would have taken advantage of the presence of abundant raw commodities to drive domestic manufacturing.
He argued that application of commodities in manufacturing and sundry production processes holds immense potential to develop and deepen domestic industrial base, broaden government’s tax income sphere and propel growth in the gross domestic product (GDP).
“I will like to take this in the context of the overall economy, not just oil and gas. In the past 60 to 62 years after independence, out economy has been built on export of primary products. Before oil and gas it was raw agricultural produce. So, peasant farmed cocoa, groundnuts, palm and others earned export revenue to fund our economy.
“Then, when oil and gas came it became easier to earn rental income from petroleum resources. And it was huge. So, from 1966 to 1970 till now we have funded our economy from rental revenue from oil and gas; accounting for about 70 to 80 percent of our revenues and about 90 percent of our foreign exchange.
“Now, in the past 20 years, that paradigm should have shifted. But because there was still easy rental revenue to depend on, we didn’t put in the hard work and discipline required to shift that paradigm. Now, a combination of this COVID and low oil prices has brought to reality on our laps.”
Mr Avuru stressed the need for government to propel a shift in the role of petroleum resources in the economy from funding the budget to propelling industrial production. He canvassed for deliberate polices that would lay incentives for in-country processing of petroleum to produce a range of productions.
The advantage, he argued, is that government would earn greater tax income from robust industrial activities that would be developed along the full midstream value chain than from total export of raw hydrocarbon liquids and natural gas.
The new value proposition, he said, would scale down the role of petroleum resources in funding annual government budgets and amplify industrial application of all commodities in the domestic business environment as the real growth propeller.
“At the end of this year we are going to find out that oil and gas revenues as a percent of the 2020 budget of N10.8 trillion will not be more than 30 percent. In 2019, it was 43 percent.
“So, the reality today is that, going forward with the trend of projections, a combination of relatively low oil price and high production cost will mean that incremental rent available to government would have shrunk to a point where you are not likely to see oil and gas revenue accounting for more than 40 percent of our budget anymore. So, that is reality check number one.
“Therefore, what do we do? So, rather than rely on oil and gas primary source of revenue, we now have to rely on oil and gas as a major catalyst for further economic activity. It is the larger economic activity that will then widen our tax base and generate the additional tax income that will fill the gap that is now being created by shrinking oil and gas revenue.
“So, for instance, instead of producing crude oil and sending it out, in the next five years this country has to become the hub for crude oil refining across western and central Africa. I do not see why any country in western Africa even central Africa would be importing petroleum products from Europe if we get our acts right.”
Mr Avuru also called on the government to reposition gas as critical role player in the country’s medium to long term economic projections, explaining that Nigeria’s vast gas reserves holds immense potentials for powering industrial and commercial activities in the domestic, regional and continental economies.
“Gas is the most critical going forward. Nigeria alone still needs between 15 and 16 gigawatts of electricity. That is about 3.0 billion cubic feet of gas per day (3Bcf/d) to generate that kind of electricity. Another 1.5 gigawatts would probably power the rest of West Africa. That would take about 300 million cubic feet of gas per day (300 mmscf/d).
“So, what it means is that about 3.0 Bfc/d of gas could generate the electricity that would move the entire West African sub-region out of darkness. Out of darkness means creating a wide range of opportunities in efficient mining, efficient manufacturing, heavy industries and others. And that also means that fertilizers will be abundant for revival of the agricultural sector.”
Mr Avuru still holds strong contention that Nigeria and African neighbours would still need greater oil and gas in their energy mix in the foreseeable future despite the impending energy transition and advent of electric cars dreaded to wipe off huge demand off the oil market.
He pointed out that whereas the role of renewable energy in the global energy mix would continue to rise, parallel shifts in demand patterns would place Africa and emerging economies at the centre of oil demand. The development, he stated, raises the challenge for African economies to evolve capacity to produce facilities that provide utility for available resources.
“Those are the opportunities now and that is where the shift is headed. It is not just saying ‘oh energy transition and we forget about oil and gas and begin to do renewable.’ No, energy transition means several things to many people.
“In 20 years when you have only electric cars in Europe, you are not likely to have only electric cars in Africa. Somebody still has to provide the vehicles that the residual vehicles that are not electric will use. Somebody still has to address the shortage of electricity that is needed even for the electric cars. So, the real shift is in defining the role of oil and gas in our own economy and not necessarily assuming that oil and gas have no role to play.”
