Reforms in Nigeria’s oil sector to generate revenue, fund investment

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The Nigerian government has announced plans for a multibillion-dollar sell-off of state assets in the energy sector, in a push to boost cash flows and improve efficiency across the sector.

Provisions in the 2018 budget, published in early November, set out proposals that allow for the sale of state equity in joint-venture (JV) oil assets, a move officials say will raise N710bn ($2bn).

The additional revenue generated from the reforms will be used to help balance the federal budget and encourage fresh investment in the energy industry.

“The reform is aimed at increasing private sector equity participation to improve efficiencies in the sector and also provides revenue to the government, which will be deployed solely and exclusively for creating new assets in Nigeria,” a statement from the Debt Management Office (DMO) said.

The idea of raising revenue by selling stakes in JV energy assets has been on the table for more than a decade but has always faced significant opposition.

However, the plan was given fresh impetus in 2015, when the Central Bank of Nigeria (CBN) promoted the measure as a way to stimulate economic development and create jobs, offsetting the negative impact of falling oil prices.

Sharper focus on inefficiencies and finances

The proposals signal a significant change in the way the Nigerian state participates in production and ownership structures in its upstream sector.

Most onshore production is undertaken through JVs between the Nigerian National Petroleum Corporation (NNPC) and private entities, while offshore activities are governed by production-sharing contracts (PSCs).

Under the JV system, all equity partners are obliged to contribute to expenses. However, the National Petroleum Investment Management Services (NAPIMS), the arm of the NNPC responsible for funding JVs, has in recent years not always been able to meet its requirements.

The total arrears in the JV system reached $6.8bn last year, although a negotiated settlement saw the amount reduced to $5.1bn by the end of the year. As part of the reform programme, repayment is now expected to be made in crude rather than cash.

The JV approach has also caused complications at the operational level in the form of delays. Companies often find themselves facing extended waiting periods while NAPIMS reviews and approves work plans for JV hectarage.

Moody’s downgrades debt ratings

National efforts to boost energy sector efficiency and financing come on the back of a decline in Nigeria’s oil industry in recent years.

The drop in revenues and lack of diversification contributed to the country’s first recession in more than two decades, and were a major factor behind credit ratings agency Moody’s decision to downgrade Nigeria’s long-term issuer and senior unsecured debt rating from “B1” to “B2” in November.

“The oil shock severely weakened Nigeria’s public finances, with general government revenues suffering a 50% decline between 2014 and 2016 (from 10.5% of GDP to 5.3% respectively),” Moody’s noted.

However, government officials countered that the downgrade had not taken into account the oil sector’s stronger performance of late, the rise in energy prices or the planned asset restructuring.

“Our revenue initiatives are changing the mix of revenue sources available to [the] government from the traditional oil or debt, to a combination of oil, debt and domestic revenue,” a joint statement from the Ministry of Finance, the CBN and the DMO said.

Several recent developments paint a more positive picture for the sector’s future.

The decision by the Organisation of the Petroleum Exporting Countries (OPEC) to scale down oil production has been credited with pushing up global Brent crude prices, which reached a two-year high of $64 per barrel in early November.

Having been given an exemption on quotas until July this year, Nigeria is benefitting from the increased revenue generated by higher prices. The country is looking to stabilise production at the 1.8m-barrel-per-day (bpd) limit set by OPEC, after output dropped to as low as 1.4m bpd in 2016 on the back of damage to infrastructure caused by militants in the Niger Delta.

If the caps are lifted, the government expects production to increase to 2.3m bpd next year, with the budget forecasting oil earnings of N2.4trn ($6.7bn) in 2018, up from the N2trn ($5.6bn) initially projected for this year.

While oil prices may ease in the immediate, they are likely to remain well above the benchmark rate of $45 per barrel set out in the newly tabled budget, helping to support revenue flows into the new year.

This increase also comes amid more positive projections for the broader economy, with Moody’s expecting real GDP growth of 3.3% in 2018, up from an anticipated 1.7% this year.

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