By Likeleli Seitlheko | –
Nigeria has just experienced historic presidential elections marking the first democratic transfer of power in this country. The new president – Muhammadu Buhari – takes over the reins in a very sensitive moment as Nigeria faces multiple challenges including economic woes triggered by the oil price collapse. Given the importance of oil to the economy and government revenues, Buhari will need to re-examine Nigerian oil policy in light of growing US light oil production and lower oil prices.
The rising oil and liquids production from major US shale plays like the Bakken and the Eagle Ford has gradually been replacing imports of crude oil into the US, particularly the light sweet grade which has a similar quality to oil produced from the US shale formations. This downward trend in the US light sweet crude imports has had an especially dramatic impact on African oil producers since the region was a major supplier of light sweet crude to the US – accounting for almost two-thirds of the light sweet crude imported into the US from 2009 to 2013. In fact, 85 percent of the 1.6 million barrels per day (b/d) drop in US crude oil imports between 2009 and 2013 came from the African region. The successful development of shale oil resources in the US is clearly upending oil flow dynamics globally and African producers have to find ways of adapting to the new environment.
Data obtained from the Energy Information Administration (EIA)
Nigeria is a prime example of the challenges faced by African producers as a consequence of the shale oil boom. Between 2004 and 2007, Nigeria supplied more than 1 million b/d of oil to the US – close to half of its crude exports – making the country the fifth largest crude oil exporter to the US trailing only Canada, Saudi Arabia, Mexico, and Venezuela. However, after years of declining quantities, Nigeria’s crude exports to the US averaged only 60,000 b/d in 2014. The loss of the US market is not a trivial matter for Nigeria, nor does it reduce the importance of Nigeria – Africa’s most populous country, largest economy, and largest oil producer and exporter – to the US. The Nigerian petroleum industry, which receives significant investment from western major oil and gas companies, is vital for the functioning of the government. Data from Nigeria’s Ministry of Finance and the International Monetary Fund shows that oil and gas revenue contributes about 70% of the total revenue collected by the federal government. Thus, finding stable long-term export markets to replace the US and absorb any future increases in production is important. However, the country should seriously consider other options like increasing domestic production of refined products and more importantly, diversifying government revenue sources.
Admittedly, the impact of the loss of export volumes to the US during the last three years was softened primarily by rising exports to Europe. However, it is doubtful that the successful absorption of Nigerian crude supplies into Europe will last in the long-term. For one thing, the increase in Nigeria’s crude exports to Europe was partly a consequence of the ongoing instability in Libya, which has negatively impacted Libyan production and exports. The recovery of Libya’s production and exports would most certainly cut into some of the market share that Nigeria has gained in Europe. Additionally, demand from Europe could decline if, as some projections suggest, the European refining sector struggles to compete with refineries located in the Middle East, Russia and the US and is forced to shed capacity. On the other hand, exports to India, the largest importer of Nigeria’s crude, and the rest of Asia did not change much between 2010 and 2013; so it remains an open question how much of Nigeria’s crude exports can be absorbed by the Asian market.
Data obtained from the Nigerian National Petroleum Corporation (NNPC)
Nigeria would be served well if it looked more inwardly at investing in its domestic refining sector. Although Nigeria has an installed refinery capacity of 445,000 b/d and its consumption of refined crude products is only 300,000 b/d, the country is forced to import almost 60% of the crude products consumed in the domestic market because decades of mismanagement have left the refineries dilapidated. Earlier this year, the Nigerian National Petroleum Corporation announced that it would undertake an 18-month rehabilitation program that should, upon completion, enable the refineries to operate at 90% of capacity. The initiative is definitely a step in the right direction but it is too early for optimism about its eventual impact especially given the woeful management track record. More likely to make a meaningful impact in the downstream sector is the new refinery that is planned by Nigeria’s largest company, the Dangote Group, which is expected to come online in 2018 with an initial capacity of 500,000 b/d. Still, the effective functioning of this refinery and the state owned refineries will be contingent on the reduction of pipeline hacking and theft of crude oil and refined products, which will require comprehensive government intervention. Major African crude oil producers like Nigeria are well placed to take advantage of the increasing products consumption in the African region, which has been growing at an average rate of 3% annually. Moreover, the development of the domestic refining sector can aid in job creation.
Beyond the changes within the oil industry, the government of Nigeria also needs to diversify its revenue sources by increasing revenue collection in the non-petroleum sectors. Lower oil prices make the need for tax diversification even more urgent. The recent rebasing of Nigeria’s GDP (changing the GDP base year from 1990 to 2010) has revealed that the country’s economy is bigger, more diverse, and less dependent on oil and gas than previously thought. However, the federal government’s tax revenue as a ratio of the revised GDP is among the lowest in the world, averaging a mere 3.2% in contrast to an average 11% among other lower middle income countries and an average 14% for the Sub-Saharan Africa region. There is clearly room to increase tax revenue, especially in the non-petroleum sectors. The successful implementation of some of the tax reforms proposed in the 2012 National Tax Policy document could help the government to develop a wider tax base and a more effective tax administration system. The proposed changes include creating an electronic nationally integrated database of all taxpayers, replacing income tax with value added tax (VAT) in the non-oil sectors to improve tax compliance, and raising the VAT rate from 5% closer to the 15-18% rate charged by neighbouring West African states. Realization of these proposals will require a lot of work – investing in human capital and putting in place the needed infrastructure – but the tax revenues would go a long way toward providing economic stability through redistribution, investment in government institutions and fortifying national security.
Perhaps the prevailing low oil price, which has put government budgets in several oil producing countries like Nigeria in disarray, might just give the incoming Buhari administration the needed incentive for fast tracking the implementation of the reforms. The changes are necessary for reducing the dependence on oil revenue and generating more revenue for public spending including funding the counter-insurgency effort against Boko Haram in northeast Nigeria.
Likeleli Seitlheko is a graduate fellow with the Baker Institute’s Center for Energy Studies at Rice University
