One of the first major tasks the administration of Gen. Muhammadu Buhari will have to contend with will be how to finance the 2015 budget in the wake of low oil price and rising threats from declining revenue.
This becomes very critical when viewed against the backdrop of the tough economic conditions witnessed over the last couple of months in the country, especially in the area of declining crude oil and gas receipts and Federal Government’s inability to meet some of its financial obligations.
It was bad enough that the 2015 budget was being passed more than four months into the year, and was passed by the House of Representatives some days ago at a higher spend rate. The House increased the budget to N4.493 trillion from the N4.358 trillion proposed by the Executive, without taking into consideration the prevailing volatility in crude oil prices. The House also removed the provisions for petroleum subsidy.
Key highlights of the budget passed by the House of Representatives include: N2.607 trillion for recurrent (non-debt) expenditure; N556.995 billion for capital expenditure, N375.616 billion for statutory transfer while N953.620 billion was allocated for debt service.
The budget was passed on the basis of crude oil sales at $53 per barrel, production estimate of 2.2782 million barrels per day, and an exchange rate of N190 to the dollar. This led to a deficit of N1.075 trillion, representing 1.12 per cent of the country’s Gross Domestic Product, GDP.
Initial proposal
Nigerian Government, guided by the declining oil price, had proposed aggregate budget revenue of N3.602 trillion made up of oil revenue of N1.918 trillion and non-oil revenues of N1.684 to fund aggregate budget expenditure of N4.46 trillion inclusive of SURE-P. The expenditure figure, according to the Minister of Finance, Dr. Ngozi Okonjo-Iweala, comprised N412 billion for Statutory Transfers, N943 billion for Debt Service, N2.616 trillion for Recurrent (Non-Debt) and N634 billion for Capital Expenditure (inclusive of SURE-P).
The Government had earlier envisaged a fiscal deficit of N755 billion, or 0.79 per cent of GDP in 2015, down from N994 billion or 1.24 per cent of GDP in the 2014 Budget. According to the Finance Minister, this deficit is well under the three per cent of GDP encapsulated in the Fiscal Responsibility Act 2007, which is also the international norm.
She said, “Projected fiscal deficit in 2015 is 0.79 per cent of GDP and it will remain under one per cent of GDP in the medium-term. This 2015 deficit of N755 billion, is to be financed by domestic borrowing of N570 billion, and N255 billion from other sources such as the Stabilisation Fund, signature bonuses, sale of government properties, and privatisation proceeds.”
Palliatives for oil crash
To fund the budget and prevent a decline in the country’s revenue, the Goodluck Jonathan’s administration lined up a number of initiatives to cushion against the effect of the low oil price. Specifically, Okonjo-Iweala had announced a number of austerity measures, including ban on foreign travels by civil servants unless for purposes that could be fully defended as absolutely necessary.
The Government also cancelled foreign training programmes, proposing that all trainings will be done in-country, while it envisaged the elimination of duplication among the functions of the Ministries, Departments and Agencies, MDAs, by working on the Steve Oronsaye Report. Part of the immediate steps to cushion the fall in oil revenue Okonjo-Iweala said, was to significantly increase non-oil revenue in the country, while announcing an aggressive tax administration in which private jets, yachts, champagne and a list of others to be announced would be taxed.
It is anticipated that the Senate’s version and the harmonised version of the budget might be slightly different from the one passed by the House. The challenge however is how the proposed aggregate revenue of N3.602 trillion made up of oil revenue of N1.918 trillion in the budget would be achieved in the face of dwindling revenues due to the volatility in oil price.
Immediate impact
The low crude oil price has started to take its toll on Nigeria’s economy, triggering a huge decline in the country’s foreign reserves and engendering a free fall of the naira, and a host of others. Already, in the April Federation Account Allocation Committee, FAAC, meeting, it was stated that the country recorded a revenue shortfall of N 86.42 billion, due to a N78.36 billion decline from oil revenue.
To make matters worse, oil majors recently warned that the country risks losing up to $10 billion about N2 trillion in revenue from oil and gas if oil traded around an average of $53 per barrel in 2015. The average oil price between January and April 2015 was about $50 per barrel, with concerns that it might slide even lower.
Particularly, oil and gas companies in the country are already considering cutting down on their investments in the country, while a number of oil and gas projects in the country have been suspended. These are grave signs that financing the budget would pose a herculean task. Also few of the oil companies have already begun to cut down on their staff strength as well as slashing salaries, a development that portends a dangerous signal for the economy.
Furthermore, oil companies are now giving conditions for additional investments in Nigeria, warning that they might be forced to discontinue some of their operations and activities unless certain conditions were met by the Federal Government.
Predictions of gloom
Specifically, PricewaterhouseCoopers, PWC, in a report titled, ‘Fit for $50 oil in Africa: Will the boom go bust?” warned that countries in West Africa, which are already highly dependent on oil exports will be faced with potential austerity measures and budget reviews. According to the report, oil revenues make up a large portion of the GDP for many African countries and if the current price environment persists, this could result in slowed development.
Written by Chris Bredenhann, PwC Africa Oil & Gas Advisory Leader, and Derek Boulware, Senior Manager, Oil & Gas Africa, the report maintained that oil and gas explorers will be scrutinising and likely reducing their budgets and deciding where to allocate their limited capital spend given the new price environment.
It added that this might include rationalisation of portfolios, in addition to adopting general cost-cutting measures on discretionary capital expenditure. PwC further stated that areas where limited infrastructure is currently in place are also likely to suffer, due to the fact that external investment is needed to develop the requisite infrastructure.
It said, “In these areas, development of existing discoveries may end up on ice unless there is a domestic need for the resource. Host governments in Africa could also see a major impact on their bottom lines caused by the suppressed price environment. “Those whose economies are not well diversified will be hardest hit and may have to consider austerity measures and a revision of the government’s budget.”
It further stated that Oilfield service (OFS) companies, in spite of cutting back on their spending, would also be under extreme pressure by oil companies to drop their prices. “The cost of contracting to conduct data acquisition, such as 2D and 3D seismic surveys already dropped by 65 per cent between 2013 and 2014. Some predict that the cost of hiring offshore rigs may fall by nearly 40 per cent,” they said.
In general, PwC agreed that additional exploration may be put on hold, adding however that development projects are expected to continue as planned.
IOCs’ chiefs speak
Also commenting on the development, Chairperson of the Oil Producer Trade Section, OPTS of the Lagos Chamber of Commerce and Industry, LCCI, Ms. Elisabeth Proust, noted that Nigeria has already started feeling the impact of the low oil price. She said this was evident in the dwindling revenue and the slowing down or outright cancellation of a number of infrastructure projects across the country.
She said, “We estimate that if crude oil prices average $53 per barrel in 2015, compared to $77.5 per barrel in 2014, the Federal Government of Nigeria’s oil and gas revenue will decline by an equivalent of $10 billion this year, or a gut-wrenching equivalent of 30 per cent.” Proust further stated that low crude oil prices have significantly reduced the level of investable funds of oil and gas operators, especially at a time when competition for investments is sharpening, and has also made it very difficult for Nigeria to meet its Joint Venture funding needs.
To continue investing in Nigeria and for the oil and gas industry to unlock its potential, positioning Nigeria to attract the required investment, Proust urged the Government to create a conducive business environment. It should also provide the necessary funding of joint ventures, JVs, with the Nigerian National Petroleum Corporation, NNPC, and ensure globally competitive fiscals and domestic gas process.
According to Proust, unlocking the oil and gas industry’s potential could add about 1.5 million barrels of oil equivalent production by 2020, thereby growing the country’s revenue profile. Similarly, Vice President, Nigeria and Gabon, Shell Upstream International, Markus Droll, said the low oil price has brought about a changing economic environment and rising cost.
For oil majors to continue investing in the country, Droll called for a review of the fiscal environment in order to ensure an attractive investment climate for all stakeholders in the industry. He argued that fiscal stability and fiscal predictability remain even more crucial today than they did last year, adding that government revenue can be forecast reliably and all parts of the sector can actually plan their work load.
“If we succeed in this, then I am confident that Nigeria will be able to attract the capital that is needed. If we fail our few investments will dry up fast and production level will decline shortly after that,” he stated. He further called for increased security around oil facilities, deployment of effective strategies to curb oil theft, increased funding for capital projects and ongoing projects.
“Nigeria has one of the oldest and most impressive oil industries in Africa but requires focus on effective management of the industry and alignment of all the key players. The success is there to be achieved, but it will require hard work and importantly it will require cooperation,” Droll added.
On his part, Managing Director, Shell Petroleum Development Company, SPDC, Mr. Osagie Okunbor, called for a renegotiation of terms among the operators and the government, as majority of the contracts were entered into before the decline in oil prices. According to him, if the basic issue of proliferation of regulatory agencies, tenure of oil licences and renewals are not resolved, no shareholder will agree to commit investment, especially at this period of lower oil prices.
He said, “With oil prices where they are and with all the uncertainties around, this is hardly the time for parties on the government and industry sides to be doing their individual things. We really need to come together and agree on the priorities we have.
“We all have a programme that we have agreed for 2015. Most of that essentially started before this radical drop in prices. So, both sides need to sit together and say what is the impact of this or what do we sensibly do going forward such that we don’t get into the business of stopping projects half-way and we end up incurring more cost.”
Managing Director, ExxonMobil Companies in Nigeria, Mr. Nolan O’Neal, decried the prolonged tendering process in Nigeria compared to other countries, and called on the authorities to put in place efforts to address this issue.
NNPC stresses prioritisation
However, the Group Coordinator, Corporate Planning & Strategy, NNPC, Mr. Tim Okon, emphasized the need for Government to identify a clear set of scenarios for where oil prices may go. He also stressed the need to develop a set of practical options on how to respond to continuous evolutions in the prices at present and in the future.
According to him, hard times call for a hard-nosed examination of existing plans to spend large significant capital in the oil and gas sector. He said, “It will be important for the Federal Government of Nigeria and for the NNPC to maintain a prudent level of capital spending to support cash generation in the medium term and to develop critical infrastructure to build the country’s gas and power sector.
“However, we also believe projects in Nigeria currently exhibit low capital productivity and there is much you can do in terms of right scoping, design-to-value, more effective contractor management and lean construction in order to deliver projects at lower cost.” He maintained that even with falling gas prices Nigerian liquefied natural gas, LNG projects are likely to be profitable, noting however, that this will depend on their ability to come on stream on time and on budget.
According to him, the continued uncertainty around the future of Brass, Olokola LNG, and Train 7 of the NLNG will not help Nigeria establish itself as a credible seller of LNG in the global markets. Okon also called on the NNPC to take a rigorous look at its overall capital expenditure, CAPEX programme so that non-critical projects are cancelled or deferred while the truly critical project portfolio is pursued with an intensive cost optimisation approach.
According to him, now is the time to challenge and overhaul expensive design, procurement and construction practices and agreements to aggressively strip out costs and reset performance targets to get the best return on investment.
He said, “Falling global prices for oil and gas means countries as well as companies come under pressure to reduce costs. With global investors critically re-examining their asset and investment portfolio, there will be increasing pressure on governments to reduce their take. However, as important as the level of taxation is the predictability of the regulatory regime.
“Similarly, low oil prices have also elicited government’s response. Measures, such as; Budget Cuts, Subsidy Removals, Liquidation of Assets etc. have all been employed by various Governments in order to minimise the impact of oil prices.
“The Nigerian government and the NNPC are also advised to follow suit. Recommendations include; passage of the Petroleum Industry Bill, restructure public finances, subsidy removal on petroleum products, focus on profitable subsidiaries, review CAPEX spending, explore Asian markets, domestic refinery optimisation and deliver export and domestic gas projects.”
It remains to be seen if these views would be taken into consideration by the Federal Government, and if stakeholders will make effective contributions to growing Nigeria’s revenue base to safeguard the economy against the effect of falling oil prices.
It was bad enough that the 2015 budget was being passed more than four months into the year, and was passed by the House of Representatives some days ago at a higher spend rate. The House increased the budget to N4.493 trillion from the N4.358 trillion proposed by the Executive, without taking into consideration the prevailing volatility in crude oil prices. The House also removed the provisions for petroleum subsidy.
Key highlights of the budget passed by the House of Representatives include: N2.607 trillion for recurrent (non-debt) expenditure; N556.995 billion for capital expenditure, N375.616 billion for statutory transfer while N953.620 billion was allocated for debt service.
The budget was passed on the basis of crude oil sales at $53 per barrel, production estimate of 2.2782 million barrels per day, and an exchange rate of N190 to the dollar. This led to a deficit of N1.075 trillion, representing 1.12 per cent of the country’s Gross Domestic Product, GDP.
Initial proposal
Nigerian Government, guided by the declining oil price, had proposed aggregate budget revenue of N3.602 trillion made up of oil revenue of N1.918 trillion and non-oil revenues of N1.684 to fund aggregate budget expenditure of N4.46 trillion inclusive of SURE-P. The expenditure figure, according to the Minister of Finance, Dr. Ngozi Okonjo-Iweala, comprised N412 billion for Statutory Transfers, N943 billion for Debt Service, N2.616 trillion for Recurrent (Non-Debt) and N634 billion for Capital Expenditure (inclusive of SURE-P).
The Government had earlier envisaged a fiscal deficit of N755 billion, or 0.79 per cent of GDP in 2015, down from N994 billion or 1.24 per cent of GDP in the 2014 Budget. According to the Finance Minister, this deficit is well under the three per cent of GDP encapsulated in the Fiscal Responsibility Act 2007, which is also the international norm.
She said, “Projected fiscal deficit in 2015 is 0.79 per cent of GDP and it will remain under one per cent of GDP in the medium-term. This 2015 deficit of N755 billion, is to be financed by domestic borrowing of N570 billion, and N255 billion from other sources such as the Stabilisation Fund, signature bonuses, sale of government properties, and privatisation proceeds.”
Palliatives for oil crash
To fund the budget and prevent a decline in the country’s revenue, the Goodluck Jonathan’s administration lined up a number of initiatives to cushion against the effect of the low oil price. Specifically, Okonjo-Iweala had announced a number of austerity measures, including ban on foreign travels by civil servants unless for purposes that could be fully defended as absolutely necessary.
The Government also cancelled foreign training programmes, proposing that all trainings will be done in-country, while it envisaged the elimination of duplication among the functions of the Ministries, Departments and Agencies, MDAs, by working on the Steve Oronsaye Report. Part of the immediate steps to cushion the fall in oil revenue Okonjo-Iweala said, was to significantly increase non-oil revenue in the country, while announcing an aggressive tax administration in which private jets, yachts, champagne and a list of others to be announced would be taxed.
It is anticipated that the Senate’s version and the harmonised version of the budget might be slightly different from the one passed by the House. The challenge however is how the proposed aggregate revenue of N3.602 trillion made up of oil revenue of N1.918 trillion in the budget would be achieved in the face of dwindling revenues due to the volatility in oil price.
Immediate impact
The low crude oil price has started to take its toll on Nigeria’s economy, triggering a huge decline in the country’s foreign reserves and engendering a free fall of the naira, and a host of others. Already, in the April Federation Account Allocation Committee, FAAC, meeting, it was stated that the country recorded a revenue shortfall of N 86.42 billion, due to a N78.36 billion decline from oil revenue.
To make matters worse, oil majors recently warned that the country risks losing up to $10 billion about N2 trillion in revenue from oil and gas if oil traded around an average of $53 per barrel in 2015. The average oil price between January and April 2015 was about $50 per barrel, with concerns that it might slide even lower.
Particularly, oil and gas companies in the country are already considering cutting down on their investments in the country, while a number of oil and gas projects in the country have been suspended. These are grave signs that financing the budget would pose a herculean task. Also few of the oil companies have already begun to cut down on their staff strength as well as slashing salaries, a development that portends a dangerous signal for the economy.
Furthermore, oil companies are now giving conditions for additional investments in Nigeria, warning that they might be forced to discontinue some of their operations and activities unless certain conditions were met by the Federal Government.
Predictions of gloom
Specifically, PricewaterhouseCoopers, PWC, in a report titled, ‘Fit for $50 oil in Africa: Will the boom go bust?” warned that countries in West Africa, which are already highly dependent on oil exports will be faced with potential austerity measures and budget reviews. According to the report, oil revenues make up a large portion of the GDP for many African countries and if the current price environment persists, this could result in slowed development.
Written by Chris Bredenhann, PwC Africa Oil & Gas Advisory Leader, and Derek Boulware, Senior Manager, Oil & Gas Africa, the report maintained that oil and gas explorers will be scrutinising and likely reducing their budgets and deciding where to allocate their limited capital spend given the new price environment.
It added that this might include rationalisation of portfolios, in addition to adopting general cost-cutting measures on discretionary capital expenditure. PwC further stated that areas where limited infrastructure is currently in place are also likely to suffer, due to the fact that external investment is needed to develop the requisite infrastructure.
It said, “In these areas, development of existing discoveries may end up on ice unless there is a domestic need for the resource. Host governments in Africa could also see a major impact on their bottom lines caused by the suppressed price environment. “Those whose economies are not well diversified will be hardest hit and may have to consider austerity measures and a revision of the government’s budget.”
It further stated that Oilfield service (OFS) companies, in spite of cutting back on their spending, would also be under extreme pressure by oil companies to drop their prices. “The cost of contracting to conduct data acquisition, such as 2D and 3D seismic surveys already dropped by 65 per cent between 2013 and 2014. Some predict that the cost of hiring offshore rigs may fall by nearly 40 per cent,” they said.
In general, PwC agreed that additional exploration may be put on hold, adding however that development projects are expected to continue as planned.
IOCs’ chiefs speak
Also commenting on the development, Chairperson of the Oil Producer Trade Section, OPTS of the Lagos Chamber of Commerce and Industry, LCCI, Ms. Elisabeth Proust, noted that Nigeria has already started feeling the impact of the low oil price. She said this was evident in the dwindling revenue and the slowing down or outright cancellation of a number of infrastructure projects across the country.
She said, “We estimate that if crude oil prices average $53 per barrel in 2015, compared to $77.5 per barrel in 2014, the Federal Government of Nigeria’s oil and gas revenue will decline by an equivalent of $10 billion this year, or a gut-wrenching equivalent of 30 per cent.” Proust further stated that low crude oil prices have significantly reduced the level of investable funds of oil and gas operators, especially at a time when competition for investments is sharpening, and has also made it very difficult for Nigeria to meet its Joint Venture funding needs.
To continue investing in Nigeria and for the oil and gas industry to unlock its potential, positioning Nigeria to attract the required investment, Proust urged the Government to create a conducive business environment. It should also provide the necessary funding of joint ventures, JVs, with the Nigerian National Petroleum Corporation, NNPC, and ensure globally competitive fiscals and domestic gas process.
According to Proust, unlocking the oil and gas industry’s potential could add about 1.5 million barrels of oil equivalent production by 2020, thereby growing the country’s revenue profile. Similarly, Vice President, Nigeria and Gabon, Shell Upstream International, Markus Droll, said the low oil price has brought about a changing economic environment and rising cost.
For oil majors to continue investing in the country, Droll called for a review of the fiscal environment in order to ensure an attractive investment climate for all stakeholders in the industry. He argued that fiscal stability and fiscal predictability remain even more crucial today than they did last year, adding that government revenue can be forecast reliably and all parts of the sector can actually plan their work load.
“If we succeed in this, then I am confident that Nigeria will be able to attract the capital that is needed. If we fail our few investments will dry up fast and production level will decline shortly after that,” he stated. He further called for increased security around oil facilities, deployment of effective strategies to curb oil theft, increased funding for capital projects and ongoing projects.
“Nigeria has one of the oldest and most impressive oil industries in Africa but requires focus on effective management of the industry and alignment of all the key players. The success is there to be achieved, but it will require hard work and importantly it will require cooperation,” Droll added.
On his part, Managing Director, Shell Petroleum Development Company, SPDC, Mr. Osagie Okunbor, called for a renegotiation of terms among the operators and the government, as majority of the contracts were entered into before the decline in oil prices. According to him, if the basic issue of proliferation of regulatory agencies, tenure of oil licences and renewals are not resolved, no shareholder will agree to commit investment, especially at this period of lower oil prices.
He said, “With oil prices where they are and with all the uncertainties around, this is hardly the time for parties on the government and industry sides to be doing their individual things. We really need to come together and agree on the priorities we have.
“We all have a programme that we have agreed for 2015. Most of that essentially started before this radical drop in prices. So, both sides need to sit together and say what is the impact of this or what do we sensibly do going forward such that we don’t get into the business of stopping projects half-way and we end up incurring more cost.”
Managing Director, ExxonMobil Companies in Nigeria, Mr. Nolan O’Neal, decried the prolonged tendering process in Nigeria compared to other countries, and called on the authorities to put in place efforts to address this issue.
NNPC stresses prioritisation
However, the Group Coordinator, Corporate Planning & Strategy, NNPC, Mr. Tim Okon, emphasized the need for Government to identify a clear set of scenarios for where oil prices may go. He also stressed the need to develop a set of practical options on how to respond to continuous evolutions in the prices at present and in the future.
According to him, hard times call for a hard-nosed examination of existing plans to spend large significant capital in the oil and gas sector. He said, “It will be important for the Federal Government of Nigeria and for the NNPC to maintain a prudent level of capital spending to support cash generation in the medium term and to develop critical infrastructure to build the country’s gas and power sector.
“However, we also believe projects in Nigeria currently exhibit low capital productivity and there is much you can do in terms of right scoping, design-to-value, more effective contractor management and lean construction in order to deliver projects at lower cost.” He maintained that even with falling gas prices Nigerian liquefied natural gas, LNG projects are likely to be profitable, noting however, that this will depend on their ability to come on stream on time and on budget.
According to him, the continued uncertainty around the future of Brass, Olokola LNG, and Train 7 of the NLNG will not help Nigeria establish itself as a credible seller of LNG in the global markets. Okon also called on the NNPC to take a rigorous look at its overall capital expenditure, CAPEX programme so that non-critical projects are cancelled or deferred while the truly critical project portfolio is pursued with an intensive cost optimisation approach.
According to him, now is the time to challenge and overhaul expensive design, procurement and construction practices and agreements to aggressively strip out costs and reset performance targets to get the best return on investment.
He said, “Falling global prices for oil and gas means countries as well as companies come under pressure to reduce costs. With global investors critically re-examining their asset and investment portfolio, there will be increasing pressure on governments to reduce their take. However, as important as the level of taxation is the predictability of the regulatory regime.
“Similarly, low oil prices have also elicited government’s response. Measures, such as; Budget Cuts, Subsidy Removals, Liquidation of Assets etc. have all been employed by various Governments in order to minimise the impact of oil prices.
“The Nigerian government and the NNPC are also advised to follow suit. Recommendations include; passage of the Petroleum Industry Bill, restructure public finances, subsidy removal on petroleum products, focus on profitable subsidiaries, review CAPEX spending, explore Asian markets, domestic refinery optimisation and deliver export and domestic gas projects.”
It remains to be seen if these views would be taken into consideration by the Federal Government, and if stakeholders will make effective contributions to growing Nigeria’s revenue base to safeguard the economy against the effect of falling oil prices.
