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AfricaApril 6 2008

Nigeria’s new energy

Like many of his predecessors, President Yar’Adua will be judged on his management of Nigeria’s energy sector. With this in mind, the premier will be personally overseeing his overhaul of the country’s oil and gas industries, write Eleanor Gillespie and Jon Marks.
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The International Monetary Fund (IMF)’s most recent Article IV consultation declared Nigeria’s immediate economic outlook to be “promising” and president Umaru Musa Yar’Adua looks more comfortable in office as challenges to his April 2007 election victory fade away. But continuing rows over government spending and worries that those who helped to put Mr Yar’Adua into power will want payback suggest more tough months ahead as the administration in Abuja gets to grips with the ever-challenging problem of how to govern Nigeria.

Critical to how the president will be judged, according to analysts and market players canvassed by The Banker in Abuja and Lagos, will be whether Mr Yar’Adua can carry out his ambitious programme of oil and gas industry reforms. These reforms could have a big impact at all levels – potentially leading to multi-billion-dollar annual borrowing to help finance upstream developments.

Radical reform

Mr Yar’Adua has survived a petition brought against him by two 2007 presidential candidates. Nigerians are now questioning whether he will be left to get on with the job, which the president has said must start by radically reforming the hydrocarbons sector. Furthermore, Mr Yar’Adua must establish a process that will bring peace to the key oil and gas-producing region, the Niger Delta. The government wants to achieve 40 billion barrels of oil reserves and output of four million barrels a day (b/d) by 2010 and has recently put the finishing touches to its major oil and gas reform plans.

Framework review

According to an authoritative draft seen by The Banker, these focus on a review of the legal and regulatory frameworks that govern the industry, coupled with the establishment of new regulatory bodies; the implementation of a new policy framework and the establishment of a national petroleum directorate (which will be a standalone, autonomous entity to take on the Energy Ministry’s current oil and gas responsibilities); the creation of a new national oil company called National Petroleum Company of Nigeria (Napcon), which will be responsible for oil and gas exploration and the production and marketing of crude oil, gas and refined products; and the establishment of a national petroleum assets management agency, which will, says Rilwanu Lukman, the influential presidential adviser, act as a “superintendent” of the upstream sector.

This marks a major change, as Nigeria – in common with a number of other major oil producers – seeks to build up its national industry, if necessary by loosening the grip of international oil companies. Senior officials in Abuja now talk of their frustration at seeing local companies unable to operate blocks, instead having to rely on expertise from other countries. A key element in plans to establish a stronger industry is the creation of the new national oil company, Napcon, which is intended to compare with the likes of Brazil’s Petrobras and Malaysia’s Petronas.

According to Mr Yar’Adua, a strong entity is needed to replace the current Nigerian National Petroleum Corporation (NNPC), “which has long witnessed other national oil companies competing against the international oil companies”.

Analysts see this as indicative of a new confidence. John Omatseye, an industry observer, says: “Russia made its gas monopoly a major negotiating instrument with its EU customers; what its could not achieve with nukes and arms build-up is now being negotiated through gas contracts, and I think Nigeria is taking cues from these events.” Further, “it reflects the changing global patterns of the Nigerian energy workforce; they have matured and are now more confident. Nigerian oil workforces are among the most sought-after in the continent”.

Borrowing potential

Officials are hoping for a radical overhaul of how the government’s share ($8.8bn this year) of joint ventures with the energy majors will be funded – $4.97bn from the 2008 budget has been allocated to cover part of the government’s share of joint ventures funding, leaving $3.8bn to be borrowed from international and local banks.

Stanley Lawson, NNPC group executive director, says: “The task today is different. We are looking at an industry that requires as much as $15.2bn in 2008. This year we are actually going out on our own to raise about $4bn – a big challenge.”

Abuja remains committed to developing the domestic banking sector and recent consolidation has left the sector leaner and more able to rise to the funding challenge. As Nigerian banks become better capitalised they will be drawn into energy projects, say some observers – although others remain sceptical about the extent to which local banks can meet a big slice of such substantial funding.

The IMF has long advised Nigeria to diversify its economy away from oil and gas. Dominique Strauss-Kahn, IMF managing director, says that the best strategy would be to harness revenues from energy to help to develop a network of small and medium businesses in other sectors.

“Another risk is to rely too much... on the energy sector... and to be satisfied with growth relying only on oil and, in the future, gas. Nigeria needs a much more diversified economy and a more balanced growth,” he says. Of the 2008 forecast of government income – which is N4530bn ($39bn) – some 80% will come from oil revenue.

Keeping control

Government spending is a contentious issue – and the authorities are struggling to keep it under control. The IMF has cautioned Abuja to stick to budgetary discipline in its fiscal spending to avoid worsening inflation. Mr Strauss-Kahn made his warning after parliament in late February jacked up the 2008 budget by more than N400bn, to N2898bn from the N2400bn presented by Mr Yar’Adua last November. “The issue of fiscal discipline is at stake with the necessity of having a high budget voted by the parliament,” says Mr Strauss-Kahn. The president has refused to sign off on this and has asked legislators to cut spending.

Mr Yar’Adua presented his 2008 budget to parliament last November. Based on the assumptions that the average oil price will be $53.83 per barrel, production will stand at 2.45 million b/d, with a gross domestic product (GDP) growth rate of 11% and inflation of 8.5% – the government expects the federation account to receive N4539bn.

In addition to funding statutory transfers and debt servicing, the government will spend N1890bn on ministries, departments and agencies. Of this, transport will receive N94.3bn (N73.1bn to be allocated to highway construction); N89.95bn will go to agriculture and water; education will receive N210.45bn (up 12% on 2007), health N138.17bn (up 12.5% on 2007), energy N139.78bn (up 15.6%), and the security sector N444.6bn (up 6.5% on 2007).

The government has also agreed to release $4bn from oil savings to federal and state governments in three tranches by June 2008 – the presidency has argued that the payment must be made in local currency, while Central Bank of Nigeria (CBN) and the Ministry of Finance want it to be paid in US dollars.

IMF advice

A senior adviser in the IMF’s African department said in February: “We see that there is some scope to spend from the savings but it has to be managed carefully to avoid pushing the deficit to a level that would really trigger inflation and require action by the central bank to tighten policy, which would squeeze the private sector.” Most of Nigeria’s 36 states remain almost entirely dependent on the federal government for revenue, and over the past few years there has been a sharp increase in pressure from the regions for revenue from the central government. The constitution provides all tiers of government – federal, state and local – a share in oil revenues. According to the IMF, revenue sharing formulas are set by the National Assembly – for natural resource revenues, oil producing states receive 13% upfront as derivation grants.

Revenue distribution

Of the remaining 87%, the federal government takes 52.7%, states take 26.7% and local governments 20.6%. Nigeria saves oil revenues in excess of the benchmark price set in the budget in an excess crude account (ECA). If some part of these oil savings were distributed, the IMF says that “the consequences of the implied fiscal shock could be considerable. Following an immediate stimulus to growth, the spending would be likely to destabilise the economy.” Given that the ECA holds relatively little cash, it is likely that this is already the case.

Indeed, the ECA is not without its problems. According to a recent report by JPMorgan, last autumn the National Economic Council, consisting of the 36 states and the CBN governor, agreed to preserve much of the current savings in the ECA, but to distribute 80% of the future ECA flows to the various tiers of government the year after they were accumulated.

As it stands, $8.2bn of the current $11.4bn is retained as a ‘base deposit’ at CBN and the remaining $3.2bn is shared among the three tiers of government. The JPMorgan report said: “Out of future flows to the ECA, it would appear that only 20% would be retained as savings for future generations.”

Tackling corruption

Nigeria has long had a reputation for corruption and other governance problems. Observers say the current administration is determined to correct perceptions of Nigeria, emphasising that the rule of law will be the government’s guiding principle in policy decisions in order to create an improved business environment.

No immunity

At the World Economic Forum in Davos this January, Mr Yar’Adua spoke in favour of removing immunity from prosecution for governors found to be corrupt and he mentioned an anticipated constitutional amendment that would strip such officials of immunity. Efforts to tackle corruption have been led by the Economic and Financial Crimes Commission (EFCC), which promises to “curb the menace of corruption”, and the Nigeria Extractive Industries Transparency Initiative (NEITI).

The EFCC has been applauded for challenging senior officials, previously thought to be untouchable, including police chiefs, state governors and ministers, but to the disappointment of many and the probable delight of some, its high-profile and seemingly fearless chairman Nuhu Ribadu was recently sent away on a year-long training course at a remote institute in central Nigeria.

This prompted concern that powerful members of the Nigerian elite had conspired to have him sidelined, and raised questions over whether Mr Yar’Adua really has the authority to stamp down on corrupt officials. Such was the outcry that the head of the UN crime office wrote to Mr Yar’Adua, saying that the sidelining of Mr Ribadu could be “detrimental in maintaining momentum of ongoing anti-corruption investigations.”

The EFCC’s acting chairman, Ibrahim Lamurde, promised that Mr Ribadu’s absence will not affect the commission’s crusade, shortly before the former governor of Nigeria’s southern Edo state, Lucky Igbinedion, was indicted by a court on a 156-count charge, including the theft of $25m of state funds. He had turned himself in to the commission.

Perpetual injunction

However, showing that nothing in Nigeria is straightforward, in early March, Peter Odili, the prominent former governor of Rivers state, secured a ‘perpetual injunction’ against arrest by the EFCC, which suspects him of embezzlement, money laundering and gross abuse of office.

The EFCC works closely with the NEITI, which was established in 2004. Nigeria is the only Extractive Industries Transparency Initiative (EITI)-implementing country to have statutory backing for its operations. A NEITI bill was passed and signed into law by former president Obasanjo in May 2007, and failure to provide information to NEITI or the government is now a criminal act. Companies are liable to fines of N30m and company officials can be subject to a fine of N5m or a two-year jail term.

A NEITI-backed 1999-2004 audit carried out by the UK’s Hart Group found that the difference between revenues paid by oil companies and those received by government agencies was some $300m, later revised to $6m – about 0.01% of the $90bn revenues for the audited period.

According to NEITI director Stan Rerri, an astonishingly small sum of money is missing from the period. He says: “People found it surprising. There were accounting problems and cases where people said we have this sum of money but we don’t know where it has come from.” NEITI will release findings from the 2005 audit and commission the 2006-07 audit by June this year.

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