Breaking News

Oil reforms: Downstream operators clamour for increased funding

By Yemie Adeoye & Elohor Okagbare
FOLLOWING the move  by the federal government to reform the oil and gas industry, operators and stakeholders in the downstream sector have called for an increased funding of the sector in order to increase the nation’s aggregate output.

They noted that although the sub-sector is not a major earner of revenue, it has a more pervasive influence in catalyzing adjunct economic sectors which includes the likes of transportation, manufacturing, power (electricity), agriculture (fertiliser, etc…).

This was stated by the Chief Executive Officer of Oando Gas and Power Mr Bolaji Osunsanya while speaking at a panel discussion on “Funding and Investment in the Nigeria Oil and Gas Industry: Implications for Economic Growth and Repositioning Nigeria in the Global Energy Dynamics.” at the recently held Nigeria Annual International Conference and Exhibition (NAICE 2009), in Abuja.

While noting that the downstream sector has a larger latitude to positively catalyze the nation’s domestic economy, he observed that the oil sector, which emerged in the 1960’s and was firmly established during the 1970’s, is of overwhelming importance to the point of over_dependence: “it provides 34 percent of GDP, 95 percent of foreign exchange earnings, and about 75 percent of budgetary revenues.

Reportedly, 80 percent of Nigeria’s energy revenues flow to the government, 16 percent covers operational costs, and the remaining 4 percent goes to investors.”

He also noted that the oil and gas sector accounts for over 93 percent of total investment in Nigeria, and from the $17 billion per annum (averaged over the past four years) spent on the sector, more than 95 percent was spent upstream.

“Fundamentally, economic growth (using GDP as a proxy) is positively correlated to a number of factors which include Investment, Consumption Spending, Government spending and the resultant aggregate of Exports and Imports. Each of these elements reinforces others and potentially has a multiplier effect.  (e.g. it is established that an initial amount of spending _ usually by the government _ leads to increased consumption spending and so results in an increase in national income greater than the initial amount of spending).

The right mix of these elements across sectors – beyond just oil & gas – is necessary to achieve the desired national economic growth.  Recognising this, we will however proceed to discuss the potential of oil and gas as a stand alone sector.

Gross capital formation continues to be an important index for nations. When compared with countries with similar resource circumstance, Nigeria, with a gross capital formation of 20.9%, is well below Algeria’s 30 percent, Iran’s 33.3 percent and Qatar’s 35.5 percent. One may hazard a guess from the above that these other countries have done a lot more in the domestic utilisation of their oil & gas resource and probably channeled the economic rent from their oil & gas into the non oil and gas sectors.”

He noted further that given the prominence of the oil and gas sector in providing the bulk of foreign exchange earnings, as well as budgetary revenues to government it becomes very important in today’s economy for Government to ensure that the goose that lays the golden egg is properly protected from events and circumstances that may retard progress and stimulate national GDP growth. The sector certainly provides hope for improvements and therefore requires further analysis.”

Osunsanya further opined that Oil and gas investments in Nigeria have been typically government_led in partnership with International Oil Companies in Joint Venture arrangements.

It has also been focused on the upstream and export markets.  There is a need to tinker with this status quo and see what impact this might portend for economic growth. In this regard, we will like to make four points.

He concluded that the role of the downstream sector is more germane to the issue of increasing the nation’s aggregate output through a deepening and broadening (diversification) effect on the local economy. “Though not a major earner of revenue, the downstream sector has a more pervasive influence in catalyzing adjunct economic sectors which includes the likes of transportation, manufacturing, power (electricity), agriculture (fertiliser, etc…).

In our quest to examine how this has played out in our country, let us take a closer look at the data of recent investment profiles for both the upstream and downstream sectors in Nigeria and compare with other OPEC countries. The five years Investment Plans (2006 – 2011) shows comparable levels of Investment Plan in Nigeria’s upstream sector of the industry with other OPEC nations.

The picture is however different for the downstream sector where the level of planned investment in Nigeria is significantly poor in comparison to the other OPEC nations.  Out of the 10 member countries of OPEC that were ranked on the gross capital formation list, Nigeria was number 7. One of the things we can glean from this inspection is that we have not done enough in comparison to others to channel new investments into the downstream and or reallocate the revenues from the upstream into the downstream.  Without a doubt, the downstream has a larger latitude to positively catalyze our domestic economy.” he enthused.


Comments expressed here do not reflect the opinions of vanguard newspapers or any employee thereof.