Osten Olorunsola, is Fellow and Country Chairman of the Energy Institute, Nigeria, and seats on the Expert Advisory Panel of the Nigerian Natural Resources Charter (NNRC). Currently, he is Chairman/Chief Executive Officer of Energetikos Limited, an energy advisory services group, as well as non-executive member of a handful corporate boards.
Olorunsola’s stint as a public servant saw him serve first as Adviser to Ministers of Petroleum Resources and was a former Director of Petroleum Resources with executive regulatory oversight of the petroleum industry in Nigeria. He retired after international careers in Shell as Vice President Commercial Gas for Sub-Sahara Africa, after a decade of petroleum geosciences and reservoir engineering roles at Agip-ENI.
In this interview with MICHAEL EBOH, Olorunsola speaks about impact of happenings in the global crude oil market on the Nigerian economy, and advises on how government can effectively cushion the economy from the effect of the looming global economic downturn.
From your analysis of the market, do you think oil price will continue to leap, at least in the short and medium term?
At the just-concluded 11th OPEC and non-OPEC Ministerial Meeting on Saturday June 6, the meeting underscored how the production adjustments in May, alongside the emergence of many economies from the lockdowns due to the COVID-19 pandemic, have helped garner tentative signs of a recovery in the global economy and oil market.
The meeting, however, emphasised that it was vital that participants, and all major producers, remain fully committed to efforts aimed at balancing and stabilising the market, in particular as global oil demand was still expected to contract by around nine million barrels per day (mb/d) for the whole of 2020.
Although the benchmark Brent crude actually leaped to a three-month high of above $42 a barrel, the price is only expected to remain at about the same level for a while, until global economy truly bounces back. That also assumes there is no major resurgence of COVID-19 pandemic across the globe again, and that the existing surplus inventories are rapidly used up to allow the much-needed balance between global demand and supply.
What factors do you think would be expected to drive the market?
The current deal among OPEC+ participants, as well as promised adjustments by other producers is a positive development. Unless a second COVID-19 wave hits the world, it will be the backbone of a structured recovery for the market as well as the industry.
Moving forward, demand will remain by far the biggest variable. So much will depend on the path to recovery from the COVID-19 pandemic plus associated issues between Saudi Arabia and Russia, and how quickly containment measures are lifted. The gradual easing of the global lockdown and consequent recovery of the global economy will be key to building back demand.
Enforcing discipline of shared responsibility as well as monitoring of agreed adjustments side by side recovery of global demand in addition to mandating further adjustments, if needed, in a timely manner will be most important in the short to medium term to balancing and stabilising the market.
How in your view, do you think the stakeholders involved in the making of Nigeria’s 2020 budget, especially the legislators and economic/budget planners, should respond to it?
At about the time the Nigeria budget was being reviewed, there was specific agreement during the OPEC+ meeting of April 10, to cut production by 9.7 million barrels per day. Nigeria’s share of this was 417,000 barrels per day.
It is very unfortunate that Nigeria was unable to fully respond to its share of that production adjustment, the failure of which has now been demanded as additions to future cuts during the months of July to September, when prices have significantly recovered.
Going forward, there will be need to ensure strict discipline in responding to agreed production cuts while monitoring the markets closely. In particular, Nigeria needs to be clever in determining how and where the cuts should come from, taking full consideration of revenues to government, technical issues, unit cost issues, as well as production associated with strategic supplies.
Finally, to better manage this going forward, it is advisable to always take a long term view of oil and gas matters. The sector has long been overdue for reforms, to remove investor uncertainties as well as upgrade terms to competitive and contemporary standards.
Because of the struggle for market shares seen clearly in fossil fuels today and going forward, such reforms will ensure that all molecules produced will make it safely to market ensuring sustained revenues for the development of other sectors of the Nigeria economy.
How do you think Nigeria’s Excess Crude Account, which has been depleted in recent times, and the Sovereign Wealth Fund (SWF) should be managed?
Proceeds from fossil fuels, similar to all other extractive minerals, ought to be responsibly utilised in such a manner that they meet the needs of the living without jeopardising future generations. It is in this context that countries tend to create some form of structure – policy, legislation, organisation etc – to ensure sustainable management of resources garnered from extractive minerals.
According to the IMF, SWFs (or safe keep of Excess Crude Accounts) are established with specific policy objectives, which largely determine their financial management, including investment and risk management decisions (Al-Hassan et al. 2013).
Based on the Santiago Principles (2008), SWFs are categorized as:
(i)stabilisation funds, set up to insulate the budget and economy from commodity price volatility and external shocks. Their investment horizons and liquidity objectives resemble central banks’ reserve managers, in view of their role in counter-cyclical fiscal policies to smooth boom/bust cycles;
(ii) savings funds, set up to share wealth across generations by transforming non-renewable assets into diversified financial assets. Their investment mandates typically reflect a higher tolerance for volatility and a focus on long-term returns;
(iii) development funds, set up to allocate resources to priority socioe-conomic projects, usually infrastructure;
(iv) pension reserve funds, set up to meet identified outflows in the future with respect to pension-related contingent-type liabilities on the government’s balance sheet. Sovereign wealth fund is an investment pool of foreign currency reserves owned by a government.
A petroleum revenue distribution legislation to guide management of resources from Nigeria’s oil and gas will be the best way going forward, similar to best practices across so many countries today.