To Buhari, on oil and gas sector

By Paul Igbinoba   |   09 September 2015   |   2:21 am  

exploration-oil-copy---CopyDEAR Mr. President, the importance of the oil and gas sector can hardly be overemphasised. As I have advised elsewhere, the most strategic decision you can take in tackling the challenges of the sector is to appoint a competent hand as Minister of Petroleum Resources. Please, appoint a minister.

Vigorously pursue the passage of the Petroleum Industry Bill (PIB) in the shortest possible time. The delay in the passage of the PIB has given Nigeria a bad image in the international community and has cost our economy tens of billions of dollars of foreign direct investment (FDI). It is also giving the competitive edge to Angola in crude oil export and Mozambique in the gas sector.

The oil and gas industry has traditionally been opaque and corrupt; the same with government, especially in the Southern Hemisphere. So when both institutions come together in the form of a gargantuan organisation like the Nigerian National Petroleum Corporation (NNPC), the result is predictable. The solution is to privatise, which is the silver bullet you need in the fight against corruption in Nigeria. Roughly 50 per cent of the executive time of the Presidency and Federal Ministry of Finance is currently spent on managing the oil and gas industry, which contributes only about 10 percent of our Gross Domestic Product.

Therefore, take the ongoing reform at NNPC to its logical conclusion by unbundling it and privatising the entire successor companies, including the core of NNPC, the proposed National Oil Company. Lessons can be learned from the process by which Mrs. Margaret Thatcher, the late British Prime Minister privatised British Petroleum. The process began in 1979 and was concluded in 1987. British Government’s interest in BP was sold in slices over the nine-year period. You can also draw inspiration and guidance from one of the key guiding principles of the Prime Minister of India, Mr. Narendra Modi: “I believe government has no business to do business. The focus should be on Minimum Government but Maximum Governance.”

The best way to handle the downstream of the oil and gas industry is to completely deregulate it. In other words, take government out of it and let the market forces of supply and demand determine prices, like in all other sectors of the economy. That is the only and most cost-effective way to ensure sanity, growth, employment and wealth creation in that sector. This will necessarily mean the removal of fuel subsidy. The interest of the poor is best served by the removal of fuel subsidy for the following reasons.

First, fuel subsidy subsidizes fuel consumption and is therefore a consumption subsidy and should best be termed ‘fuel consumption subsidy.’ Any commodity the price of which is subsidised by government leads to waste, market distortion and huge corruption as we are now experiencing with premium motor spirits (PMS) or petrol.

Secondly, petrol is a commodity like any other commodity and its price is best determined by market forces and not by the political process. You will agree with me that food is more important to the poor than petrol. Why are the prices of food items not subsidised? So if you will not control or subsidise the price of garri or millet, why subsidise the price of petrol?

Thirdly, fuel consumption subsidy goes largely to the rich and not the poor. An average middle class family in Lagos may fuel two cars per week with a 100 litres and another 50 litres to fuel generators in a worst case scenario. The higher-income class families may fuel their cars with 200 litres per week and do not use petrol generators. A poor family may buy only five litres of fuel per week for their mini generator and spend limited amounts on public transport. Most of the poor in the rural areas do not enjoy fuel subsidy, as they neither take public transport nor own mini generators.

Fourthly, removal of fuel consumption subsidy will save the Federal Government billions of dollars yearly, which can be channeled into the provision of infrastructure and social services to the benefit of the poor.

Fifthly and finally, the best way to fight corruption in the downstream oil and gas sector is through the removal of fuel consumption subsidy, not through administrative measures, which are costly and lend themselves to corruption.

The gas sector is huge and is the future of the oil and gas industry in Nigeria. It is unfortunate that since the commissioning of the first train of the Nigeria Liquefied Natural Gas (NLNG) plant in 1999, Nigeria is yet to build another LNG plant. Eleven years since Brass LNG was incorporated in 2004, the final investment decision (FID) for the take-off of the project is yet to be signed. Meanwhile, Mozambique, with huge offshore gas reserves, is entering the LNG market in a big way. One U.S. oil major alone is currently building two out of 10 proposed LNG plants in Mozambique. There is, therefore, the need for us to fast-track developments in the gas sector.

A significant step forward in developing Nigeria’s huge natural gas resources is to carve out gas as a separate industry, the Nigerian Gas Industry – notwithstanding the operational issues with associated gas – with a separate regulator, apart from the Department of Petroleum Resources. The mandate of the gas industry regulator will be to fast-track the development of Nigeria’s upstream gas resources, key of which is the development of LNG plants.

In conclusion, Mr. President, a critical success factor in the ability of your Administration to turn around key sectors of the Nigerian economy, including oil and gas and the electric power sectors, will be a strong commitment to market-oriented reforms and liberalisation. There will be no need to reinvent the wheel. You only need to gain the confidence of local and international investors and partner with the private sector in an unequivocal way as the engine of growth of the Nigerian economy.

• Igbinoba is a Lagos-based economist and business consultant.



  • emmanuel kalu

    All this writer recommendation is good, excerpt the privatization of NNPC. yes it should be privatized, but not in the sense the govt is completely out of it. it should be a publicly held company with govt owning a good share of it as investment owner, not operators. The rest of shares should be owned by only nigerian, with no one owning more than 2% of the company.

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