Nigeria faces challenge of dwindling oil revenues

Sep 04, 2002 02:00 AM

As the Nigerian government slashes its budgets in response to dwindling oil revenues, analysts and industry executives warn that deeper cuts in oil industry investment could damage the country's ability to meet future production targets. President Olusegun Obasanjo last month announced a reduction of $ 260 mm in the government's equity contribution to joint venture oil development projects. The cut represents around 7.7 % of the $ 3.37 bn the government originally proposed in its 2002 budget.
Nigeria says its current dilemma is largely due to the decision by OPEC, of which it is a member, to cut total oil output from the beginning of this year. The country is expected to cite its financial constraints as the basis of its request to OPEC to increase Nigeria's share of the group's total output.

Oil industry officials, for their part, point to the steadily increasing price for crude and argue the production cuts shouldn't have made a serious dent in the government's revenues. In the meantime, however, the government decision to reduce its oil industry investments is likely to create a scenario where production continues to fall, threatening future revenues as well.
The government holds an average of 57 % in the joint venture projects, which together account for around 98 % of Nigeria's total crude oil production. An aide to Obasanjo told that the reduction was justified by the current lower level of crude production in Nigeria. "The volume of our production doesn't require the kind of money we are giving to our joint venture partners," Special Assistant to the President on the budget Oby Ezekwesili said.

Oil company executives, however, say the government's approach is short-sighted. "That person does not understand the nature of the industry," a source at Nigeria Agip Oil said of Ezekwesili's comments. Because of the long lead time between investment, exploration and actual crude oil production, investors "may not get planned production in five years' time," the source said.
An official at Shell Petroleum Development, Nigeria's leading crude producer, echoed this view, adding that the country should build its oil reserves now, rather than wait until a production increase is needed. "Reserve build-up is not something you do for a short time," he said. "It needs long-time planning."
Nigeria has already achieved its 2003 target reserve level of 30 bn barrels ahead of schedule. However, the country must still meet its goal of a 40 bn barrel reserve and production level of 4 mm bpd by 2010.

Nasir el-Rufai, director general of the Bureau of Public Enterprises, part of the National Council of Privatisation, said recently that current overall revenues are just 60 % of what the government earned last year. Central Bank of Nigeria Governor Joseph Sanusi cited the revenue drop as the basis for the bank's decision to defer debt-service payments.
He said that crude oil export earnings fell 44.9 % in the first half of the year to $ 4.26 bn from $ 7.73 in the year-earlier period. But industry officials also expressed scepticism about the government's claims of dwindling resources. Although output has fallen, they noted that Nigeria's 2002 budget was based on a benchmark oil price of $ 18 per barrel, while IPE front-month Brent is currently quoted at $ 27.30 a barrel. "It's true that the price of oil has gone up, but the net effect of the massive cuts in production is a reduction in revenue," Ezekwesili said.

The government could decide to divest its level of interest in the joint venture projects as an alternative solution, the Agip official said, to restrict its involvement to a level that is more affordable. At the same time, he acknowledged, such an approach might be politically untenable. "To divest is a political consideration," he said, adding that many Nigerians see the government's current interest in the projects as too low and would be likely to oppose a further reduction in the government's shareholding.
Another alternative, the executive said, would be for the government to allow companies to undertake alternative funding for the joint venture projects under the government's Production Sharing Contract. The contracts stipulate that the oil company funds project development on its own, up to the production of crude oil, recoups its expenditure from the sale of crude, and shares the balance with the government according to an agreed ratio. However, current laws only permit such contracts for new exploration, particularly in deep offshore fields, which would exclude the joint venture projects.

Nigeria currently produces about 1.788 mm bpd of crude, down from 2.1 mm bpd in 2001. The reduction followed OPEC's decision to cut its overall output, a cut which was divided proportionately among OPEC member countries.
Nigeria's government, through the state-run Nigerian National Petroleum Co., has divided Nigeria's 400,000 bpd reduction among the country's oil producing companies in proportion to their shares of total output. The cuts have depleted treasury coffers, the government said, despite recent increases in the price of crude oil. Revenue from crude oil exports accounts for some 90 % of the government's total revenues, and 96 % of total foreign exchange earnings in Nigeria. This makes the country vulnerable to changes in crude prices, the OPEC quota, or both.
The constraints imposed by a reduced OPEC total output quota and lower government funding have forced several companies to shut some of their production facilities, as NNPC distributed the reduction among its joint venture partners. Reduced government contribution to the projects also means the companies may be forced to reduce their exploration activities.

Source: Dow Jones
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