One of the first major tasks the administration of
Gen. Muhammadu Buhari will have to contend with
will be how to finance the 2015 budget in the
wake of low oil price and rising threats from
declining revenue.
This becomes very critical when viewed against
the backdrop of the tough economic conditions
witnessed over the last couple of months in the
country, especially in the area of declining crude
oil and gas receipts and Federal Government’s
inability to meet some of its financial obligations.
Budget highlights
It was bad enough that the 2015 budget was
being passed more than four months into the
year, and was passed by the House of
Representatives some days ago at a higher spend
rate. The House increased the budget to N4.493
trillion from the N4.358 trillion proposed by the
Executive, without taking into consideration the
prevailing volatility in crude oil prices. The House
also removed the provisions for petroleum subsidy.
Key highlights of the budget passed by the House
of Representatives include: N2.607 trillion for
recurrent (non-debt) expenditure; N556.995
billion for capital expenditure, N375.616 billion
for statutory transfer while N953.620 billion was
allocated for debt service.
The budget was passed on the basis of crude oil
sales at $53 per barrel, production estimate of
2.2782 million barrels per day, and an exchange
rate of N190 to the dollar. This led to a deficit of
N1.075 trillion, representing 1.12 per cent of the
country’s Gross Domestic Product, GDP.
Initial proposal
Nigerian Government, guided by the declining oil
price, had proposed aggregate budget revenue of
N3.602 trillion made up of oil revenue of N1.918
trillion and non-oil revenues of N1.684 to fund
aggregate budget expenditure of N4.46 trillion
inclusive of SURE-P.
The expenditure figure, according to the Minister
of Finance, Dr. Ngozi Okonjo-Iweala, comprised
N412 billion for Statutory Transfers, N943 billion
for Debt Service, N2.616 trillion for Recurrent
(Non-Debt) and N634 billion for Capital
Expenditure (inclusive of SURE-P).
The Government had earlier envisaged a fiscal
deficit of N755 billion, or 0.79 per cent of GDP in
2015, down from N994 billion or 1.24 per cent of
GDP in the 2014 Budget.
According to the Finance Minister, this deficit is
well under the three per cent of GDP encapsulated
in the Fiscal Responsibility Act 2007, which is also
the international norm.
She said, “Projected fiscal deficit in 2015 is 0.79
per cent of GDP and it will remain under one per
cent of GDP in the medium-term. This 2015 deficit
of N755 billion, is to be financed by domestic
borrowing of N570 billion, and N255 billion from
other sources such as the Stabilisation Fund,
signature bonuses, sale of government
properties, and privatisation proceeds.”
Palliatives for oil crash
To fund the budget and prevent a decline in the
country’s revenue, the Goodluck Jonathan’s
administration lined up a number of initiatives to
cushion against the effect of the low oil price.
Specifically, Okonjo-Iweala had announced a
number of austerity measures, including ban on
foreign travels by civil servants unless for
purposes that could be fully defended as
absolutely necessary.
The Government also cancelled foreign training
programmes, proposing that all trainings will be
done in-country, while it envisaged the
elimination of duplication among the functions of
the Ministries, Departments and Agencies, mass,
by working on the Steve Oronsaye Report.
Part of the immediate steps to cushion the fall in
oil revenue Okonjo-Iweala said, was to
significantly increase non-oil revenue in the
country, while announcing an aggressive tax
administration in which private jets, yachts,
champagne and a list of others to be announced
would be taxed.

It is anticipated that the Senate’s version and
the harmonised version of the budget might be
slightly different from the one passed by the
House. The challenge however is how the proposed
aggregate revenue of N3.602 trillion made up of
oil revenue of N1.918 trillion in the budget would
be achieved in the face of dwindling revenues due
to the volatility in oil price.

Immediate impact

The low crude oil price has started to take its toll
on Nigeria’s economy, triggering a huge decline in
the country’s foreign reserves and engendering a
free fall of the naira, and a host of others.
Already, in the April Federation Account
Allocation Committee, FAAC, meeting, it was
stated that the country recorded a revenue
shortfall of N 86.42 billion, due to a N78.36 billion
decline from oil revenue.

To make matters worse, oil majors recently
warned that the country risks losing up to $10
billion about N2 trillion in revenue from oil and
gas if oil traded around an average of $53 per
barrel in 2015.

The average oil price between January and April
2015 was about $50 per barrel, with concerns
that it might slide even lower.

Particularly, oil and gas companies in the country
are already considering cutting down on their
investments in the country, while a number of oil
and gas projects in the country have been
suspended. These are grave signs that financing
the budget would pose a herculean task.

Also few of the oil companies have already begun
to cut down on their staff strength as well as
slashing salaries, a development that portends a
dangerous signal for the economy.

Furthermore, oil companies are now giving
conditions for additional investments in Nigeria,
warning that they might be forced to discontinue
some of their operations and activities unless
certain conditions were met by the Federal
Government.

Predictions of gloom

Specifically, PricewaterhouseCoopers, PWC, in a
report titled, ‘Fit for $50 oil in Africa: Will the
boom go bust?” warned that countries in West
Africa, which are already highly dependent on oil
exports will be faced with potential austerity
measures and budget reviews.

According to the report, oil revenues make up a
large portion of the GDP for many African
countries and if the current price environment
persists, this could result in slowed development.
Written by Chris Bredenhann, PwC Africa Oil &
Gas Advisory Leader, and Derek Boulware, Senior
Manager, Oil & Gas Africa, the report maintained
that oil and gas explorers will be scrutinising and
likely reducing their budgets and deciding where
to allocate their limited capital spend given the
new price environment.

It added that this might include rationalisation of
portfolios, in addition to adopting general cost-
cutting measures on discretionary capital
expenditure.

PwC further stated that areas where limited
infrastructure is currently in place are also likely
to suffer, due to the fact that external
investment is needed to develop the requisite
infrastructure.

It said, “In these areas, development of existing
discoveries may end up on ice unless there is a
domestic need for the resource. Host governments
in Africa could also see a major impact on their
bottom lines caused by the suppressed price
environment.

“Those whose economies are not well diversified
will be hardest hit and may have to consider
austerity measures and a revision of the
government’s budget.”

It further stated that Oilfield service (OFS)
companies, in spite of cutting back on their
spending, would also be under extreme pressure
by oil companies to drop their prices.
“The cost of contracting to conduct data
acquisition, such as 2D and 3D seismic surveys
already dropped by 65 per cent between 2013 and
2014. Some predict that the cost of hiring
offshore rigs may fall by nearly 40 per cent,” they
said.

In general, PwC agreed that additional
exploration may be put on hold, adding however
that development projects are expected to
continue as planned.

IOCs’ chiefs speak

Also commenting on the development, Chairperson
of the Oil Producer Trade Section, OPTS of the
Lagos Chamber of Commerce and Industry, LCCI,
Ms. Elisabeth Proust, noted that Nigeria has
already started feeling the impact of the low oil
price. She said this was evident in the dwindling
revenue and the slowing down or outright
cancellation of a number of infrastructure
projects across the country.

She said, “We estimate that if crude oil prices
average $53 per barrel in 2015, compared to
$77.5 per barrel in 2014, the Federal Government
of Nigeria’s oil and gas revenue will decline by an
equivalent of $10 billion this year, or a gut-
wrenching equivalent of 30 per cent.”

Proust further stated that low crude oil prices
have significantly reduced the level of investable
funds of oil and gas operators, especially at a
timewhen competition for investments is
sharpening, and has also made it very difficult for
Nigeria to meet its Joint Venture funding needs.
To continue investing in Nigeria and for the oil
and gas industry to unlock its potential,
positioning Nigeria to attract the required
investment, Proust urged the Government to
create a conducive business environment. It
should also provide the necessary funding of joint
ventures, JVs, with the Nigerian National
Petroleum Corporation, NNPC, and ensure globally
competitive fiscals and domestic gas process.
According to Proust, unlocking the oil and gas
industry’s potential could add about 1.5 million
barrels of oil equivalent production by 2020,
thereby growing the country’s revenue profile.
Similarly, Vice President, Nigeria and Gabon, Shell
Upstream International, Markus Droll, said the low
oil price has brought about a changing economic
environment and rising cost.

For oil majors to continue investing in the
country, Droll called for a review of the fiscal
environment in order to ensure an attractive
investment climate for all stakeholders in the
industry.

He argued that fiscal stability and fiscal
predictability remain even more crucial today than
they did last year, adding that government
revenue can be forecast reliably and all parts of
the sector can actually plan their work load.
“If we succeed in this, then I am confident that
Nigeria will be able to attract the capital that is
needed. If we fail our few investments will dry up
fast and production level will decline shortly after
that,” he stated.

He further called for increased security around oil
facilities, deployment of effective strategies to
curb oil theft, increased funding for capital
projects and ongoing projects.

“Nigeria has one of the oldest and most
impressive oil industries in Africa but requires
focus on effective management of the industry
and alignment of all the key players. The success
is there to be achieved, but it will require hard
work and importantly it will require cooperation,”

Droll added.

On his part, Managing Director, Shell Petroleum
Development Company, SPDC, Mr. Osagie Okunbor,
called for a renegotiation of terms among the
operators and the government, as majority of the
contracts were entered into before the decline in
oil prices.

According to him, if the basic issue of
proliferation of regulatory agencies, tenure of oil
licences and renewals are not resolved, no
shareholder will agree to commit investment,
especially at this period of lower oil prices.

He said, “With oil prices where they are and with
all the uncertainties around, this is hardly the
time for parties on the government and industry
sides to be doing their individual things. We really
need to come together and agree on the priorities
we have.

“We all have a programme that we have agreed
for 2015. Most of that essentially started before
this radical drop in prices. So, both sides need to
sit together and say what is the impact of this or
what do we sensibly do going forward such that we
don’t get into the business of stopping projects
half-way and we end up incurring more cost.”

Managing Director, ExxonMobil Companies in
Nigeria, Mr. Nolan O’Neal, decried the prolonged
tendering process in Nigeria compared to other
countries, and called on the authorities to put in
place efforts to address this issue.

NNPC stresses prioritisation

However, the Group Coordinator, Corporate
Planning & Strategy, NNPC, Mr. Tim Okon,
emphasized the need for Government to identify a
clear set of scenarios for where oil prices may go.
He also stressed the need to develop a set of
practical options on how to respond to continuous
evolutions in the prices at present and in the
future.

According to him, hard times call for a hard-nosed
examination of existing plans to spend large
significant capital in the oil and gas sector.

He said, “It will be important for the Federal
Government of Nigeria and for the NNPC to
maintain a prudent level of capital spending to
support cash generation in the medium term and
to develop critical infrastructure to build the
country’s gas and power sector.

“However, we also believe projects in Nigeria
currently exhibit low capital productivity and
there is much you can do in terms of right
scoping, design-to-value, more effective
contractor management and lean construction in
order to deliver projects at lower cost.”

He maintained that even with falling gas prices
Nigerian liquefied natural gas, LNG projects are
likely to be profitable, noting however, that this
will depend on their ability to come on stream on
time and on budget.

According to him, the continued uncertainty
around the future of Brass, Olokola LNG, and
Train 7 of the NLNG will not help Nigeria establish
itself as a credible seller of LNG in the global
markets.

Okon also called on the NNPC to take a rigorous
look at its overall capital expenditure, CAPEX
programme so that non-critical projects are
cancelled or deferred while the truly critical
project portfolio is pursued with an intensive cost
optimisation approach.

According to him, now is the time to challenge and
overhaul expensive design, procurement and
construction practices and agreements to
aggressively strip out costs and reset
performance targets to get the best return on
investment.

He said, “Falling global prices for oil and gas
means countries as well as companies come under
pressure to reduce costs. With global investors
critically re-examining their asset and
investment portfolio, there will be increasing
pressure on governments to reduce their take.
However, as important as the level of taxation is
the predictability of the regulatory regime.

http://www.vanguardngr.com/2015/05/oil-crash-dwindling-revenue-threaten-nigerias-2015-budget/