Nigeria oil and gas

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Nigeria Oil Economy and National Development
Being paper presented by
Mr. Kayode Adebiyi MBA, FCA, ACTI MIoD
to
at the THINK-TANK INITIATIVE
NOVEMBER 14, 2023
Mr. Kayode Adebiyi Managing Director HONEYROCK
MULTICONSULT LTD 18B, Bayo Ajayi Street, Off
Hakeem Balogun Street, Marwa Brooks Estate,
Alausa, Ikeja, Lagos. 08033181225,07064078211 Em
ail hmlconsultancy_at_outlook.com
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Openers

• The opportunities that God gives does not wake up
  those who are asleep, tap the snoring nor make
  sober those who are drunken Proverb
• To whom much is given, much is expected
• National resources can only translate into
  national blessing through national
  resourcefulness
• Revenues must be seen as seed to invest, not as
  sweet to lick

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Strategic Nature of Oil

• Characterizations as a source of energy
• Dominance in world economy and politics
• Skewed geographical concentration of reserves
• Major driver of growth, wealth, conflicts and
  wars
• Captive market the hydrocarbon man in the
  hydrocarbon society

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Special characteristics of oil

• National asset
• Motor of globalization
• Depletability
• Boom-bust cycles
• Capital intensive
• Enclave nature
• Exceptional profits

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Nigeria Oil Industry in the beginning

• Exploration started in 1937 by Shell DArchy
• Concession initially the whole of Nigeria
• Oloibiri was the first commercially successful
  well
• Discovery 1956, production 6,000 bopd, first
  shipment 1958

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Nigeria Oil Industry today

• Oil Reserves
• Oil production
• Crude oil refining capacity
• Natural Gas reserves
• Natural Gas consumption/utilization

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Nigeria Oil Revenue Management summer and
winter

• Bust and Boom cycles
• First windfall 1973 Arab Israeli face off
• Nigeria recorded 350 increase in revenue 1973
• After a prolonged lull in crude oil prices, there
  was a rebound in 1999. From 10 in 1998 to 147
  in 2007
• Crude oil is particularly vulnerable to (a) price
  volatility and (b) non-renewability

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How was the oil money managed?

• Opinions are divided but facts are sacred
• The metrics GDP, per capital income, state of
  infrastructures, imbalances say it loud
• Boom became doom, windfall became pitfall
• Lamentation not liberation
• How are the barrels fallen and the power of
  petrodollars perish!

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Oil-rich countries (ORC) Startling revelations
(1)

• ORCs are among the weakest growth performers
  despite the fact that they have high investment
  and import capacity
• Countries that depend on oil for their livelihood
  are among the most economically troubled, the
  most authoritarian and the most conflict-ridden
  in the world
• There are almost no cases of successful a
  nations development based on the export of
  petroleum
• Oil windfalls flatter to deceive, creating a
  false sense of unlimited wealth

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Oil-rich countries (ORC) Startling
revelations(2)

• Oil development can take resources and investment
  away from other sectors of the economy and lead
  to Dutch disease
• Oil development encourages government expansion
  and centralization. It weakens the impetus to
  implement economic reforms
• Oil producing countries have difficulty creating
  inter-sectoral linkages and are vulnerable to
  price and interest rate shocks
• Because oil prices are inherently unstable,
  excessive reliance on oil makes the economy
  vulnerable to rapid swings
• Resources are rarely used effectively in
  petro-economies because the large profits that
  the industry generates often lead to corruption.

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Resource curse

• Economic effects
• Dutch disease
• Revenue volatility
• Enclave effects(Mono sector economies)
• Human resources
• Incomes and employment

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What is Natural Resource Curse?

• The phenomena whereby a country with an
  export-driven natural resources sector,
  generating large revenues for government, leads
  paradoxically to economic stagnation and
  political instability
• Resource curse a.k.a paradox of plenty. The
  paradox that countries and regions with an
  abundance of natural resources, tend to have less
  economic growth and worse development outcomes
  than countries with fewer natural resources
• The surprisingly negative outcomes in oil and
  mineral dependent countries

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Natural Resource Curse Some Characteristics
(1)

• Disproportionate impact sectors of the economy
  because of lack of diversification options to
  invest revenues or off-set revenue volatility not
  abundant
• Worsened income inequality
• Enclave nature of oil/gas sector few forward or
  backward linkages, and global sourcing
• Revenue expenditure concentrated in towns and
  cities, to detriment of rural economy

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Natural Resource Curse Some Characteristics
(2)

• Dutch Disease effects
• a phenomenon in which the oil sector drives up
  the exchange rate of the local currency,
  rendering other exports non-competitive
• an economic concept that tries to explain the
  apparent relationship between the exploitation of
  natural resources and a decline in the
  manufacturing sector combined with moral fallout
• resource movement/crowding out of non-oil
  resources
• spending effect (exchange rate
  appreciation/domestic inflation particular
  challenge to manufacturing and domestic
  agriculture).

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Natural Resource Curse Some Characteristics
(3)

• High public expectations, wrong attitudinal
  dispositions large rent revenues puts pressure
  on government to spend, leading to drift away
  from national development plans and fiscal
  discipline or reform
• Eroding of tax base when boom ends, Federal,
  States and Local governments are trapped by high
  levels of recurrent expenditure
• Absorptive capacity rapidly breached
  windfalls reposition governments as key drivers
  of growth, yet often lack institutional capacity

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Natural Resource Curse Some Characteristics
(4)

• Political economy windfalls promote shift
  from developmental to predatory state revenue
  leakage, clientism, rent-seeking, raiding by
  elites.
• Political instability statistically the most
  powerful factor for why countries might be at
  risk of civil conflict is the share of their
  income (GDP) derived from the export of primary
  commodities.

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Natural Resource Curse Some Characteristics
(5)

• Lagging skill accumulation and heightened
  inequality
• The enclave and tax problem
• Wasteful domestic oil policy
• Elite claim to resources and elite power
• Sovereign leaders who have little or no
  dependence on citizens
• Weak or ineffective income smoothing systems
• Opaque, highly politicized fiscal systems that
  lacks checks and balances

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Biggest Resource Curse
Countries dependent on oil are more likely than
resource poor countries to have civil wars the
wars are more likely to be secessionist and of
greater duration and intensity compared to wars
where oil is not present. Oil may be a catalyst
to start a war petrodollars and pipelines may
serve to finance either side and prolong the
conflict. And this is, of course the biggest
resource curse of all Source Covering Oil
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BIG Questions for ORCs

• How much to save for future generations
• How to achieve economic stability in the face of
  uncertain and widely fluctuating oil revenues a
• How to manage boom-bust cycles
• How to ensure that spending is of high quality

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Wealth is in the journey!

• Oil industry is an enclave
• Fiscal linkages 
• Forward linkages
•  Backward linkages
•  Consumption linkages
•  Socio-political and cultural linkages  
•  Environmental linkages

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Key Drivers of Petroleum wealth (1)

• A countrys existing reserves and their ability
  when produced to generate positive cash flow
• Her willingness and ability to invest in
  finding, acquiring and producing oil and gas
  reserves
• Her people and their ability to find, develop
  and produce oil and gas reserves
• The investment capacity of the country in the
  downstream sector and the ability to transform
  crude oil to usable products at a profit

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Key Drivers of Petroleum wealth (2)

• Her recognition of oil and gas reserves as a
  non-renewable resource ability to design,
  implement and follow-through a thoughtful
  depletion policy, fix appropriate prices based on
  user cost and replace reserves produced
• The ability of her people to translate oil
  revenues to productive capital thereby converting
  a nonrenewable resource into a renewable one
• The totality of the economic environment,
  systems and procedures in place to obtain,
  retain, sustain, increase and multiply petroleum
  wealth

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Key Drivers of Petroleum wealth (3)

• Nature determined, Money determines, Men decide
• As age does not translate a spinster to a
  married woman, riches do not automatically
  translate to wealth
• Riches are received but wealth is acquired
• Poverty needs no planning, but wealth cannot be
  acquired without a scheme.

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Maximising the Opportunities

• Get the politics right
• Forward planning
• Economic policy sequencing
• Resource management funds
• Managing revenue flows and expectations

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Maximising the Opportunities

• Creating linkages with non-petroleum sectors
• Expanding local capacity and infrastructure
  development
• Human capacity building and development
• Advancing technical, entrepreneurship and
  managerial progress
• Democratic governance and transparency

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The Opportunities

• Get the choice of revenue management and economic
  policy, their sequencing, and alignment with
  global value chains, right
• ..support this with fiscal prudence, adequate
  institutional capacity and civil society
  participation
• .. then oil and gas revenues can be a force for
  sustained economic growth and social development.

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The Risks

• Get the revenue management and economic policies,
  sequencing and alignment wrong
• . and ignore issues of institutional absorptive
  capacity and good governance
• .then international experience tell us that a
  boom in natural resource revenues can become a
  curse, depressing economic growth, worsening
  poverty and fuelling political insecurity

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Strategic Resources

• What are strategic resources?
• ltgt Resources that are used to create value for
  customers and shareholders oil, minerals, etc.
• Are strategic resources not easy to manage?
• ltgt The problem does not lie with the resources,
  but their management

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Last Notes
Crude oil is neither beneficial or detrimental.
All depends on what its owners do with it and its
proceeds. The fault is never in resource but in
the owners!
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Thank You. Kayode Adebiyi 08033181225
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Profile of Mr Kayode Adebiyi Kayode Adebiyi holds
an MBA from the University of Lagos and he is
both a Fellow of the Institute of Chartered
Accountants of Nigeria (ICAN) and Chartered
Institute of Taxation of Nigeria (CITN). His
working experience is rounded - spanning from the
manufacturing industry to academics and
Management Consulting. He rose to the position of
Executive Consultant before joining NNPC in 1991
as a Senior Accountant. In NNPC, he worked in
various SBUs - IDSL, CHQ. NAPIMS and NPDC where
he acquired cognate experience in oil and gas
accounting, taxation, managing Joint Ventures
(JVs), Production Sharing Contracts (PSC) and
Service Contracts (SC). With his vast exposure,
extensive training, work attachment and
self-development, he is an acclaimed subject
matter expert in Oil and Gas Accounting and
Taxation in the Nigerian Oil and Gas industry. He
rose to the position of Executive Director,
Shared Service in the Petroleum Products
Marketing Company (a subsidiary of the Nigerian
National Petroleum Corporation) before retiring
from NNPC in March 2020 to start his financial
and management consulting practice. He has
authored three books, the most notable of which
is "Petroleum Accounting and Taxation in
Nigeria" which he co-authored with Dr. R. U.
Uche, a former President of the Institute of
Chartered Accountants of Nigeria. A notable
conference speaker, he has presented papers to
the most distinguished audiences in his
professional domains. He has recently been
appointed a Guest Lecturer in the Department of
Accounting, Covenant University, Ota. Ogun
State. He is presently the Managing Director of
HoneyRock Multiconsult Ltd, a financial and
management consulting firm based in Lagos and
Abuja, Nigeria. Mr. Adebiyi is a member of the
Institute of Directors (IoD).