Download
1 / 32
E N D
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, BayoAjayi Street, Off Hakeem Balogun Street, Marwa Brooks Estate, Alausa, Ikeja, Lagos. 08033181225,07064078211 Email: hmlconsultancy@outlook.com
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
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
Special characteristics of oil • National asset • Motor of globalization • Depletability • Boom-bust cycles • Capital intensive • Enclave nature • Exceptional profits
Nigeria Oil Industry – in the beginning • Exploration started in 1937 by Shell D’Archy • Concession initially the whole of Nigeria • Oloibiri was the first commercially successful well • Discovery 1956, production 6,000 bopd, first shipment 1958
Nigeria Oil Industry – today • Oil Reserves • Oil production • Crude oil refining capacity • Natural Gas reserves • Natural Gas consumption/utilization
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
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!
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 nation’s development based on the export of petroleum • Oil windfalls flatter to deceive, creating a false sense of unlimited wealth
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.
Resource curse • Economic effects • Dutch disease • Revenue volatility • Enclave effects(Mono sector economies) • Human resources • Incomes and employment
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
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
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).
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
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.
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
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
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
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
Key Drivers of Petroleum wealth (1) • A country’s 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
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
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.
Maximising the Opportunities • Get the politics right • Forward planning • Economic policy sequencing • Resource management funds • Managing revenue flows and expectations
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
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.
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
Strategic Resources • What are strategic resources? <> Resources that are used to create value for customers and shareholders – oil, minerals, etc. • Are strategic resources not easy to manage? <> The problem does not lie with the resources, but their management
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!
Thank You. Kayode Adebiyi 08033181225
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).
