Kolmani Oil Discovery: What it means

Ahmed Adamu, PhD

Some Nigerians had some euphoria as the game-changing oil and gas discovery in Kolmani, a Northern Nigerian area, was announced. It is the first Northern Nigerian proven petroleum reserve, sixty-six years after petroleum discovery in southern Nigeria. "What does this discovery mean to us as Nigerians and northerners," someone from the north called and asked me.

An estimated proven reserve of 1 billion barrels of crude oil and 500 billion cubic feet of natural gas were found in an oil field that straddles Bauchi and Gombe states, known as the Kolmani oil field. The commercial quantity of the oil reserve in this area could increase in the future.

Anywhere oil is found in Nigeria belongs to the federation. The only benefits to the host community are the 3% of the oil operating cost in the area from the preceding year and the constitutional 13% derivation funds to the state government. The new oil-rich states will benefit from these two sources.

The 3% is only for the oil-bearing communities; other non-oil-bearing communities will not benefit from it. At the same time, 13% of all the revenue generated from the oil produced in the state will go to the state government. Oil-producing states and their host communities could get more than N100 billion in a year from these two sources alone.

Other extended benefits to the new oil-rich states could be direct jobs for high, medium, and small-skilled labor. Already some Indian oil companies have shown interest in becoming partners in developing the onshore Kolmani oil fields.

Onshore oil production in Nigeria, like the Kolmani field, is not attractive to major oil-producing companies. The five major oil companies operating in Nigeria are divesting from onshore and shallow water oil fields despite the recent reduction in taxes and royalties in the PIA. Oil companies prefer deep water oil production to avoid hostilities from restiveness, vandalism, and insecurity associated with the onshore oil production areas.

Because of what is stated in the PIA relating to the 3% for host communities, the Kolmani oil production should not experience restiveness and vandalism. The PIA said, "In any year where an act of vandalism, sabotage or other civil unrest occurs which causes damage to petroleum and designated facilities or disrupts production activities within the host communities, the community will forfeit its entitlement to the extent of the cost of repairs". Host communities' benefits are now tied to the smooth running of the oil production in their area.

NNPC limited will be the Kolmani oil and gas concessionaire and will lift Nigeria's profit oil and gas from the oil field and transfer the proceeds to the Nigerian Petroleum Upstream commission after deducting its service cost. However, the profit oil could only be derived after cost recovery by the developers of the field, known as contractors.

The New Nigeria Development Company (NNDC) is the lease owner for petroleum mining on the field. But, could NNDC be able to develop this new oil field? No. NNDC may not have the technical and financial readiness to develop the Kolmani field yet. Therefore, oil companies must be contracted to spend millions of dollars and provide technical expertise to develop the area.

There will not be a profit oil and gas from the field until after some years of production to allow the contractors to recover their cost, but this depends on the oil price and contract agreements. Mainly the cost incurred by the contractor in developing the field is amortized and may take up to the first five years of production, and then the profit sharing will start. This is to allow the operators to recover their costs of development. The government will transfer the exploration costs to the operator, which will add to the total cost of oil.

The only money that will be accruing to the federation account in the early years of production will be the royalty crude and hydrocarbon taxes (only if there is a profit), which are 15% and 30% of the crude oil produced, respectively. It could take between five to ten years to develop the field. So, any financial benefits will be after developing the area.

Would the focus be on developing crude oil only or both crude oil and gas? Natural gas has far-reaching economic benefits, but developing it is more expensive. With the ongoing gas pipeline projects, there could be more gas supply from this field which will help industrial growth in the country.

Now, some states will begin to suspect their possible oil and gas reserves. We can now conclude that every part of Nigeria has a possible oil and gas reserve. With the first oil discovery in the north and with the creation of the Frontier Exploration Funds, more exploration will be undertaken in the north. The Frontier Exploration Fund is funded by 30% of the NNPC Limited profit oil and gas and 10% of all rents on petroleum licenses and leases.

Many states are facing debt and development issues and might wish to have more control and access to the natural resources in their states to fix their problems. More oil, gas, and other natural resources could be harnessed when state governments are given the right to control those resources. States will maximize their potential resources to outcompete each other.

In the event of states' resource control, people ask, how could border states handle shared oil and gas fields that cross their borders? Just like the Kolmani oil and gas field, which straddles across Gombe and Bauchi states. Any state that produces more at the border areas may draw more oil from the neighboring state. So, who drills first captures the oil.

 To avoid over-production and damage to the environment at the border areas, the neighboring states should unify the oil field, appoint a single operator, and share the profit based on where the field lies in relation to the boundary. State governments in a geo-political zone could undertake this kind of unification.

Even after states' resource control, further oil explorations will continue to search for more oil and gas reserves in the states that do not confirm their petroleum deposits yet. So, non-oil-producing states could become oil producers eventually.

With oil fading away and growing restrictions on the use of fossil fuels, we can maximize the utilization of our endowed petroleum resources to build infrastructure and the economy and fund alternative energy sources and consumption.

Finally, more oil reserves without growing and functioning refineries will not make any difference. The focus should be on functioning and adequate refineries locally to stop importing refined petroleum. Imported refined petroleum is the biggest bill in our import basket. Having local refineries will help restore the value of our exchange rates. Government refineries must be privatized as soon as possible, and modular refineries should be encouraged to grow their efficiencies and capacities. So, the discovery of oil and gas in the Kolmani area is not a given benefit; it is a potential benefit, so celebrate not yet.

Ahmed Adamu, PhD

Petroleum Economist

ahmadadamu1@gmail.com 

How Subsidy Removal on Diesel causes Scarcity and High Price of Petrol in Nigeria.

Ahmed Adamu, PhD

The removal of subsidy on Diesel coupled with the increase in the international oil price led to the increase in the price of Diesel by 180% in just a year. This caused some banks to close early because they cannot afford the higher diesel prices. Other businesses and commercial centers also shortened the duration of their services. This slows down the economy. The cost of transporting goods and petrol has more than doubled, as a result, hence the unprecedented inflation, which was 17% as of April 2022.

Removing subsidy on Diesel have more effect on inflation because heavy transportation of goods and fuels are done using trucks that use Diesel. Commercial and industrial centers are more affected by Diesel inflation than petrol inflation. 

The cost of doing business and producer transportation is largely affected by the Diesel price increase. To avoid increasing the cost of production, countries like Brazil delayed removing the subsidy on Diesel until after the successful removal of the subsidy on jet fuel, gasoline, and LPG.

Petrol, known as PMS in Nigeria, directly affects the cost of mostly human transportation. Despite subsidizing the PMS price, inflation is still going high and fuel scarcity is becoming worse because diesel prices are increased.

Now, what is the link between diesel price hikes and fuel scarcity?

In the Nigerian PMS pricing template, marketers of the fuel are paid for the bridging cost to ensure price equalization across the country, now that the marketers are paying more for every distance because of diesel price increases, they are demanding more to pay for their inflated transportation costs. 

However, the government wants to stick to the existing N165/liter pricing template, which allows for a lower bridging cost. Marketers are now left with the option to either stop operations or sell at a more expensive location to recoup their transportation costs.

Locations like Abuja where officials can easily trace any violation of the pricing regime suffer the most. Marketers avoid Abuja because they are forced to sell at a lower price than they wanted. They would rather take it to other locations that have little or no supervision and sell it at their desired prices. Higher prices always fix excess demand, that’s why queues are less outside Abuja.

On the other hand, the government is shying away from adjusting the pricing template because it will mean paying more for the bridging purpose, which is a form of additional subsidy. Already, the government planned to spend N3 trillion on subsidy this year, and additional bridging costs are going to add to the subsidy burden.

The Nigerian government has only six months since the passage of the PIA to stop all kinds of fuel subsidies. This means subsidies cannot exceed June 2022. 

President Buhari has no plan on how to convince Nigerians or deal with the subsidy removal. He is now scared of the public resistance and the implication of that for his party in the forthcoming election. That is why President Buhari must send a bill for the amendment of the PIA to enable him elongate petroleum subsidy, otherwise, petroleum subsidy is illegal from the end of June.

With the landing cost of about N600 per liter, removing the subsidy will make the government save N29 billion every day, and will help clear all the queues at the filling stations. However, the pump price will be above N600 per liter. 

Is Buhari’s administration ready for this reality? Keeping subsidies or removing subsidies; both options have painful consequences, the best thing to do is to go for what is best for Nigerians for a longer period even if it hurts more now.

With the price of oil being $126 per barrel as of June 2022, the highest oil price in more than a decade, Nigeria stands for no gain. The only oil-exporting country that does not benefit from the high oil price. Because higher oil prices mean higher subsidy payments, where a 1% increase in oil prices leads to a 1.58% increase in subsidy spending.

Sometimes, the Nigerian government would prefer low oil prices to avoid higher subsidy bills. In just 20 years, the Nigerian government has paid over N14 trillion on petroleum subsidies. Imagine the opportunity cost of that huge amount. That amount would have been enough to build refineries, but we are still left with no working refining capacities.

Our refineries are big liabilities, as Nigerians’ money is used to keep them alive even without refining a single liter. Now, that NNPC is commercialized, refineries are open for grabs, but even NNPC limited is afraid to take the refineries because of their liabilities. So, if the government cannot handle the refineries, they must be sold, because billions of Naira are lost to the refineries that are not working.

One thing that will take Nigeria off the hook is full deregulation, President Buhari should stick to the PIA calendar for the subsidy removal and the refineries should be privatized too. However, there are certain steps, conditions, investments, and lifestyle reforms that must be in place for subsidy removal to be seamless.

Ahmed Adamu

Petroleum Economist

ahmadadamu1@gmail.com

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Big Economic Crisis Looms in Nigeria

Ahmed Adamu, PhD

As Nigeria heads to a decisive election in 2023, attentions are largely on the candidates and political parties and intrigues in between. Little do Nigerians know about the impending danger their economy faces. 

 

The Nigerian currency faces the worst devaluation ever as Nigerians shun away from their local currencies. There are now competing dollar queues in Nigerian banking halls. Nigerians are rushing to open dollar accounts and converting their savings into dollars. 

People prefer to store their money in dollars than in Naira, as keeping the dollar alone is now a lucrative investment due to the continuous Naira devaluation. The increasing demand for the dollar increases the supply of the Naira and hence its continuous devaluation. 

Most of the demand for the dollar is not for transaction purposes but speculative reasons. Hoarding the dollar and waiting for it to increase value to sell it is disastrous and treasonous economically. 

Dollar hoarding and speculation increase the supply of Naira in circulation and fuel even more inflation. Already the headline inflation is as high as 16% as of the first quarter of 2022. More Naira in circulation will increase inflation to above 20%. As the 2023 election season has started, election and campaign spending by politicians will fuel even more inflation. 

Naira is losing value in the eyes of Nigerians, and that’s why it will continue to deteriorate. Some hotels, landlords, and schools in Nigeria charge in dollars instead of Naira. 

Trading local goods and services in dollars is the surefire way to total economic collapse. Even government transactions and spendings are also in dollars. These created huge dollar demand and scarcity and shot its value high, which as of April 2022, stands at N590 in the parallel market. 

Foreign investors are now finding it difficult to repatriate their revenue from Nigeria in foreign currencies. Some international airlines have complained about their inability to repatriate their revenues in dollars, which forced them to now sell their tickets only in dollars. This development will further increase the demand for the dollar and the oversupply of the Naira and further devalue the Naira.

The continuous devaluation of the Naira is putting enormous pressure on Nigeria’s foreign reserve, which was questionably reported to be around $40 billion as of February 2022. The parity fixed exchange rate policy is widening the depletion of the foreign reserve. 

Sometimes, authorities might not be open about the reserve depletion to protect the integrity of the economy. However, if the effect explodes, it will be catastrophic. 

The increasing cost of pegging the dollar will soon become unbearable. However, liberalizing the exchange rate market will increase the dollar value to about N1,000 or more. This will cause hyperinflation, increasing unemployment, and capital flight. It is the trap Nigeria found itself in.

Investors are already avoiding Nigeria due to the fluctuating and unreliable forex policies. Existing investors are already thinking of divesting. Foreign Direct Investment inflows are at their lowest in a decade. The main source of forex in Nigeria is crude oil sales, and that is also reducing due to the crude oil swap system. 

Investment analysts highlighted severe social, market, and political risks of investing in Nigeria. These range from insecurity, insufficient infrastructure, and government interventions to political unrest and instabilities.

These risks caused an almost a collapse in the non-oil exports in the country, leaving the economy very susceptible to oil market volatilities. It also makes imports susceptible to exchange rate fluctuations and foreign inflation. 

The local manufacturers struggle to acquire expensive dollars to import capital and inputs. These are conditions for hyperinflation, a serious economic crisis that could destroy the Naira. Once the Naira collapses, so does Nigeria’s economy.

With the increasing capital flights, imports, borrowing, and budget deficit, one can only wait for the inevitable explosion. 

Very soon Nigeria’s government may become unable to peg the value of the dollar, and once this happens, then the worst catastrophe will befall the Naira. The collapse of the Naira will demolish the purchasing power of people’s income and usher in more hunger and poverty. Once these happen, the total anarchy will set in.

However, the above impending agony can be prevented by taking certain decisive actions. First, the Central Bank of Nigeria (CBN) must be checkmated to fish out excesses and effectively manage the forex policy through transparency and fairness. 

The CBN must meet the demand of the foreign investors and airlines to enable them easily repatriate their income in foreign currency. This will boost investor confidence by having the guarantee of liquidity of their returns in their desired currency. 

The unnecessary discharge and sale of dollars must be stopped. There should be new reforms to discourage trading physical dollars in the country. The government should set a maximum target for using dollars for official activities and transactions. 

The government should minimize the need for dollars in its transactions. We have to add value to our locally manufactured products and services to increase the supply of forex through exports. Citizens must be conscientise of the importance of valuing the local currency and the danger of saving or transacting locally in dollars.

For us to manage our economy, we have to manage inflation and restore confidence in Naira, and this can only happen through economic reforms such as import substitutions, forex reforms, and investment in infrastructure. 

We have to develop our major mineral resources and build the agricultural value chain for exports and attract forex. Foreign investors can only come if we can strategically address the social, economic, and political risks in the country.

The next administration has a herculean task to rescue the sinking economy first before rebuilding it. That is why the focus should be on which candidates understand the economy and the solutions. Otherwise, we will all be doomed and fall into serious economic crises like what happened in Asia in 1997, Zimbabwe in 2008, and recently in Sri Lanka. 

The 2023 election is not just a common election between parties, it is a decision on the fate of our economy and by extension our survival. Therefore, it is not about a region, party, or ethnicity, it is about the vision that could overturn the current mayhem.

Ahmed Adamu, PhD

Petroleum Economist

ahmadadamu1@gmail.com

@AhmedAdamu

Fuel Scarcity: Issues and Solutions

Ahmed Adamu, PhD

Most refineries are designed to produce certain specifications of petroleum products, depending on the market requirement. Though, some modern refineries are equipped to produce varying specifications of the products. This enables marketers to buy petrol and blend it with some chemical substance to meet varying destination requirements.

Each country has a specific chemical composition requirement for their petrol. The marketers or refineries can blend the petrol to suit each country’s specifications.

Methanol is a chemical substance added to petrol for smooth running in car engines. It helps in increasing fuel efficiency and reducing energy intensity and CO2 emissions. The Nigerian gasoline-powered vehicles are compatible with petrol blended with up to 5% methanol. Some countries allow only 2-3% of the methanol in their petrol. 

Early February 2022, Nigeria imported 200 million liters of petrol from Belgium through a crude oil swap arrangement. The imported petrol contained methanol up to 20%, which is far above the methanol content threshold in Nigeria. This petrol is called off-spec petrol for Nigeria. For any Nigerian vehicle to use this petrol, it has to be retrofitted. Countries like Brazil and Germany who retrofitted some of their vehicles may use this kind of specific petrol.

Nigerian officials were not aware of the off-spec petrol, and they allowed it to enter the Nigerian market. Some vehicle owners started noticing some damages and malfunctions in their vehicles after taking the off-spec petrol. That was when Nigerian officials realized that the imported petrol was not suitable for Nigerian vehicles. They have to call all the petrol back to the depots.

The withdrawal of the 200 million liters of petrol created a supply glitch in the country, hence the scarcity. Since Nigeria is vulnerable due to its sole reliance on imported petrol, Nigerians have to wait on filling stations queues until the next importation. Any slightest petroleum import glitch always affects Nigeria significantly.

Had it been Nigerian officials have tested for the methanol content, they would have noticed it since from the departure country or at least at the arrival of the vessels at the Nigerian seaports. Nigerian officials only test for vapor pressure, benzene, sulfur content, and density. From this experience, Nigerian officials should start testing for methanol content levels for any imported petrol.

The resultant scarcity has created a window for unscrupulous petroleum sellers to charge exorbitant prices. Unconfirmed reports suggested that a liter of petrol is sold at N1000 in some places. The welfare of the people has been negatively affected as a result. People sleep in the queue at filling stations. The movement of people and goods have reduced significantly, slowing down the entire economy and pushing inflation further high. 

For the supply to stabilize, more petrol has to be imported to clear the queues and meet the subsequent usual daily demand. The Nigerian officials committed to buying 2.3 billion liters of petrol to bridge the supply gap. The importer of the adulterated fuel must take it back and re-supply its equivalent with some additional penalties.

It might take weeks or months to bridge the supply gap. The 2.3 billion liters of emergency import will add to spending on the side of the government for petroleum consumption. Already the government is planning to spend N2.6 trillion for petroleum subsidy consumption. These are huge burdens just for petroleum importation and subsidizing petroleum consumption in Nigeria.

No administration will ever succeed without stopping petroleum importation and removing petroleum subsidies. However, the removal of the subsidy must be under certain conditions and through a certain gradual process. These conditions include sufficient local refineries, exchange rate stability, and single-digit inflation. 

The steps for removing the subsidy include petroleum consumption auditing to ascertain and track petroleum consumption. The next step is the petroleum consumption reduction program, which will target reducing the daily liter consumptions in Nigeria from 70 million liters to about 30 million liters. This is possible by targeting large consumption cities like Abuja, Lagos, and Kano.

The program will require investment in mass transport systems, which include convenient public trains, light rail transit, and busses in these cities. The idea is to impose car taxes to discourage people from using their cars and incentivize them to use the public transport systems. This will reduce the energy per capita consumption in these cities and encourage the use of alternative fuels like CNG and LPG in these mass transport facilities. The program could be extended to other major cities gradually.

Imagine a scenario of ten people going to the same office daily, using ten different cars at the same time, and consuming the same quantity of fuel each. If coming and going to the office consumes 5 liters daily, it will mean 5 liters multiplied by 10 people, which is 50 liters of petrol daily. But when they all use one vehicle, the energy consumption will be only 5 liters daily, which means petroleum consumption is reduced by 90%. The payment of subsidy for these people will reduce by 90%. That is the energy conservation process of removing the petroleum subsidy.

But the public transport systems must be in place first. The private sector could be mobilized for such investments. Then, the next step will be the implementation of the targeted subsidy, which I explained clearly in my previous article.

The subsidy issue has been and will continue to be an issue and a great burden on the government. After fixing the current petroleum scarcity, the government must come up with a strategic roadmap for addressing the subsidy issues. The current scarcity is one of the serious shortages Nigerians have experienced in a decade.

Lastly, the question now is why and who imported the off-spec petrol into Nigeria? Was it deliberate? Was it the refiner or the marketer? This investigation must be conducted, and Nigerians must be informed. 

Punishing the culprits would also serve as a deterrent to others. It might be possible the marketers might have blended the petrol on the sea during the transit, or it might be the refiner that mixed the wrong quantity of the methanol. Whatever, Nigerians will be waiting for an explanation and looking forward to measures that will prevent future occurrences of the situation.

Ahmed Adamu, PhD

Petroleum Economist

ahmadadamu1@gmail.com

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The Petroleum Subsidy Trap and The Way Forward

Ahmed Adamu, PhD

Lack of refining capacities and Petroleum subsidies have caused Nigeria to lose significant foreign exchange and its ability to fund infrastructural development. 

The Nigerian government's share of crude oil averaged around 900k barrels per day in 2021, and at least 70% of that was exchanged for petroleum products, which means only 30% of our crude oil exports brought back dollars. 

Going by the above, Nigeria received an average of only $20 million per day from oil exports in 2021. On the other hand, Nigeria loses a minimum of $45 million cash to crude oil swaps every day. 

Instead of receiving dollars after selling our crude oil, we receive refined petroleum to fill the local refining capacity deficiencies and meet the outrageous local petrol demand. 

That has caused the flow of foreign exchange into Nigeria to reduce drastically, which caused the deterioration of our foreign exchange reserve, dollar scarcity, Naira devaluation, and hence inflation. That is the cost of not having sufficient local refineries.  

On top of that, the Nigerian government is spending more than N150 billion monthly on petroleum subsidies. These funds would have been for infrastructural development and job creation programs. Nigerian government loses a significant amount of revenue due to petroleum regulation. 

The subsidy also leads to serious supply leakages, where more than 40% of subsidized petroleum is being arbitraged in neighboring countries. Nigeria is creating a business opportunity for rent-seekers to buy the Nigerian subsidized petrol and then sell it at an expensive market to make a profit. This is a big revenue leakage that petroleum subsidy causes. 

Petroleum Subsidy is an "evil necessity" at the moment; Despite the above challenges, the government must continue with petroleum subsidy. There is no doubt that the petroleum subsidy is not sustainable for now, but the question is when and how to remove it? 

In the meantime, Nigerians cannot afford the unsubsidized price of petrol. Without petroleum subsidies, petrol prices will be more susceptible to fluctuations in crude oil prices and exchange rates. Prices at filling stations will fluctuate to any change in the exchange rate and crude oil price. These fluctuations could happen on daily basis. 

The deregulated petrol price will be anything above N300 per liter at the moment; this will cause further inflation because everything links to the petrol price. The resultant inflation will harm the economy more than the subsidy harms the economy at the moment. Now, this is the trap.

Now, to answer when to remove subsidy. The best time to remove petroleum subsidy is when there is a minimum of 500k barrels per day of local refining capacities, when the exchange rate is stable, and when inflation is at a single digit. 

Dangote refinery is still at a "maybe" state; there is no specific time when it is likely to start operating, but if it does, it will help satisfy the first and most important condition. 

Achieving the first condition will enable us to achieve the second condition of exchange rate stability, but that has to be complemented with import substitution strategies. Fulfilling the first and second conditions will automatically make the third condition achievable.

 

But the how-to remove the subsidy is the main question. We have options of targetted subsidy or quota subsidy as phasing out strategies. Let us look at the targeted subsidy strategy first.

Under this regime; any Nigerian that wants to benefit from the petroleum subsidy will have to enroll in the subsidy program, where his biometric data will be collected and linked to his vehicle details. A person will receive an electronic sticker that will be scanned to verify his national identity, biometric data, and vehicle specifications at the point of purchasing the subsidized petrol.

Petrol stations will have to enroll in this subsidy regime, and it is only the affiliated filling stations that will be selling the subsidized petrol. The government should incentivize filling stations to sign up for the subsidy regime. 

Other filling stations that did not join the program will be selling the petrol at the market price. So, you will have two sets of filling stations: the ones that sell at a subsidized price and the others that do not. 

Nigerians that can afford the unsubsidized petrol will conveniently buy from the unaffiliated filling stations. While others will have to consume at the filling stations that signed up for the subsidy program. That is why the government should ensure many filling stations, especially in the rural areas signed up for the program. 

By doing that, the consumption of subsidized petroleum will be limited to only Nigerians and the subsidy spending will reduce drastically. The government may target a certain subsidy payment threshold every month.  Every beneficiary should have a maximum number of allocated liters per month to avoid round-tripping. 

By implementing this, only less than 30 million liters per day will be subsidized, as against the reported 70 million liters, which automatically makes the Nigerian government save up to N90 billion every month and still provide the subsidy to the poor people. 

Another alternative phasing out strategy is the quota subsidy, where a certain number of liters are allocated proportionately to categories of consumers monthly. The consumer categories will include commercial vehicle users, industrial vehicle users, and private vehicle users. 

This will narrow down the subsidy more to the poor and consumer goods production processes. The need for the government to fund palliatives may not arise, as the masses will continue to enjoy the subsidy. 

Finally, the savings from the reduction in subsidy spending may be used for railway construction to interlink the country for easier and cheaper transportation. This will translate into cheaper consumer products. The government should stop giving cash palliatives but implement capital projects that ease businesses. 

The government should be honest and transparent in dealing with petroleum subsidy issues. Delaying the subsidy removal until after the election is purely political, unpatriotic, and patronizing. Punishing Nigerians after using them for electoral votes is treason.  

Ahmed Adamu, PhD

Petroleum Economist

ahmadadamu1@gmail.com 

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