New Telegraph

A tougher turf for energy sector

govThe second wave of COVID-19 could lead to a serious oil glut, a situation Nigeria’s oil economy should dread as it moves deep into days of 2021. What can the country do? ADEOLA YUSUF, in this report, attempts an answer to the question.

“There is a big issue of COVID-19 second wave to contend with in 2021,” the Organisation of the Petroleum Exporting Countries (OPEC), which stated this, declared that it was already dreading this situation and focusing attention on how members like Nigeria could cushion the effect this situation would likely have on their economies. President Muhammadu Buhari has already signed a budget for the year in which $40 per barrel benchmark was slammed on oil, biggest revenue earner for the budget.

This 2021 benchmark at $40 per barrel is up from $30 from 2020, when the country had to revise the 2020 budget oil benchmark from $57 per barrel to $30. Its production output was also revised from approximately 2.1 million barrels to 1.7 million per day.

In the power sector, the president has also cancelled financial interventions, which the Central Bank of Nigeria (CBN) usually extend to the power sector and this step is expected to determine how the sector will survive in the new year.

Of oil glut and trouble ahead

The earlier signs of economic recovery in some parts of the world are now overshadowed by fragile conditions and growing scepticism about the pace of the recovery. In particular, a resurgence of COVID-19 cases across the world and prospects for partial lockdowns in the coming winter months could compound the risks to economic and oil demand recovery. For Nigeria, which is already losing its European oil market share to the US, another wave of COVID-driven lockdown signifies a threat.

West Africa, especially Nigeria, is one of Europe’s main sources of crude and given that very few of cargoes from September have been sold into the region, Nigeria will have to give a great discount to sell off its November cargoes.

“Nigeria needs to keep its market share of the European market. I know that November cargoes have not been sold as at today and also remember that there was a time when crude was sold at negative prices. Sellers, like Nigeria, will have to give as much discount as they can to keep their market share and reduce CIF,” a report by Africa Report reads. Just ahead of the second Europe-wide lockdown, Nigeria was already losing its European market share to the US.

“Nigeria’s Brass River and Forcados have similar qualities with the US grades and the US crude is cheaper. With this second lockdown, more sales will be lost in both the short term and long term. Nigeria has to think of incentives to attract buyers. Incentives like attractive discounts which may result in loss of revenue to the country,” the report read.

Foreign exchange crisis

With a potential drop in oil prices, Nigeria is likely to face a foreign exchange crisis for longer as crude oil, its top revenue source is selling at less than $40 a barrel, says Olumide Adesina, an investment trader and member of the America-based Chartered Financial Analyst (CFA) society.

Forex liquidity squeeze “will continue for as long as oil prices are down and Nigeria fails to diversify its economy,” adds Samuel Segun, South-African based analyst at SBM Intelligence. According to him, “following the first wave of COVID-19, foreign portfolio investors (FPIs) pulled out their investments from Nigeria, causing a further forex squeeze. If the lockdown affects demand for crude, it would mean reduced forex earnings for Nigeria and an “inability to finance the budget and meet key government obligations,” adds Segun.

The budget

The 2021 N13 trillion budget for 2021 was signed by President Muhammadu Buhari. The document is based on a $379 exchange rate and an oil benchmark of $40 barrel per day. The budget proposes an oil production volume of 1.86 million per day and a Gross Domestic Product growth target of three per cent, as well as an inflation rate of 11.95 per cent, on the assumption that Nigeria’s economy will grow three per cent by 2021.

“We do expect that Nigeria’s economy will recover to the path of growth early in 2021; so the total aggregate revenue that is projected for the 2021 budget is N7.89 trillion and what is unique about the 2021 budget is that we have brought in the budgets of 60 government-owned enterprises,” Finance Minister, Zainab Ahmed, said of the budget. Ahmed cautioned that the resuron gence of COVID-19 in Europe could affect the 2021 budget estimate.

“The actual projection was $40 per barrel and that is the average price that we projected to be for the year. Some of the institutions that are responsible for tracking price of crude oil actually have crude oil price going as far as $50, $52 per barrel. We took the safer path. It seems the second wave of COVID-19 in Europe is affecting us. We are hoping to have clarity as to which direction to take in the next week or two,” she said.

The budget was predicated on $40 per barrel, but at the moment the current price of the crude oil in the market stands at $37. Nigeria’s persistent economic problems including rising inflation rate, as well as fall in in the Purchasing Managers Index (PMI) caused by dollars’ scarcity as well as depressed in crude oil prices are likely to ‘stifle’ growth in Africa’s biggest economy. The way Adesina sees it, “until crude oil prices stabilise above $50 amid falling foreign exchange reserves that continue to add pressure on the naira, Nigeria [will] start down a potential prolonged foreign exchange shortage.”

The storm ahead for power sector

Still wallowing in serious consumers’ apathy, the power sector has issues of liquidity to contend with in 2021 fiscal year. President Buhari succinctly captured this in his speech at the launch of SCADA system by the Eko Electricity Distribution Company (EKEDC) where he declared an end to CBN intervention for the power sector.

He said: “My administration remains committed to addresing the liquidity challenges which are adversely affecting the power sector’s viability. We noted with grave concern: the increase fiscal burden on the Fedetal Government occasioned by the tariff shortfalls in the power sector which are no longee sustainable. My efforts, via the CBN’s Power Assistance Fund (CBN PAF) targeted at supporting tariff shortfalls.

Such interventions can no longer be extended and must be phased out to promote the sectir’s financial independence. “We are also aware that these tariff shortfalls sit on DisCos’ book and impair their ability to raise capital and invest.

The FG is working assiduously to address these financial and fiscal challenges through various programs such as the National Mass Metering Program (NMMP), the Siemens AG Power Project and the World Bank Distribution Sector Recovery Program (DISREP) etc.

“These efforts by my administration are geared towards integrated resource planning in the Nigerian Electricity Supply Industry (NESI). We must ensure that there is an alignment of capacity and attraction of investments across the generation, transmission and distribution components of the power sector’s value chain.” For the customers, he said: “On the part of the consumers, I wish to call on the valued customers of all DisCos to desist from tampering with electricity meters.

This is not only on account of protecting the revenues of DisCos but also related to the safety of customers as there have been reports of consumers losing lives in the course of by-passing meters. “The FG reaffirms its commitment to ensure that electricity gets to the homes and businesses of all Nigerians, wether unserved or underserved.

In the area of off-grid Electricity supply, the FG recently unveiled the five million solar connection ls program, through the CBN’s Development Finance Department and this application is still open.

“Upon completion, the five million solar connection programme will expand energy access to 25 milion individuals by providing five million new connections through the provision of solar home systems (SHS) or construction and operation of mini grids. “Increase local content in the off-grid solar vakue chain, through facilitating the growth of the local manufacturing industry and incentivise the creation of 250,000 new jobs in the energy secto “The FG assures all DisCos of its readiness to support any initiative that is geared towards addresing the challenges facing the Nigerian power sector.”

Corruption

A major way the troubled waters of 2021 could be conquered by the energy sector is through sincere fight with corruption. Corruption has been said to be responsible for a lot of woes contronting the industry and signs are abound that the ernment has realised this and that it is putting up the fight more than ever before. Nigeria is expected to, from January 1, 2021, come under obligation to make terms of contracts entered into in the oil and gas, and solid minerals sectors available to citizens in line with a new standard by the Extractive Industries Transparency Initiative (EITI).

Under the 2019 EITI Standard, implementing countries are required to disclose any contracts and licenses that are granted, entered into or amended after January 1, 2021. Countries are also required to document government’s policy on the disclosure of contracts and licenses that govern the exploration and exploitation of oil, gas and minerals.

EITI explained on its website that when countries commit to contract transparency, “they accept to publicly disclose the full text of any contract, license, concession or other agreement governing the exploitation of oil, gas and minerals”. Director, Communication and Advocacy, Nigeria Extractive Industries Transparency Initiative (NEITI), Dr Orji Ogbonnaya Orji, said plans are already in place to meet the new requirement.

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