Avoidable Oil and Gas Revenue Losses: Breaking the Election Cycle

Oil & Gas
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Friday, January 18, 2019/08:54 AM/PwC

 

Like most developing democracies, election periods in Nigeria are typically associated with uncertainties, which generally impede business decisions and slow down economic productivity. In Nigeria, the last three election cycles have been followed by inflationary pressures occasioned by increase in money supply, which in turn forces the CBN to tighten monetary policies via the MPR (Monetary Policy Rate) and reserve requirements. 

Prudent business leaders stall investment decisions, while they await the outcomes of the electioneering process and policy direction from the new administration. The impact of these delayed decisions on the economy varies depending on the significance of the sector.        

In this brief, we attempt to quantify the cost of elections in Nigeria over the last 17 years focusing on the oil & gas sector, as it constitutes over 90% of the nation's foreign earnings and about a tenth of the nation's GDP .  

First, we establish the historical relationship between election cycles and volume of projects completed in the oil & gas sector in Nigeria. Next, we quantify the loss (in Naira terms) illustrating how election cycles affect government revenue vis-à-vis federal budget performance. We conclude the brief with key recommendations that could reduce the impact of election cycle on government finances. 

Data from 2001 to 2017 indicates that the number of oil wells completed on a yearly basis -  in the oil & gas sector typically decline immediately after an election year regardless of the price of crude oil in the international market (see table below). The range of this decline was between 14.0% and 59.0% within the period under review. 

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Further analysis showed that oil wells completion in postelection years were negatively impacted by the twin factors of policy uncertainties and heightened security challenges in the Niger-Delta region (election effect).  In 2016, Nigeria survived a triple assault of uncertain policies, security challenges and slump in the price of crude in the international oil market. 

Interestingly, the fall in oil well completions should potentially translate to a drop in the nation's crude oil production as well as the government oil revenues. This, however, has not entirely been the case as higher crude oil prices in 2004 and 2008 fortunately boosted oil revenue despite the fall in the number of oil wells drilled. We weren't so lucky in 2016!

 

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In 2012 the fall in crude oil production - 2.0% - outweighed the 0.6% rise in the price of crude. This translated to a revenue loss of c.N853.0 billion, 18.0% of the N4.8 trillion budget for that year. The revenue shortfall in 2016 was more severe at N1.1 trillion – 19.0% of the 2016 budget of N6.1 trillion – induced by the “election” effect and the slump in the price of crude in the international market. This analysis does not capture other losses to the economy in terms of capacity development and forgone investment inflows into the economy. From our findings, this relationship exists only in Nigeria via-a-vis other oil producing countries in OPEC (Organisation of Petroleum Exporting Countries), and the OECD (Organisation for Economic Cooperation and Development).

We anticipate a similar pattern post 2019 elections (year 2020 in particular) which may starve the treasury of about a fifth of its oil revenues required to fund the budget for that year. 

This is worrisome given the widening fiscal deficit of the federal budget, which has risen to a decade high of N3.8 trillion in 2017 from N2.2 trillion in 2016. For instance, recent report from the Budget Office on the performance of the 2017 budget indicated that actual federal oil revenue (N1.12 trillion) was inadequate to fund federal personnel cost (N1.87 trillion).


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The implication of all these factors is that the government will likely continue to accumulate debt, which is already at its highest in the last half decade. This scenario will likely worsen the N1.6 trillion debt service expense (69.0% total government revenue as at 2017), leaving the country will meagre resources to finance its core/essential development needs; infrastructure in particular.


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 Proshare Nigeria Pvt. Ltd.


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