Buhari's removal of the Nigerian National Petroleum Corporation (NNPC) board, his hesitation in appointing a Petroleum Minister, and his insistence that the NNPC must apply for its annual budget after it has paid its revenues into the federal account, reveals that plugging the leaks from government is his top priority.
Falling revenue is high on his agenda as the impact of depressed oil prices hits home. We estimate a loss of US$75 billion in royalty and taxes between 2014 and 2018, while the NNPC's cash flow will also experience a US$1.8 billion drop this year.
Such losses will be a significant blow to a government that relies on the upstream industry for the bulk of its income. But as Buhari rightly points out, 'given the previous levels of waste and corruption, if we spend what we have more wisely and effectively, we can achieve a great deal more'.
The proposed breakup of the NNPC into two separate entities – a regulator and an investment vehicle - is a welcome move that should improve transparency and sector governance. But we are still in the dark on how the government will fund the NNPC's share of Joint Venture (JV) cash calls, estimated at US$88 billion over the next decade. A partial sale of its interests could raise up to US$33 billion and ease the financial burden on the government.
Revenues from deepwater Production Sharing Contracts (PSC) could be further boosted, with the government raising its share of profit oil on a case-by-case basis with contractors. Every percentage increase in government take would generate a further US$1 billion over the lives of the projects. However, the government will need to be careful to avoid stalling investments by aggressively increasing its take.
In the longer-term, Nigeria's continued success as an oil and gas producer depends on its ability to replenish produced reserves. Unfortunately, exploration activity in the past decade has been low and success rates disappointing. Even when discoveries are made, excessive bureaucracy leads to cost escalation and many projects struggle to break-even on a pre-tax basis in a US$60 oil price world. If these issues remain unresolved, Nigerian oil production will begin to decline within five years.
It's clear that Buhari has a sizeable task in front of him if he is to reform Nigeria's upstream oil and gas industry and, despite his party winning the majority in both houses of parliament, he may have to make executive decisions if he wants to move quickly.
His priorities may also diverge from those of investors. His commitment to pursue corruption in the NNPC could become a long drawn-out process when the IOCs want quick decisions on deepwater PSC terms and a solution to inadequate JV funding. Finding the right balance between such priorities will be key to revitalising the industry.
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