The 2017 Budget and Kachikwu’s Oil Industry Reforms

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The focus and details of this year’s budget confirm the relevance of the ongoing reforms at the Petroleum Ministry under the leadership of Dr. Emmanuel Ibe Kachikwu, reports Terpase Joseph Namor

The strong focus on oil revenues in the 2017 budget reflects two very important realities. One, it shows the importance of the oil sector and the importance of the reforms which the Minister of State, Dr. Emmanuel Ibe Kachikwu and his team is carrying out under the vision of the President Muhammadu Buhari. Two, it demonstrates that in spite of efforts to diversify the country’s revenue base, the oil sector remains the most ready, important and reliable source of revenues for financing the budget, funding critical social infrastructure, getting the country out of recession and laying the foundation for a post-oil era.

The 2017 budget numbers clearly show this. From the projected budget revenues of N4.940 trillion, the oil sector is to account for N1.985 trillion, while non- oil’s and independent revenues contribution stand at N1.373 trillion and N1.583.6 trillion respectively. Oil takes the lead with forty percent of total projected revenues while non-oil and independent revenues are at twenty eight and thirty two percent.

The reverse was the case in 2016. The 2016 budget had put the non-oil sector in the lead as part of government policy to reduce over-reliance on oil revenue and reduce the country’s exposure to oil price volatility. Non-oil revenues, comprising Company Income Tax (CIT), Value Added Tax (VAT), Customs and Excise duties, and Federation Account levies were projected to contribute N1.45 trillion while only N820 billion was projected to come from oil related revenues. The 2016 budget had also projected that by enforcing strict compliance with the Fiscal Responsibility Act, 2007 and public expenditure reforms in all MDAs, about N1.51 trillion will be derived from independent revenues.

Unfortunately, these projections did not materialize. In a recent report on 2016 revenue performance, the Minister of Budget and National Planning, Senator Udoma Udo Udoma, said that non-oil revenue projections fell far below expectations. For instance, the Federal Inland Revenue Services (FIRS) failed to deliver on the N5 trillion revenue target and only managed to collect N500 billion in non – oil taxes in three quarters – estimated to be the worst collection figure in six to seven years.

The renewed focus on oil revenues in the 2017 budget as the central source of budget financing may be seen by some as a lesson from the 2016 bad experience with non-oil. But most importantly, it underscores the optimism of the government in the sector which is a result of the reforms and innovative policies of the Kachikwu leadership of the oil industry. He has been a key part of a series of positive international and local developments in the oil sector key amongst which are the recent rally in global oil prices, increase in local production, flexible oil and gas financing system as well as increased investment in the oil industry amongst others.
Concerning the global oil price rally, Kachikwu was one of the earliest proponents for production cut as a way to reduce the glut in the market and cause some increase in price of oil.

Initially the campaign to fix production cuts met stiff resistance from OPEC countries like Saudi Arabia and UAE. Saudi Arabia particularly having amassed substantial savings in dollars from oil over time, had a deliberate strategy to allow and keep prices low so as to maintain their international customer base and make it completely unproductive for shale oil producers in the United States to keep production going. Along with countries like Qatar in this fortunate position, they were obviously not concerned about the damaging effects of very low prices on other countries like Nigeria who did not have such a cushion to fall back on. Despite the initial opposition and lack of cooperation, Kachikwu soldiered on – hopeful that at some point – there will be some consensus around the idea.

This actually came to pass. In November, OPEC sent crude oil prices soaring by agreeing to its first production cuts in eight years. The deal, designed to drain record global oil inventories, overcame disagreements between the group’s three largest producers — Saudi Arabia, Iran and Iraq — and ended a flirtation with free markets that started in 2014. It was also broader than many had expected, extending beyond OPEC. Most strikingly, Russia agreed to unprecedented cuts to its own output.

Due to the strategic role that Kachikwu played and his strong international lobby and representation of Nigeria’s peculiar position, the country has benefitted immensely from this production cuts at two key levels. For one, Nigeria’s production quota of 2.2 million barrels per day is not affected by the new production cut. The country was completed excluded. Two, with new oil prices nearing the $60 mark, this means greater earnings from oil and a sharp increase in the contribution of the sector to budget financing.

The consistent engagement of Niger Delta militants and elders from the region has also helped significantly to increase local production. Early last year, the activities of militants had led to the vandalization of critical pipelines. This led to forced production shut-ins by oil majors and drove crude oil production numbers to historic lows. The production losses contributed to the fall poor performance of revenue projections in the 2016 budget.
The policy of diplomacy, engagement and involvement of militants and stakeholders in the region has helped to calm tensions in the region, reduce militancy and vandalization significantly. As a result, production has risen to over 2 million barrels. This and ongoing efforts makes the 2017 production assumption of 2.2 million barrels feasible.

The successful elimination of the decades old joint cash call system by the Kachikwu-led leadership of the oil sector is also a key factor in the 2017 budget. Unlike earlier budgets, the budget 2017 did not make any provision for taking money from government revenues to fund joint venture cash calls. As has been the practice, each year sizable portions of government revenues which ordinarily should go into capital expenditure taken out and used to finance government’s financial commitments to joint venture investments in the downstream sector. The new system has changed this for good.

In the place of the old plan which required government to provide 50 percent of costs required for joint venture operations, the new funding regime is largely private-sector driven. Government contribution to financing joint venture operations with the international oil companies like Shell, ExxonMobil, etc is now to be funded by commercial banks in a smart and innovative structure. The arrangement is such that the banks will recover their monies while the federal government will only collect dividends from the profits. This has freed-up the government from the annual ordeal of budgetary cash call obligations and increased the amount of money available for financing the 2017 budget.

Besides freeing up revenues that would have gone into financing of joint venture operations, the negotiation and securing of a debt write off accumulated cash call arrears and a convenient payment plan for the balance has also taken a lot of pressure off budget revenues. The cash call arrears which stood at $6.8billion and would have been provisioned in the 2017 budget were negotiated down to $5.1 billion. About $1.7billion was taken off of the total as a result of the negotiations. The balance of $5.1billion is to be paid within five years at basically zero interest rate. Besides, the source of funds for payment is structured to put the least possible pressure on the government as it is expected to come only from additional barrels. This also makes the 2017 assumptions more realistic.

The deregulation of the oil and gas industry and removal of the fuel subsidy payments in May 2016 is another key policy that has also taken a lot of pressure off of the funds available for budget implementation in the 2017 budget. Instead of budgeting trillions of naira to pay subsidy claims, government has re-directed the savings into capital expenditure to be spent towards the financing of social infrastructure like roads, power, hospital and schools. It will be recalled that immediately it was done, the removal led to a 30% drop in consumption – due to smuggling and savings of $4.5million a day from the elimination of false subsidy claims.

Overall, it is clear that the policies and reforms that Kachikwu is bringing to bear on the oil industry under the vision and direction of the President is increasing confidence in the sector as a continuing major source of national revenues for financing the budget. While it is important to aggressively pursue a diversification agenda, to expand the sources of revenues with focus on agriculture, mineral resources, and the experience of the 2016 budget revenue projections have shown that it is yet early days. Oil still remains for now the most immediate source of revenues for financing the budget, getting Nigeria out of recession and financing the diversification agenda. And this is why the work that Kachikwu is doing is so important.

– Namor is a public policy analyst