Shocking Reasons Nigeria’s Oil Sector Will Never Be Key Contributor To GDP

Victor Ndukauba, the Deputy Managing Director of investment banking firm, Afrinvest (West Africa) Limited, has disclosed reasons Nigeria’s oil sector will never really be key contributor to the Gross Domestic Product of the country.

Ndukauba said this while reacting to the oil sector’s 10% contribution to the GDP despite generating over 90 per cent to the nation’s revenue. According to him, due to low economic activity in the sector, the oil sector wouldn’t be a key contributor to the GDP growth.

In his explanation, he also said it’s not a large employer of labour, “On the one hand, the oil industry has been buffeted with a lot of challenges. It has not really lived up to expectation, as far as contribution to GDP growth generally. The point is in 2019, it was actually the sector that drive our GDP numbers, most of the other sectors were down, such as agriculture, manufacture was negative, ICT. But having said that, historically, I think it goes for most other countries, in terms of GDP contribution, you wouldn’t expect oil to be a key contributor.

“Normally, what GDP measures is the flow of economic activities. Unfortunately, the oil industry is limited, with extremely specialist skills and skilled people. If you are talking of either exploration or you are acquiring your seismic data or you’re actually drilling to explore to see what potential you would be able to uncover in the process of exploiting those resources on a commercial quantity. So it’s not typically the large employer of labour.

“Perhaps, you can argue that we should do a lot more in the value chain, having operated that industry for nearly 50 years. But the reality is that if you come down to it, it’s one of assets, servicing the assets, it’s not something that is going to be common to the average Nigerian to be able to get into that value chain. The truth is that the oil sector will never really be key contributor to the GDP for the mere fact that it doesn’t attract a lot of economic activity.”

Impact of oil policies for Nigeria: Ndukauba said policies implemented have its role on the revenue generated by the oil sector. He, however, said in a The Nation report, that the rule governing Nigeria’s oil and gas industry are still many and complicated, “At the last LBS breakfast programme, there was a presentation by the CEO of Chevron for Nigeria, where he laid out some of the implications of the revised rules around the Production Sharing Contract and what it means for Nigeria. Well, from his summary, if I recall, is that what Nigeria is actually trying to do is to increase the amount of revenue and be sure of whatever revenue comes from deep offshore as a percentage of the total. So, it’s for good reason.

“The truth is that policy needed to have been revised for a long time based on the oil price when it was $75, which we have longed gone past. I think the challenge however, and that’s where the industry operators are complaining is that, within the context of a country that has been trying to reform the rules governing the entire industry, which is the Petroleum Industry Bill (PIB). 20 years down the line, we haven’t quite made any headway with that. Instead, there are several laws still operating there, such as the governance, industry operational bill, we still haven’t quite got anything going.”

Ndukauba added that, “Unfortunately, in that space of time, crude oil has been discovered by a couple of other countries and they have, learning from Nigerian mistakes, essentially made more better and clear rules for operating. So the big challenge really, the rule governing Nigeria’s oil and gas industry are still many and complicated. And our neighbours have simplified their own rules and therefore are becoming more and more attractive to capital. And I think that’s where the risk is. We’re acting as if we have all the time in the world, and we feel that because it’s Nigeria, people will always want to come in whereas capital is not emotional, capital is usually very rational. It’ll go where it is most welcomed. I think that is really the fear of our operators, that look, we don’t have so much time left given several other things happening at the international scene in terms of investment in renewables, and how that is impacting the whole industry. So it’s a major challenge.

“Having said that, I think the philosophy behind that change is not wrong. What may be the issue is when you actually look at the quantum of the adjustment and what it means for operators. If I recall correctly from that presentation, you will see that the operators now based on the new rules would be getting about 30 per cent or less on the economics on the revenue they make from what they produce from deep offshore.

“So what that means us that if I sell a barrel of crude oil at $60 and all I can get is maybe $6, as my own share of revenue. So having taking the risk of going to source capital to invest in that field and earn a return, why will I bother doing that, I would rather go somewhere else. I think that’s really the concern and it’s a valid concern.” Ndukauba said.- Nairametrics