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Tag: Oil price slump

  • Oil price slump… Return of the tempest

    After surging to over $80 per barrel, oil prices have begun to plummet. As at the close of the year, the price of the global benchmark, Brent, was below $52 per barrel. Other crude grades have gone below $50 per barrel. The dwindling price sends adverse signals to oil producing nations, especially those economies that depend on oil revenues for survival, such as Nigeria. EMEKA UGWUANYI examines the underlying factors determining the current oil price and its impact on the economy.

    Volatile market conditions are back in the global oil and gas industry, with prices below $50 per barrel. Brent, the global benchmark crude, traded at $51.60 per barrel while other crude grades were below $50 per barrel. With the falling prices, countries, such as Nigeria, may not be able to implement their budgets.

    Some economists and industry operators expressed concern that the way oil price is falling, implementation of Nigeria’s 2019 budget may be difficult. To  Adetunji Adepeju and Phil Aragbada, Nigeria’s woes are compounded by the reduction of its OPEC production quota. Some industry players described the oil price slump as an economic tempest for Nigeria as most of the 2019 budget projections will not be realizable should oil price continues to fall.

    Adepeju said: “The unstable price of crude in the international market is a major factor in the implementation of the 2019 budget. “We should also bear in mind that OPEC has reduced the production quota of crude oil. We will not be able to meet the target of 2.3 barrels per day (bpd) even though the production level has been about 1.9 bpd due to the activities of the Niger Delta militants. This has caused instability and unless our refineries start working, we will not make some gains. Also, the burden on dollars for importing refined petroleum products will be less if we locally produce what we consume.” He also expressed concern that nothing much could be achieved in terms of capital projects, given that more than 70 per cent of the budget goes to recurrent expenditure.

    “The fact that about 52 per cent of the recurrent expenditure goes to salaries and emoluments is not a good omen for the next fiscal year. What should have been done instead is that our capital expenditure should be more than the recurrent expenditure or at most the two should be at par. It is good that the capital expenditure is focused on developing transportation, power and housing. If these are done and fully implemented as planned in the budget, it will be a good foundation for development in future.”For Aragbada, “to reposition the nation’s economy requires a lot of sacrifice from all Nigerians. Nigerians would have to suffer a while to enjoy the gains later. “The 2019 appropriation bill is an ambitious one not a budget of hope. If you read the details, it was based on $60 per barrel. The fall in the price of crude and production quota would negatively affect the budget implementation. We have a combination of two tragedies, reduction in oil price and oil production quota and both situations will affect the implementation of the budget.”

    He, however, said oil subsidy policy is politically expedient but not economically, adding that the policy favoured mainly the elite. He said it is advisable for the nation to borrow to finance infrastructure rather than subsidy. Building infrastructure would help to create employment, boost disposable income and improve the economy. “But when money is borrowed for subsidy, there would be no gain for us economically as a nation, just political satisfaction,” he said.

     

    Oil politics and price direction

     

    The direction of international oil market was majorly determined by the United States. The United States was the world’s greatest oil consumer and importer as well as a major producer, which was buoyed by in recent times by shale oil. But the emergence of China as big economy and oil consumer is gradually taking that glory from the United States. The growing strengths of OPEC members and its partners such as Russia, have substantial impacts on the direction of the oil market, hence the production cut option was able to stop free-fall of oil price in 2016 until now when prices started going down.

    When oil prices climbed above $80 per barrel this year, the U.S. Congress considered “NOPEC Act,” which is No Oil Producing and Exporting Cartels Act.” The proposal to establish the NOPEC Act was necessitated by high gasoline prices, which raised the ire of U.S. politicians. The Congress started to mull “No Oil Producing and Exporting Cartels Act,” which would make OPEC subject to Sherman antitrust law, meaning the U.S. government could sue OPEC for manipulating the oil market. The bill was said to have been around in some form for more than a decade, but previous presidents have opposed it. President Donald Trump has voiced support for the measure in the past, and because of his unpredictable nature, analysts say the odds of it becoming law, while still low, have never been better. Of course, if OPEC announces a production increase in a few days, it could take the steam out of the legislative effort. Currently, the United States is considered the largest oil producer in the world with outputs put at average of 11.6 million barrels per day in November and 11.7 million barrels in December.

    Besides, the developed and oil consuming nations, stockpile reserves when oil prices are low, which creates relief for them during high price era. Also the International Energy Agency (IEA) said that non-OPEC supply could still outgrow demand next year, expanding by 1.5 million barrels per day while demand may only soak up 1.4 million barrels per day of that additional supply. As such, OPEC and partners might be forced to maintain the cuts through the end of the year, which happened.

     

    PetroYuan – the emerging global oil market game-changer

     

    The pricing of oil futures in Chinese Yuan may be one of the major determinants of the direction oil prices will go in future. Currently, its impact may not be well-perceived but certainly it is going to be a game-changer forthe global oil market.

    China is not unaware of its potentials. It has the population, market and technology and it is fully using the elements to her advantage. When it overtook the United States as the world’s biggest oil buyer and consumer, it opened a domestic market to trade futures contracts culminating in realisation of a long-term vision.  The Shanghai International Energy Exchange, an arm of Shanghai Futures Exchange, was established to allow Chinese buyers to lock in oil prices and pay in local currency. Also, foreign traders will be allowed to invest in China’s commodities markets as the exchange is registered in Shanghai’s free trade zone.

    Stefano de Stefano of Kerogen Ventures LLC, Houston, Texas, said China’s plan to push the Petroyuan could trigger the shift of other product payments to the yuan, including metals and mining raw materials. To him, this move by China will have implications on geo-politics, oil market gyrations, and new futures markets especially on the sub-Saharan African energy development.

    Stefano said China with time may take over from the United States as the global leader for oil and gas. He said: “China’s new drive to “make the skies blue again” is recasting its role in energy. China’s economic and currency ambitions are reshaping oil markets. The status quo since 1973 is that oil and gas, other commodities, and black markets are all priced in dollars. Estimates of future pricing are based upon supply, demand and US Federal Policy.

    “However, Yuan-denominated crude oil futures kicked off with a bang, surpassing Brent trading volume. China took the next major step in the challenging the Dollar’s supremacy as global reserve currency and is internationalizing the Yuan. China took the first steps to paying for crude oil imports in its own currency instead of U.S. dollars.  And interestingly, Russia, Angola, Saudi have begun payments in Yuan.” Will Nigeria look at that direction with the increasing bilateral trade relations? He noted that pricing crude futures in Yuan will give China more power over global oil/commodity prices, and will also increase the relative value of the Chinese Yuan as against US dollar and gold.

    According to him, the move will also permit reduction in foreign exposure to US dollar holdings, lead to increased US interest rates, devalued dollar and balance of payments crisis and making Gold become the reference point for oil competitiveness. “The energy downturn, fracking, and China’s financial markets have created a revolution in the oil and gas industries. Chinese Yuan-denominated oil futures could result in higher interest,” Stefano said, noting opportunities for Africa to take advantage of these dislocations that abound.

    He said if oil is only priced in US dollar that means we must only consider global oil supply and demand, US Federal Policy to arrive at oil prices estimates. It also means that Organisation of Petroleum Exporting Countries (OPEC) must act to ‘minimise oil output to maximise US dollar’ to ensure their US dollar purchasing power is protected over time, he added.

    Another analyst said futures trading would wrest some control over pricing from the main international benchmarks, which are based on dollars. Denominating oil contracts in yuan would promote the use of China’s currency in global trade, one of the country’s key long-term goals. And China would benefit from having a benchmark that reflects the grades of oil that are mostly consumed by local refineries and differ from those underpinning western contracts. He noted that China led the first crude oil benchmark in Asia, which is important because that’s where oil consumption is growing the most. And it will be the first contract priced in Chinese currency, known as the renminbi or yuan. Currently, the main global benchmarks for crude oil are in New York and London — and priced in dollars.

    “For the oil market, it shows how the centre of gravity is shifting to Asia. It means the U.S. is not front and centre in the oil market anymore,” said Matt Piotrowski of Securing America’s Future Energy, a nonprofit focused on U.S. energy security.

    To the immediate past President of NAPE, Dr Andrew Ejayeriese, “Oil being priced in Chinese currency will not have any impact on the global oil prices, they will only do currency equivalence. You can actually price oil in Naira. When you have the dollar value, you can convert to naira. It doesn’t really make any difference. Chinese  do what they do because they are one of the biggest consumer of oil and gas in the world, so rather than go look for dollars to pay you, they pay the equivalent in their currency. Also they export products to all parts of the world and they have a huge population and they are taking advantage of these factors. So it doesn’t change anything if they buy and sell oil in their own currency. Although the Chinese stepped up petro-Yuan transactions in the last two years, it doesn’t change anything because the price of oil will still be competitive. If they (Chinese) decide to buy oil at a cheaper rate because the value of their currency is less than dollar, people will not sell to them, except if they will buy at a higher rate. China is a big economy and they want to maximise value from that. Remember that Nigeria has done a currency swap deal with China basically because a lot of people import from China. To make such imports, the importers have to first change their currencies to dollar and to Chinese currency. So why take that detour, if they can do the exchange directly with Chinese currency and remove that corridor and make the exchange easy.”

     

    Need for increased exploration activities, investment

     

    For the oil and gas industry players, the Federal Government needs to make provision in 2019 budget and subsequent years for offshore and onshore exploration activities to encourage new discoveries. According to them, Nigeria has huge reserves of oil and gas, which ought be exploited and the accruing revenues deployed to develop other sectors of the economy.

    To the former President, Nigerian Association of Petroleum Explorationists (NAPE), who is also the Managing Director, Degeconek Nigeria Limited, Mr. Abiodun Adesanya, there was noticeable improvement in the revenue generation in 2018 occasioned by better oil price and less disruption in export volumes. “In 2019, we should work harder to sustain and improve on the modest gains of 2018 especially the production and export infrastructures. The Federal Government also needs to conduct a fresh licensing round.”

    Adesanya urged the government to develop modular refineries to reduce importation of refined petroleum products. “The modular refinery concept is a good idea but its implementation will be difficult under the existing structure. How would the modular refineries resolve the challenges of the Niger Delta region and how will they be funded? How can the crude supply be guaranteed, in what currency will the crude be sold to the refineries given that products will be sold in Naira?

    Immediate past Chairman, Society of Petroleum Engineers (SPE), Nigeria Council, Mr. Chikezie Nwosu, said: “Establishing fairly comfortable oil price should be of particular interest to the oil and gas industry in 2019 and beyond. He said the current uncertainty in global politics had effects on the global economy and that prediction of market trends was becoming increasingly difficult.”

    According to him, “global political tensions add significant uncertainty to an already challenged oil and gas industry; demand versus supply economics. The tensions between the United States and Iran as well as the Saudi Arabian issues with the killing of the journalist, Jamal Khashoggi, and the withdrawal of Qatar from the Organisation of Petroleum Exporting Countries (OPEC). The trade tariff skirmishes between China and the USA, BREXIT and the sudden announcement of the total withdrawal of the USA from Syria, all added to the global tensions,” he said.

    Predicating the budget, Nwosu said, will to a large extent depend on oil revenues, adding that an oil price of $60 per barrel seemed a bit optimistic. “A more realistic range will probably be between $40 and $45 per barrel, allowing for windfall receipts if higher, but also providing a hedge against lower oil prices. Oil production from the current data as at September stood between 2.03 million barrels per day and 2.3 million barrels per day, is possible. These projections are achievable, however, provided the 2019 elections are peaceful and the results do not aggravate the Niger Delta and host and impacted communities.

    “It will also be good if all four key component bills of the Petroleum Industry Bill (PIB) are passed by the National Assembly and assented to by the Presidency early enough in the year before mid-year 2019.”

    Nwosu said passage of the bills would bring the needed peace to the host and impacted communities as they become partners in the exploitation of oil and gas resources. According to him, the bill will also restructure the industry and the Nigerian National Petroleum Corporation (NNPC) to be more effective, with a world class governance structure. He said the bill would also attract the necessary direct investments both local and foreign. “Markets including the oil and gas industry do not like uncertainty and the PIB will go a long way to address the framework for doing business in the Nigerian oil and gas industry,” he said.

    Nwosu said of particular importance was the full implementation of the 7Big Wins initiated by the Minister of State for Petroleum Resources, Dr. Emmanuel Ibe Kachikwu and supported by the Group Managing Director, NNPC, Dr Maikanti Baru, which addresses many policy challenges in the industry. He said unlocking the huge potential of the gas resources would also help in diversifying and growing the Nigerian economy through its impact on power, agriculture and other industry. He said integrated Oil and Gas Field Development Plans (FDPs) must be emphasised by the NNPC and some urban planning concepts must be encouraged. This, he said, will help leverage synergies of development by the various operators especially in offshore developments, and which will significantly lower unit technical and production costs. He said to encourage investments in exploration, it is important NNPC insists that exploration and appraisal plans are an integral part of all FDPs.

    For the Chairman, Integrated Oil and Gas Limited, Mr. Emmanuel Ihenacho, “In the last 10 years, the demand for refined products had always been on the increase. Iheanacho said building a modular refinery of about 1,000 barrels costs over $1.2 billion. Building a modular refinery is not easy, apart from citing your refinery beside the sea, one can as well site it near a marginal oil field. Finance is the major reasons why most investors in the modular refineries abandoned it. No bank is ready to give loan to any investor in modular refineries that is why it is just only two out of 40 investors given licences were able to build. Government should engage the banks to provide the finance needed for building modular refineries,” he said.

    In his views of Mr. Muda Yusuf, the Director-General, Lagos Chamber of Commerce and Industry, “the Federal Government needs to review its policy on refined products to encourage investors into the sector. It is a pity that after many years of oil discovery, the country is still importing its refined products for consumption. As long as we have the oil and gas sector linked to the government, private investors will continue to evade the sector.” He urged the government to overhaul the sector to encourage private investors to come in.

    A former Chairman, Nigerian Council of Society of Petroleum Engineers, Dr Saka Matemilola, also urged the NNPC to repair the existing refineries to improve its production. Matemilola also urged Department of Petroleum Resources not to revoke the licences of investors who were unable to build modular refineries. According to him, withdrawing the licences will not solve the problems facing the sector. He said there was need to work with the licences owners to address the issue of sourcing for finance from the banks to build the refineries.

    Kachikwu had said three out of the 40 planned modular refineries would come on stream by end of 2019. “Out of the 40 licences issued, only 10 have shown progress by submitting their programmes and putting something on the ground. By end of 2019, we are assured that three private modular refineries would come on stream,” he said.

     

  • ‘Oil price slump hurting workers’

    ‘Oil price slump hurting workers’

    Sunday Olushola Salako is the National President of Association of Senior Staff of Banks, Insurance and Financial Institutions (ASSBIFI). In this interview with TOBA AGBOOLA, he says the oil price slump is taking its toll on workers and the economy. To address the problem, the government, according to him, should focus on agriculture and small and medium enterprises (SMEs) growth.

    Many financial experts are canvassing for diversification of the economy in the face of the falling oil price. What is your position?

    There is no doubt that agriculture, small and medium enterprises (SMEs) are supposed to be crucial sectors of our economy. They are pivotal to building a self-sustaining economy. But much has not been achieved in this regard. Although much has been said and many schemes have been put in place by the Federal Government over the years, I do not want to speak of past failures, neither will I  speak on grand propositions that were never put to practice. Rather,  I would like to speak plainly and frankly on the need to urgently and aggressively pay more attention to agriculture.

    To the best of my knowledge, fixing the challenges of agriculture and setting in motion a process for the creation of more robust agro-allied and SMEs, are the most important steps that must be taken by the government. This is also a holistic measure in establishing a lasting solution to the burgeoning unemployment plague. In other words, significant phrases such as self-sustenance and autonomous development, will not be used for Nigeria’s economy except we have citizens that are gainfully employed, and are productive. And the only segments of the economy that can help the government accomplish these objectives are agriculture and small scale enterprises.

    History has shown that these steps were taken by many developed countries in the past and they worked for them. For instance, this is what Japan did many years ago and through proper implementation, Japan’s industrialisation aspiration was achieved. Other countries such as Singapore, Brazil, India, and Malaysia keyed into the same policy and it did magic for their economies. I am also of the view that if there is any country that has such capabilities and human resources, it is Nigeria because the current statistics showed that there are about 10 million unemployed Nigerians. This is because if labour and capital form the basic requirements for the agriculture and SMEs sector, then we are already half way through to addressing our challenge.

    What can be done to enhance agriculture and the SMEs sector?

    Nigeria has come a long way, and agriculture was the mainstay of our economy. But it is unfortunate that agriculture is currently playing a less significant role and the potentials in it have been lost. The sector, at the moment, cannot meet up with the early day successes. For instance, the workforce in the sector has now aged. Recent research revealed that the average age of the workforce in the agriculture sector is between 62 and 65 years. I am of the view that to revitalise this sector, resources should be channelled to areas that can benefit the country through exportation and creating  jobs should be the focus. More youths should be encouraged to go into these two sectors. Fundamentally, there is an urgent need for Nigeria to seek ways to not only develop primary agriculture, that is, cultivation of crops and animal husbandry, but also develop other agro-allied businesses such as post-harvest handling/transportation and processing to transform the economy.

    There is no better time for us to start than now. We all remember the promises of our political leaders, so we should hold them accountable for them. They must be able to do as they have promised and that should be now. I say this because as a labour leader, no matter how much we desire a change and no matter how many plans individuals make to build these two crucial sectors, the government has a huge role to play for those plans to come into fruition. The government must first create an enabling environment where businesses, no matter  how small, are given the chance to thrive in order to help boost a market where competitive trade is encouraged.

    Will well implemented government policies redirect the economic sustainability?

    Yes. This, of course, has to do with government policies, processes, and projects. It has to do with trade boosting concessions, export subsidies, especially on agricultural products and the repositioning of relevant government agencies to ensure that these numerous agencies with varying competences are put to work. I am of the view that a well thought out plan ought to seek ways to boost the agricultural sector in at least, four dimensions: primary food/cash crop production and animal husbandry; food preservation, storage, processing and manufacturing; research and extension services and engineering operations, would do the magic.

    Is it only through ‘reliable government policies in these sectors’that women and youths can be empowered?

    Yes. I would like to also point out that exploiting the strengths that we have in these two important sectors would present an ample opportunity, not only in increasing youths participation in the building of the economy, but in opening more doors for more women to take the informal skills, which they may already have to a more professional level. It may be safe to say that agriculture and agro-allied sector boast of an equal spread of women and men, albeit in an informal arrangement, because there is a large percentage of female participation in the works and building capacities to bring about an upscale to a more professional level, will not be far-fetched.

    What is the way out of the economic woods?

    We want to respectfully appeal to governments at all levels to reduce Nigeria’s dependence on crude oil through diversification of their economies from oil/gas to agricultural, manufacturing, industrial and other labour intensive sectors. This is because the oil and gas sector is an enclave sector; it is very capital intensive, and its contribution to overall employment is minimal. We should also be courageous enough to review our system of fiscal federalism such that state and local governments would be motivated to grow their economies in their areas of comparative advantage.There is also the urgent need for a holistic approach to the power sector problems including the consideration of other sources of energy. Also, the state governments should be encouraged to embark on the provision of electricity as service to their people.

    Jos, in Plateau State for instance, once had its own electricity generating company that provided uninterrupted power supply for years until it was taken over by the then National Electric Power Authority (NEPA). The private sector should also be encouraged to participate in power generation and distribution at reasonable margin. The success story of Bonny Utilities Company (BUC), which has provided some 95 per cent uninterrupted power supply since its inception to communities in Bonny in Rivers State, should be replicated. This holistic approach to solving the power sector problem in Nigeria should include the progressive review of all legislations militating against efficient and effective power generation and distribution.

    In addition, government at all levels should expedite actions in resuscitating ailing/comatose government owned industries and companies through Public/Private Partnership in such a way that these companies/industries can sustainably create jobs and guarantee reasonable returns on their investments. We also appeal to federal and state governments to urgently review the curriculum of our various educational institutions, taking into consideration the current and future economic and social needs of the country and trends in the global marketplace, and with strong emphasis on entrepreneurial and technical education. It is also our considered view that both the federal and state governments should finally resolve the Niger Delta problem through the faithful implementation of the report of the Ledum Mitee Technical Committee on Niger Delta. This is very crucial since much of the resources that would be used for the diversification of the economy in today’s Nigeria will come from the Niger Delta region. In addition, the gas that will power the Independent Power Plants (IPPS) will also come from the region.

    How can the government, employers and workers work in harmony to cushion the effect of austerity measures?

    In our analysis of the ongoing macro and micro economic situation of Nigeria, there is need for every Nigerian worker to be worried as the nation has lost more than 40 per cent of its revenue from oil since the last six months as a result of the accelerated decline in the global prices of oil from over U$120/barrel in December 2013 to about U$30/barrel in December 2015. Our concern is that the implications for our fiscal space and monetary health are dire when we realise that oil receipts account for nearly 80 per cent  of our national revenue and over 90 per cent of our nation’s foreign exchange receipts. And when the Federal Government called for austerity measure to cushion the economy from the effects of the falling prices, it became obvious that  the tightening of expenditure meant that the quantum of funds available for the running of the economy has drastically reduced.

    And as I speak, we are already beginning to see its impact on the present backlog in the payment of workers’ salaries across the nation with some states owing their workers up to five months in arrears while the Federal Government has been unable to pay December salary. And this is very unusual. The non-payment of workers’ salaries as a result of the current austerity challenges, expectedly, is because of the penchant of governments at all levels to hold the lives of workers in contempt and total disdain, believing that their lives could be suspended or held in abeyance for them to continue enjoying the unbridled looting of our collective patrimony.

    Our concern is for peaceful industrial harmony to prevail. We expect the government to follow the rule of the game by not delaying the payment of workers’ salary because if decisive steps are not taken, government and employers at all levels are expectedly going to threaten the operational environment of workers, exacerbating the already oppressive work environment and conditions of employment under severe pressures across both public and private sectors of the economy this year.

    What is your take on the recent report on the on-going discussion between Nigeria Atomic Energy Commission and Russia’s Rosatom Corporation to build nuclear plants in Nigeria?

    Without mincing words, I am of the view that concerted effort as well as political will are required to adequately address the problem of ‘power poverty’ in the country. But we need to think outside the box of building nuclear plants in the country because of the attendant consequences. Nuclear power plants are some of the most sophisticated and complex energy systems ever designed and no matter how well it is designed and engineered, it cannot be deemed failure-proof.

    It is evidently clear that we do not have the required capacity to manage disaster that may emanate from nuclear accident. This is because, Japan, even with the high level capability in terms of human and economic power, found it extremely difficult to manage the nuclear accident, which rocked the country in 2011 and led to the death of thousands of people. I am of the view that building of nuclear plants in Nigeria for now will no doubt subject the citizens to unavoidable risk.We cannot turn skewed-eye to the global concerns that a combination of human and mechanical errors at a nuclear facility could result in significant harm to people and the environment. It is obvious that operating nuclear reactors contain large amount of radioactive fission projects, which if dispersed can pose direct radiative hazard, contaminate soil and vegetation and be ingested by humans and animals.Human exposure at high enough levels can cause both short term illness and longer-term deaths by cancer and other diseases.

    The issue of unresolved problem of radioactive nuclear waste remains a big issue.  This is because nuclear power plants typically have high capital costs compared with other power plants. I am of the view that instead of subjecting the nation to these hazards, alternative power stations should, for now, be built rather than nuclear plants.

     

     

     

     

    But, there is argument that workers form part of the nucleus of sustainable development. How do you see this?

    Yes. Economically, attempts to implement sustainable economic development at national, state or enterprise level by government will, and must involve labour. As representatives of workers, trade unions, for instance, are vital actors in facilitating the achievement of sustainable development in view of their experience in addressing industrial change. The achievement of sustainable development can only be achievable when the government allows the freedom of association and the effective recognition of the right to collective bargaining; freedom from discrimination in employment and occupation; freedom from forced labour, and freedom from child labour, which are the four International Labour Organisation (ILO)’s global fundamental principles and rights at work, and which are cardinal to national rebirth that ought to enable working women and men in Nigeria to freely claim their fair share of the wealth they produce. We are of the view that when these rights are promoted and respected by the incoming government, workers in the country will be motivated and motivation will lead to higher productivity and higher productivity will lead to more profit and economic revival. Arising from these, more jobs will be created as industries will seek to expand.

    Do  these your demands apply to other nations of the world?

    Yes. The prosperity and economic revival of many nations have, to a great extent, depended on the productive capacity and unifying strength of the workers. To ensure the prosperity of their nations, workers have in the past contributed positively in various ways. To ensure democratic consolidation and economic revival for the benefit of all Nigerians, all tripartite constituents and other key stakeholders must engage in social dialogue with a view to evolving policies and strategies that would lead to national rebirth. Such dialogues must be based on trust, respect for others’ views and commitment to the resolutions of such dialogues.

    What advice do you have for the government on the current challenges confronting the Nigerian economic development?

    Our advice on the challenge of national development is for the government to manage the economy in such a way as to promote job-led growth, rather than the present situation of jobless growth. Our concern is that unemployment continues to be the number one problem in the nation. This is largely due to the fact that the growth is concentrated in the crude petroleum sector, which continues to be an enclave. There is the urgent need for government to decentraliise the economy for genuine development to take place. I strongly believe that in order to promote development and growth, there is need for government to go into partnerships with the private sector on selective basis until such a time that the domestic private sector becomes fully developed.

     

     

  • Oil price slump: Uncertainties loom over JV projects

    Uncertainties loom   over several Joint   Venture (JV) projects that international oil companies (IOCs) are executing with the Nigerian National Petroleum Corporation (NNPC).

    They are planning to scale down the projects that are either in their planning or advanced stages. No thanks to the slump in oil price.

    The Nation learnt that IOCs and some indigenous oil companies under the aegis of Oil Producers Trade Section (OPTS) are discussing  the oil price regime and its implications.

    The OPTS, it was also learnt, had decided that most of the projects that would be affected were JV projects that are being planned for development and those that they are being executed.

    A source in the petroleum industry said the OPTS members were meeting and would soon come up with a position on the issue. The source said the majority of projects under the production sharing contract (PSC)   would not be affected by the OPTS’ decision since they are funded by the IOCs.

    The source also said some major gas projects, such as the $5 billion Trans-Nigeria pipeline project, and the $4 billion Southnorth gas pipeline, designed to be built from Calabar through Ajaokuta and to Kano, would be put on hold. The Trans-Nigeria pipeline project is a major backbone pipelines targeted at integrating the gas transmission systems in the country. It also forms part of the Trans-Sahara pipeline project.

    Another project the oil price fall will affect is the over $5 billion Brass Liquefied Natural Gas (Brass LNG) project, which will be sited on Brass Island in Bayelsa State. The project, which was recently resuscitated after years of delay due to fund challenges and pull out of ConocoPhillips, which held 17 per cent interest in the project will be affected, the source said.

    Some of the IOCs’ officials  declined to make definite statements but noted that that they would come out with  statements on the issue. Oil companies operating JVs with the Nigerian National Petroleum Corporation (NNPC) include Shell Petroleum Development Company (SPDC), ExxonMobil, Chevron, Total, Eni/Agip, Addax Petroleum, Petrobras, Pan Ocean, among others.

    The NNPC has reduced its capital budget for the 2015 joint venture oil operations by 40 per cent to $8.1 billion from the initial budget of $13.5 billion due to the slump in crude oil prices.The budget was planned when oil price was around $80 per barrel while price stands at about $52 per barrel.

    The Group Managing Director, Nigerian National Petroleum Corporation (NNPC), Dr Joseph Dawha, at the Offshore West Africa conference in Lagos, said the  fall in oil price affected about three deep water projects, adding that many firms had serious cash challenges due to oil price decline.

  • ‘Oil price slump won’t weaken banks’ base’

    ‘Oil price slump won’t weaken banks’ base’

    The crash in oil price has implications for a mono-economy like Nigeria’s. Since oil is its major revenue earner, the country caught cold when the price fell. It has kept on dropping. But Oyewale Ariyibi, Head of finance at FBN Holding Plc, believes banks have nothing to fear about the falling oil price. In this interview with reporters, he argues that banks stand a chance in the face of the crashing price. Capital Market Editor Taofik Salako was there.

    IN what ways will the monetary policy of the Central Bank of Nigeria (CBN) and falling oil prices affect  banks’ profitability?

    I believe that one of the key objectives of the regulator is to engender financial stability in the system by ensuring that banks are adequately capitalised and well-resourced for the businesses that they undertake. From April 2013 and up till now, there have been a number of pronouncements that have impacted income generation capacity of banks. Some of these policies amongst others are increase in Cash Reserve Ratio (CRR) for both public and private sector deposits; mandatory payment of a minimum 30 per cent MPR rate on savings deposits; attaching a risk weight of 125 per cent to oil and gas exposure of banks with 20 per cent or more of its portfolio in oil and gas; progressive reduction in Commission on Turnover (COT) from 5/mille to 3/mille in 2013, 2/mille in 2014 1/mille in 2015 and zero in 2016. No doubt, these pronouncements have impacted earnings of banks, including FirstBank and, ultimately, the holding company. Let me illustrate the impact with just the CRR at 75 per cent for public sector deposits and 20 per cent for private sector deposits, FirstBank, has about N560 billion sterilised with the Central Bank yielding no interest or return whatsoever. Hitherto, such funds would have been invested at an average interest rate of 12 per cent per year, thus the opportunity cost is an annual lost income of N67 billion. The bank has complied with all these regulations and re-arranged its operating structure and created more efficient internal processes to ensure quality service delivery and minimise the impact of the regulatory pronouncements on earnings and the bottom line. Our financial results for the nine months ending September 30, 2014 showed that the group has made significant progress with a profit of N74 billion compared to N70 billion for the equivalent period of prior year.

    How do you see the changes in capital adequacy ratio?

    The CBN, as the regulatory authority in the Nigeria banking industry, has come up with operational guidelines and categorisation for banks in Nigeria. Large commercial banks-mostly Tier 1 banks, with international operations are required to have a minimum capital adequacy ratio (CAR) of 15 per cent while banks classified as systemically important banks (SIBs) are required to have an additional 100 basis points, that is, 16 per cent CAR with effect from April 2015. It is also pertinent to note that the banking industry will be adopting Basel II Capital Accord with effect from October 2015. The adoption of Basel II essentially means additional capital charge for market and operational risks. For us at FBN Holdings, FirstBank is the subsidiary under the CAR requirements and we are pleased with the efforts and actions put in place by the management of the bank to remain compliant both with the regulation and the SIB requirement taking effect from April 2015.

    Looking at the regulatory policies, which do you think should be reviewed in the next financial year?

    The regulators have made policy pronouncements based on their research and data gathering system. As I said earlier, the objective would be to ensure that there is stability in the system and we fully align with some of these policies. One area, I wish the CBN can take another look is the issue of CRR vis-a-vis liquidity ratio. The funds are sterilised in CBN for CRR purposes and these funds – N560 billion in the case of FirstBank, do not count for liquidity but the banks are not relieved of the burden of liquidity ratio for the underlining deposits. Hence banks make provision for liquidity ratio on deposits that are not available for their use and do not count for liquidity. It is either those deposits are excluded from computation of liquidity ratio or the sterilised funds are counted as part of a bank’s liquid assets.

    CBN said there is excess liquidity in the system and banks. What do you think necessitated such excess liquidity policies?

    This does not really apply to our group. The bank has constantly extended credit to the productive sectors and, especially small and medium enterprises (SMEs), which explains why FirstBank has the largest loan portfolio in the banking industry.

    There are fears that non-performing loans (NPLs) will spike next year as a result of potential downward trend in government spending. How do you mitigate this risk?

    You know before the bank extends facilities, there are risk acceptance criteria and credit assessment mechanisms that give some level of comfort that the obligor has the capacity and capability to repay the loan from the cash flow point of view. If the fundamentals of the obligors’ businesses do not change, loans do not go bad; however, temporary macroeconomic challenges might impact margins and profitability. On our own, we have very competent and experienced personnel at the bank who are daily monitoring the bank’s portfolio and the obligors to ensure that the loan covenants are adhered.Generally, given the more robust risk framework and proactive approach of the apex bank, we do not expect oil and gas related non-performing loans to become somehow significant or require the kind of bailouts that the industry witnessed in 2009.

    How do you intend to drive down cost and increase the bottomline and profit next year given  changing regulatory headwinds?

    We appreciate the strength in financial size, and the size of the institution has been a major asset to us. At present, we have about 800 branches and service points across the enterprise, and there are attendant operational costs associated with this size. For example, for each branch, you need to have a transformer and a generator with the attendant costs of maintenance. With the benefit of experience, the bank can safely estimate how much it will cost per year to operate different types of branches and quick service points. Hence, a template can be developed and deployed as benchmark across different branches and quick service points. In addition, with current advances in technology and the deployment of online banking, mobile banking, over 2,200 Automated Teller Machines (ATMs) and other platforms, the customers can transact their businesses from the comfort of their homes and offices without necessarily going to the physical bank locations. With this, we can begin to record savings in this area going forward. The group’s target is that by the end of 2016 which is the end of the current three-year strategic planning cycle, we would have shaved off about 500 basis points in cost-income ratio compared to 2013. This is a stress target and all hands are on deck towards achieving this.

    FBN Holdings  recently acquired Kakawa Discount House Limited. Are you eyeing further acquisition in Africa?

    The acquisitions that you have seen are in line with the group’s strategic plan for growth and earnings diversification. If I can take you back a little bit, you will recall that one of the key reasons for adopting the financial holding company structure is to extract synergies and optimise cross selling opportunities across our subsidiaries, hence the inherent value in the group will be harnessed with the financial holding company structure such that the holding company will focus on co-ordination and consolidation and allow each operating company, that is, subsidiary business to focus on the strategic core of its mandate. The group is structured along four strategic businesses namely: commercial banking group, investment banking and asset management, insurance and other financial services. The commercial banking is focused strictly on commercial banking and related businesses, investment banking and asset management focuses on asset management, corporate finance, and capital market operations, including issuing house and security dealing, advisory services etc., while the insurance group focuses on risk underwriting.

    Prior to this time, the group held 46 per cent of the shares of Kakawa Discount House Limited and was an associated business. Kakawa offers a unique proposition to the group. It comes with a rich and unique blend of a fixed income origination and distribution capacity which can be integrated into our investment banking and asset management group and with this, we are not only reaching out to places we have not reached before but we are also able to deepen existing relationship, improve and increase the type of product offerings available to our customers. This makes Kakawa a perfect fit in the FBN Holdings structure. In view of this, the group decided to acquire the 54 per cent shares hitherto held by non-members of FBN group thus FBN Holdings Plc has become the beneficial owner of 100 percent shares of Kakawa Discount House Limited. Previously, the commercial banking group through FirstBank had completed the acquisition of ICB West Africa operations in Ghana, Gambia, Guinea, Sierra Leone and Senegal. Additionally, FBN Insurance Limited acquired Oasis Insurance Plc. thereby affording the company the opportunity to underwrite general insurance business in addition to its Life business license. FBN Holdings Plc has not raised fresh equity in recent time, and the acquisitions were through internally generated funds. We monitor the group performance periodically and regularly with the objective of ensuring that we sweat the equity for efficiency. Our strategy generally is to enrich our subsidiaries’ footprints across Africa and in selected countries across the continents. We give higher priorities to markets that offer higher potential returns on investments and shorter payback period.

    With our diversified business and revenue base, we are confident that we have laid strong foundation for the future towards improving the well-being of our stakeholders. For now we do not have any immediate plans of further acquisitions, but to focus on integration and getting the benefit from the investments.

    FirstBank is the largest bank in Nigeria, but considering the market capitalisation figures, do you think the bank is still leading ?

    In 2012, the FBN group re-structured its businesses to adopt the financial holding company structure. First Bank of Nigeria Limited today is the largest subsidiary of FBN Holdings Plc. So, the quoted company, which listed on the Nigerian Stock Exchange is FBN Holdings Plc. The groups’ financial results as at third quarter ended September 2014 showed total assets of N4.19 trillion, deposit liabilities of N2.91 trillion and net loans and advances to customers of N2.03 trillion. With these, FBN Holdings Plc is the largest financial institution in Nigeria and the 13th largest in the whole of Africa by total assets. Considering the size of this institution, number of branches, number of customer accounts, and the employees, FBN Holdings is still the largest financial institution in Nigeria. Also, in terms of our contribution to economic development; you will observe that the bank supports the highest number of productive sectors in terms of loans and advances.

    Do you think there is disconnect between returns and investors’ valuation of FBN Holdings, especially in the light of the share price trend at the stock market?

    First, the market is bearish. Secondly, Pension Fund Administrators (PFAs), which constitute large institutional investors in Nigeria, were barred from further investing in the shares of financial holding companies (Holdcos). This is because holdcos were categorised as new companies in line with section 73 of the Pension Reform Act of 2004. This section of the old law debars PFAs from investing in new companies that has not made profit or declared dividend in the last five years. Whereas, FBN Holdings Plc, in substance over the form, is essentially a continuation of FBN Plc. A quick look at our five-year dividend history from 2010 to 2014, showed that the group had declared and paid 10 kobo, 60 kobo, 80 kobo, 100 kobo, and 110kobo yielding a cumulative annual growth rate (CAGR) of 62 per cent. Investing in FBN Holdings Plc is like a fixed income security with en equity upside. The dividend CAGR is very commendable in view of the very challenging macroeconomic environment under which we have operated in the past five years.

    With the promulgation of the new Pension Reform Amendment Act of 2014, the section has been amended and coupled with the release of the guidelines for the operations of a financial holding companies in Nigeria, we await the release of the necessary circular from the National Pension Commission (PENCOM) that will enable PFAs to resume investing in the shares of financial holding companies. We are confident that once this circular is released, the shares of FBN Holdings Plc. will gravitate towards its full intrinsic value.

    With the new regulatory pronouncement stipulating an interest rate of 3.6 per cent to be paid on all savings accounts, does this pose a challenge to FirstBank’s profitability?

    It is not difficult to pay interest on deposits. Even before the pronouncement, FirstBank was paying interest on its savings and the bank encourages people to save. When the rate is indexed against MPR, this has increased interest expense and cost of funds slightly, but the bank has managed this appropriately with careful and profitable deployment of the funds. No doubt, regulatory risks in recent period have had negative impacts on the profitability of some of our subsidiaries, but given strong measures we have taken, we have been able to weather the storm. FBN Holdings has built robust structures to respond to potential regulatory policies, guidelines, and measures in the context of emerging macroeconomic outlook.

    You have made acquisitions and also made divestments too. Are there plans to further divest from underperforming assets?

    FBN Holdings Plc is like an investment management company. The company has expectations and usually set target returns for its operating companies in line with the group’s aspirations and strategic plan. Usually, we consider both the short and long term profitability of any business before taking any decision. Review of performance is a continuous process and the decision to invest or divest rests squarely with the board of directors.

    What are your projections on the impact of regulatory tightening policies on the bottom-line?

    The market is bearish, but those companies with strong fundamentals will bounce back as investors and analysts take a longer view of the economy from first half of 2015.  Our investment banking and asset management business is fully diversified to mitigate the impact of the bearish market.