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Effects of North American Oil & Gas on Nigerian Economy

This paper discusses the effects of the US-Nigeria oil and gas trade developments on the Nigerian economy, including government revenue, employment, economic output, oil and gas exports, and the Nigerian currency. It also explores lessons that can be learned from the development of non-conventional oil in North America and options for Nigeria going forward.

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Effects of North American Oil & Gas on Nigerian Economy

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  1. EFFECTS OF NORTH AMERICAN OIL • AND GAS DEVELOPMENTS ON THE • NIGERIAN ECONOMY Presented at the 34th USAEE/IAEE North American Conference October 23-26, 2016 Tulsa, Oklahoma, U.S.A. By CHINYERE IKEDI And ADEWOLE AYOOLUWA Centre for Petroleum, Energy Economics and Law(CPEEL)University of Ibadan Center for Petroleum, Energy Economics and Law (CPEEL) University of Ibadan

  2. The United States of America and Nigeria are economic giants in their own rights • U.S.A is a global economic powerhouse and Nigeria is one of the largest economies in Africa. • Over time, both countries have become major trading partners with the U.S.A (until recently) a major destination for Nigerian crude oil (the country’s major export) • Nigeria majorly imports manufactured products from USA. Introduction Center for Petroleum, Energy Economics and Law (CPEEL) University of Ibadan

  3. However, the rise in unconventional oil and gas production in North America has changed the dynamics of crude oil trade between Nigeria and the United States of America. • In recent times Nigeria has been compelled to seek alternative trade destinations for its crude oil exports. • These developments coupled with the recent fall in oil prices and other factors has caused a downturn in Nigeria’s economy. Introduction Center for Petroleum, Energy Economics and Law (CPEEL) University of Ibadan

  4. Some of the drivers of recent developments in the Global crude oil market Introduction Drivers Center for Petroleum, Energy Economics and Law (CPEEL) University of Ibadan

  5. This paper therefore discusses the effects of the US-Nigeria oil and gas trade developments on the Nigerian economy, using a descriptive analysis. • The paper outlines the effects of these developments on • Nigerian government’s revenue, • Employment, • Economic Output and Government Expenditure, • Oil and gas exports and investments, • The Nigerian Currency, • Lessons that can be learnt from the development of non-conventional oil in North America. • Options for Nigeria going forward Introduction Center for Petroleum, Energy Economics and Law (CPEEL) University of Ibadan

  6. Introduction Center for Petroleum, Energy Economics and Law (CPEEL) University of Ibadan

  7. NIGERIAN TRADE WITH THE US Data source: UN Comtrade database, 2014 Center for Petroleum, Energy Economics and Law (CPEEL) University of Ibadan

  8. NIGERIAN OIL AND GAS TRADE WITH THE US Data Source: EIA (2015) Center for Petroleum, Energy Economics and Law (CPEEL) University of Ibadan

  9. Figure: Nigeria’s Crude Oil and Condensate Exports by Destination (2015) • Source: EIA, 2015 NIGERIAN OIL AND GAS TRADE WITH OTHER COUNTRIES Center for Petroleum, Energy Economics and Law (CPEEL) University of Ibadan

  10. Oil and Gas Investments • Even though it is not only factor responsible, the shale oil and gas revolution in the United States contributed significantly to the last major episode of oil price shocks • This had effects on oil and gas investments globally, and the Nigerian oil and gas sector was not exempted • The Nigerian National Petroleum Corporation (NNPC) highlighted that capital expenditures would be cut by 40 per cent from the proposed budget of $13.5 billion in a report to its joint venture partners • Three deep water offshore oil projects and one shallow water oil field are at risk of being delayed or cancelled because of the decline in oil prices. EFFECTS OF THE SHALE OIL AND GAS DEVELOPMENTS ON THE NIGERIAN ECONOMY Center for Petroleum, Energy Economics and Law (CPEEL) University of Ibadan

  11. Oil Production and Exports • The Nigerian economy is highly dependent on foreign exchange earnings from oil and gas sales abroad. The oil and gas sector contributes over 90% of export earnings in Nigeria EFFECTS OF THE SHALE OIL AND GAS DEVELOPMENTS ON THE NIGERIAN ECONOMY Center for Petroleum, Energy Economics and Law (CPEEL) University of Ibadan

  12. Oil Production and Exports • As highlighted earlier, the shale oil and gas developments in the U.S has signalled lower Nigerian exports to North America, even though this has been offset by exports to Europe and Asia. • However, the twin effects of low investments in new finds as well as rising militancy has seen annual production levels in Nigeria drop from 852 billion barrels in 2010 to 798 billion barrels in 2014 • Some optimism remains, as this decline has not reached the levels experienced in 2002, when annual production declined to 699.7 billion barrels. EFFECTS OF THE SHALE OIL AND GAS DEVELOPMENTS ON THE NIGERIAN ECONOMY Center for Petroleum, Energy Economics and Law (CPEEL) University of Ibadan

  13. Oil Production and Exports EFFECTS OF THE SHALE OIL AND GAS DEVELOPMENTS ON THE NIGERIAN ECONOMY Datasource:NigerianNationalPetroleumCorporation,2014 Center for Petroleum, Energy Economics and Law (CPEEL) University of Ibadan

  14. Nigerian Currency • The over exposure of the Nigerian economy to the oil and gas industry coupled with inept economic policies have resulted in a fall in the value of the naira to a 43-year low • The currency was placed under restriction by the Central Bank of Nigeria (CBN) as the spread between the CBN official rate and the rate at the parallel market widens. • The currency was eventually devalued earlier this year, but that has not prevented the freefall it has experienced in the parallel market EFFECTS OF THE SHALE OIL AND GAS DEVELOPMENTS ON THE NIGERIAN ECONOMY Center for Petroleum, Energy Economics and Law (CPEEL) University of Ibadan

  15. Nigerian Currency EFFECTS OF THE SHALE OIL AND GAS DEVELOPMENTS ON THE NIGERIAN ECONOMY Center for Petroleum, Energy Economics and Law (CPEEL) University of Ibadan

  16. Nigerian Currency EFFECTS OF THE SHALE OIL AND GAS DEVELOPMENTS ON THE NIGERIAN ECONOMY Center for Petroleum, Energy Economics and Law (CPEEL) University of Ibadan

  17. Employment • Recently, oil firms in Nigeria have been taking measures to tackle the impact of the oil price slump. • Data from the Petroleum Technology Association of Nigeria (PETAN) reveals that over 20,000 workers have been laid-off since the oil price crash in 2014. • They also estimate that over 6,000 technical workers, including geologists, engineers and other ancillary workers have been sacked following oil price slump. • Oil service companies employ about 20,000 technical workers with indirect employees of about 100,000. • With continued shale oil production, further downward pressure expected on the price of crude oil, and firms that provide technical services might see employment levels drop further. EFFECTS OF THE SHALE OIL AND GAS DEVELOPMENTS ON THE NIGERIAN ECONOMY Center for Petroleum, Energy Economics and Law (CPEEL) University of Ibadan

  18. Economic Output and Government Expenditure • The GDP of Nigeria (which was rebased in 2010) from $568.5 billion in 2014 to $481billion in 2015 and this was primarily attributed to the fall in oil prices. • Even though data on government expenditure for 2015 is not yet available, it is expected that this would have also declined as it has followed a similar trend to GDP over time. • The removal of fuel subsidies earlier this year is a step in the right direction as it reduces the burden on constrained Government expenditure EFFECTS OF THE SHALE OIL AND GAS DEVELOPMENTS ON THE NIGERIAN ECONOMY Center for Petroleum, Energy Economics and Law (CPEEL) University of Ibadan Data Source: WDI 2016

  19. Economic Output and Government Expenditure EFFECTS OF THE SHALE OIL AND GAS DEVELOPMENTS ON THE NIGERIAN ECONOMY Center for Petroleum, Energy Economics and Law (CPEEL) University of Ibadan Data Source: WDI 2016

  20. The shale revolution was caused by an inter-play of numerous factors some of which might facilitate or hinder its development in Nigeria. Firstly, the land and resource ownership rights in the United States in unique as landowners are also owners of the resources beneath the ground. However in Nigeria, the land and the resource beneath the ground belong to the government. With numerous issues in the oil producing Niger Delta region hinged on ownership and control of the oil and gas resources, it might be difficult for shale exploration to pick up in Nigeria. It would require a lot of buy-in from host communities who might be sceptical to such developments due to the experience of the communities in the Niger Delta region still feel marginalized. LESSONS TO BE LEARNED FOR NIGERIA Center for Petroleum, Energy Economics and Law (CPEEL) University of Ibadan

  21. The shale revolution in the United States was driven by access to capital which provided critical investment that the exploration companies needed at the initial stage of the revolution. The Nigerian capital market witnessed a huge reduction in market value over the past two years as the investment climate in the country has looked bleak. A number of traditionally strong companies, especially banks lost market share value due to over exposure to the oil and gas market. As such it these banks and financial institutions might be unwilling to drive investments into the oil industry until there is a major price rebound. LESSONS TO BE LEARNED FOR NIGERIA Center for Petroleum, Energy Economics and Law (CPEEL) University of Ibadan

  22. Thirdly, the shale revolution was able to take off because it occurred at a time of sustained high oil prices. With the currently market realities not favouring high prices in the nearest future, it would be slightly difficult to have such a revolution in Nigeria. However, with low oil prices, it can be a period where Nigeria, as a country goes back to the drawing board and develops strategies and enacts critical reforms in the oil and gas that would position the nation to reap the gains from the price rebound. This reforms include the passage of the Petroleum Industry Bill which has been stuck in Senate for years. LESSONS TO BE LEARNED FOR NIGERIA Center for Petroleum, Energy Economics and Law (CPEEL) University of Ibadan

  23. It should also be noted that the United States focused on meeting local demand before exports which Nigeria can also do as a country, especially with incessant fuel scarcity. While it is understandable that foreign sales of oil and gas generate revenue for government, the sector should equally focus on meeting growing domestic demand. There should be a balance in generating foreign revenue and addressing energy security concerns in Nigeria Presently, the Nation seems to focus on the former rather than the latter. LESSONS TO BE LEARNED FOR NIGERIA Center for Petroleum, Energy Economics and Law (CPEEL) University of Ibadan

  24. Technology and infrastructure were two major factors that worked hand in hand to promote the shale revolution in United States. Nigeria has made progress in promoting technology as there has been a rapid increase in mobile penetration and ICT improvements. However, the infrastructure gap in Nigeria is still huge and it would require huge investment from both Public and Private sector to offset this gap. Also educational institutions especially universities and research institutes have an important role to play to ensure that their scientific and technological research is relevant to the oil and gas industry and solves societal problems. LESSONS TO BE LEARNED FOR NIGERIA Center for Petroleum, Energy Economics and Law (CPEEL) University of Ibadan

  25. To recover from some of the effects highlighted earlier the nation can do the following; • Diversify the economy away from the oil sector, focusing on sectors with less volatile returns, • Improve refinery efficiency: This would aid the sale of Nigeria’s refined and unrefined crude oil products, both locally and internationally, • Pass the Petroleum Industry Governance Bill which has caused us to losses huge investments over the years, • Increase investment in educational and research institutions. OPTIONS FOR NIGERIA GOING FORWARD Center for Petroleum, Energy Economics and Law (CPEEL) University of Ibadan

  26. THANK YOU Center for Petroleum, Energy Economics and Law (CPEEL) University of Ibadan

  27. CPEEL Centre for Petroleum, Energy Economics & Law All correspondence and enquiries should be directed to: The Director Centre for Petroleum, Energy Economics and Law (CPEEL) 7, Parry Road University of lbadan, lbadan, Oyo State Nigeria Telephone:+23481 03279807. Email: cpeel@mail1.ui.edu.ng Website: www.cpeel.ui.edu.ng UNIVERSITY OF IBADAN, IBADAN ADVANCING EXCELLENCE AND INNOVATION

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