Oil industry weakness threatens infrastructure spending growth

The Nigerian oil and gas industry which is currently being undermined by a poor investment climate constitutes a major threat to the country’s growing share in the sub-Saharan African infrastructure market, BusinessDay has learnt.

Infrastructure spending, which rose to $23 billion in 2013, is expected to grow by $4.5 billion yearly to $77 billion in 2025 underpinned by a more investor-friendly environment towards oil investment and solid government revenue growth from oil price rises.

But Nigeria has in recent times seen a decline in oil and gas investment and revenue from the industry on the back of delay in the passage of the Petroleum Industry Bill (PIB), drastic fall in imports of Nigerian crude oil by the United States and rising crude oil theft and sabotage.

The country has also suffered historically from a lack of refining capacity, which means exporting the overwhelming majority of its crude oil output and importing fuels, and this is taking a toll on government coffers.

The country’s economy is currently

highly dependent on the capital-intensive oil and gas sector but the sector accounts for less than 25 percent of Gross Domestic Product (GDP) on average from 1999-2012.

The sector currently accounts for about 95 percent of foreign exchange earnings, 98.8 percent of total exports, and 75 percent of federally collected revenues in 2012.

“The engine to propel the Nigerian economy to the expected end in 2020 is primarily the oil and gas sector in the short to intermediate run. So the slow growth in natural gas development and utilisation must be reversed in order to get the full multiplier impact of oil and gas,” said Wumi Iledare, president, International Association for Energy Economics and emeritus professor, LSU Center for Energy Studies, USA.

“The petroleum industry reform of the oil and gas institutions and fiscal provisions is a necessary condition to re-energise the industry and the economy. Fiscal responsibility, transparency and accountability in the oil and gas sector must be strengthened,” he said.

Akin Adetunji, executive vice chairman, Terra Energy Services Nigeria Limited, who described the present state of the industry as pitiable, said, “From the point of view of our present reserves, 10 years ago, we were at 40 billion barrels reserves. Today, we are talking about 35 billion barrels. What it means is that we have been moving backward.”

PwC, in a report released last week, says overall it expects infrastructure spending in Nigeria to grow from $23 billion in 2013 to $77 billion in 2025.

“A more investor-friendly environment towards oil investment would likely boost this projection further – initially in the oil sector itself, followed by the impact of oil output and government revenues on transportation, utilities, and social sectors,” the report says.

Spending on fuel refinement in the country is forecast to grow from approximately $2.5 billion to $3.5 billion over the next several years.

Nigeria’s population is set to grow from 171 million in 2013 to 229 million by 2025, with an additional 10 percent of the population living in urban areas, says PwC.

“Investment in transportation (mainly roads) and utilities provision (principally electricity generation, transmission, and distribution) will likely grow by 10 – 12 percent a year, underpinned by solid government revenue growth from oil price rises,” it adds.

According to the report, Nigeria and South Africa dominate the infrastructure market in sub-Saharan Africa, but other countries like Ethiopia, Ghana, Kenya, Mozambique, and Tanzania are also poised for growth. The robust growth in the region will likely fuel infrastructure spending as well.

“There is a lot of talk about how to improve infrastructure for manufacturing on the continent,” said Brian Molefe, group chief executive, Transnet SOC Ltd, the state-owned freight transport and logistics company responsible for South Africa’s rail freight, ports, and pipelines network.

“We think that if infrastructure never develops, or if infrastructure is not made available as a matter of urgency, then there is a big risk that many opportunities will be lost on the continent, and that growth will be slower than it could otherwise be,” he said.

As countries in this region continue to develop, we expect a substantial increase in spending in the basic manufacturing sector, says PwC.

“Annual spending in the chemicals, metals, and fuels sector is forecast to increase across the seven major African economies to $16 billion by 2025, up from about $6 billion in 2012,” the report says.

Industry analysts have continued to stress the need for Nigeria to create an enabling environment for investors in the country’s oil industry, urging the National Assembly to expedite action towards the passage of the PIB, which is expected to overhaul the industry.

Businessday