A couple of months ago, I wrote on the impact of the Joe Biden Presidency on the oil markets. Now that he is President of the United States with his inauguration on the 20th of January, every country would go back to their political and foreign drawing boards to analyse the impact of his swearing-in on their respective economies or governments.
While some countries would face pressure from Biden in respect to their human rights issues, climate change policies and other diplomatic matters, countries like Nigeria will be analyzing the impact of Biden’s policies on the fate of Oil.
Three standpoints are crucial here;
- Will shale oil, which has been the albatross on the neck of oil prices for years, weaken in respect to Joe Biden and notably Kamala Harris’ views on fracking?
- Will Joe Biden’s soft foreign policy on Iran enable Iranian oil to return to the market?
- Will Joe Biden emulate Trump in meddling with OPEC+ affairs?
The answers to these three questions would give an outlook on the fate of Nigeria’s black gold.
Over the years, the investment in the Shale industry in America has seen the United States increase oil production significantly. In understanding market dynamics, increased production of oil has a negative effect on oil prices. This is why we have not seen $100 oil in many years now.
An increase in US oil has significantly reduced OPEC+ market share and dominance in the oil markets. Historically OPEC could influence prices with their policies, but nowadays, US oil appears as a barrier in the oil markets.
The dominance of shale is enabled by a few factors. Firstly, Fracking. Fracking is the process of drilling down into the earth before a high-pressure water mixture is directed at the rock to release the gas inside. It is highly controversial as it threatens to cause pollution and is detrimental to climate change.
Now, climate change is at the forefront of Joe Biden’s energy policy. Inadvertently, it will hamper the production of fossil fuels in the long-run.
Additionally, Wall Street would be wary of investing in the oil and gas sector as the future looks more into renewable energy.
Joe Biden’s relations with Iran would differ from Trump’s relationship with Tehran. While Donald Trump gave tough sanctions during his tenure, Biden would seek to pamper Iran just like Obama did and this will mean Iranian oil can come back to the market. Although private intelligence shows Iranian oil is still exchanged in the markets, this diplomatic relation would still be significant especially with Iran accounting for about 9.5% of the world’s total oil reserves.
Meddling with OPEC+
During Trump’s tenure, OPEC+ was rattled several times. Trump has never hidden his mistrust in OPEC. He has previously labeled them a cartel in the past. When oil prices go high and affect the cost of gasoline on American consumers, Trump calls out OPEC to find ways to reduce the prices.
However, when prices are so low and energy companies in America can’t break even, Trump, like he did in April 2020, interferes and calls out OPEC to intervene. Interestingly, according to trumptwitterarchive.com, Donald Trump tweeted 271 times about “oil”; 70 about “OPEC”; 351 about “gas” (gasoline and natural gas); 68 about “Saudi Arabia”. It would be rare for Joe Biden to do the same thing as his style of governance will be seemingly different from Trump´s.
Additionally, America as one of the largest consumers of oil will need to improve its demand overtime before supply outweighs demand as a result of the pandemic. How Joe Biden handles the pandemic would be significant in American demand. Would he endure lockdowns or not? That’s very important in the conversation on his impact on gasoline prices and demand.
Nigeria’s black gold – Oil, would be dependent on the future outlook of the oil market and Biden’s policies. It would be interesting to see if Biden would allow OPEC to seize market share from American oil. The first few years would be very important.
Why NNPC should be commercialised
A commercialized NNPC with more committed employees would mean better accountability and transparency in its operations.
The Nigerian government is seeking efficient ways of positioning the country on its path to recovery and the petroleum industry which contributes about 90% of its exchange earnings would undoubtedly be critical on this journey.
The long-awaited Petroleum Industry Bill (PIB) which seeks to regulate the entire Nigerian Petroleum Industry and repeal a host of existing legislation is paramount in transforming the industry and introducing more efficiency particularly in its government-owned parastatals. The PIB has gained more traction in the current administration and is now awaiting deliberations by legislators.
A key highlight of the PIB is commercializing the State-run behemoth, Nigerian National Petroleum Corporation (NNPC). This move would see the NNPC incorporated as a Limited Liability Company and be known as NNPC Limited. This company would conduct its affairs on a commercial basis without resorting to using government funds.
While this might seem like a bold move by the government, it still should not come off as a surprise…
Owing to the fall in crude oil prices from over $100/barrel to below $50/barrel levels in 2020, Nigeria’s exciting story with crude oil slowed down but has picked up in recent months. The country’s heavy dependence on the volatile crude oil market and its ineptitude in diversifying during its “oil-rich” days have now thrown its growth story in jeopardy. The once 3rd-fastest growing economy with foreign reserves in excess of $40bn now wallows in rising inflation complemented and a weakened currency.
Why do we need to commercialize NNPC?
A core theme with a number of government-owned parastatals is the plague of inefficiency and obscurity in the way they are run. To give an idea of the NNPC’s lack of transparency, the corporation only published the group’s audited financial statements for the first time in its 43 years of operation in 2020. It’ll be right to commend this administration is pushing for transparency but you can go on to imagine what went on during those opaque years of operation.
As expected, the results were not impressive. The corporation reported a recurring loss, albeit 70% lower in 2019. The significant reduction in losses may prove the government’s will in improving the operations of the NNPC, however, comments on the report noted that “material uncertainty exists that may cast significant doubt on the Group and Corporation’s ability to continue as a going concern.”
Moving down to the State-owned refineries with a combined capacity of 445,000 bpd, capacity utilization well below 20%, and recurring annual losses in excess of ₦150bn, we can agree that the condition of these refineries is utterly worrisome. Despite the government’s annual budget for Turn Around Maintenance of these refineries, they have now been shut down with plans to undergo a Build, Operate, and Transfer (BOT) model.
Chief among the NNPC’s problems is corruption. A number of investigative reports have explained how subsidy payments, domestic crude allocation, revenue retention practices, and oil-for-product swap agreements are smeared with corruption. The Senate has initiated countless probes and new management seeking transparency has been introduced by the President, however, it just seems like the rot has eaten too deep into the system.
What does commercializing NNPC mean for the country?
The government-managed NNPC has proved to be inefficient and riddled with corruption. A commercialized NNPC with more committed employees would mean better accountability and transparency in its operations. The possible introduction of more shareholders would strengthen the amount of funding available to the NNPC and further shift the burden of being the sole-financier away from the government.
Exploring an NNPC IPO
An Initial Public Offering (IPO) would see the NNPC’s shares traded on Stock Exchanges and position the corporation to raise much more funding, build trust and endear to the international community. While this might seem like a daunting task, Nigeria can perhaps take a cue from Saudi Arabia whose National Oil corporation; Saudi Aramco began raising capital for its IPO in December 2019.
The Saudi Crown Prince; Muhammad bin Salman (MBS) announced a valuation of $2trn enticing the world’s largest investment banks, appointed a new set of leaders on the board of the corporation, and executed a highly engaging local marketing strategy. Although the valuation figure was brought down to $1.5 – $1.7 trillion by financial advisors, Saudi Aramco successfully achieved its IPO raising nearly $26 billion for 1.5% of Aramco’s value.
NNPC’s fundamentals might not support an IPO currently as investors might be wary of the high level of risks involved but we can’t deny the immense opportunities an IPO would present not just for NNPC’s transparency and performance but Nigeria’s economic reform.
The recurring performance of the corporation with several corruption allegations, inefficiency, and unclarity is indeed worrisome. It is time to have the NNPC turn over a new leaf and operate on a commercial basis. This would afford the government the ability to deploy funds into other segments of the economy and have the NNPC focus on being a commercially viable entity.
AfCFTA: The underlying principles, objectives and benefits
The fears around the issue of dumping and border security should not outweigh the huge benefits that AfCFTA offers to the member-states.
The Agreement (the “Agreement”) establishing the African Continental Free Trade Area (the “AfCFTA”) has continued to generate discussions following the commencement of trading under the new economic bloc. The Agreement was signed on 21 March 2018 at the Extra-Ordinary Summit of the African Union held in Kigali Rwanda and came into force on 30 May 2019 after the Gambia became the 22nd State to ratify it.
Nigeria signed the Agreement on 7th July 2019 and after initial dilly-dallying, ratified it in November 2020 leading to the formal deposit of the Instrument of ratification before the 05 December 2020 submission deadline. Paradoxically, Nigeria (34th member State to ratify the treaty) who was at the forefront of developing and negotiating the AfCFTA Agreement later became jittery at the point of ratification. The initial hesitation has been explained on the basis that prior consultation with the manufacturing community and other stakeholders was needed before ratification.
COVID-19 pandemic delayed the phase 2 negotiations and commencement of trading under AfCFTA which was earlier scheduled to start on 1st of July 2020. Trading eventually kicked off on 1st January 2021 and it is too early to assess the impact of trading yet particularly as some countries are yet to ratify the treaty. The AfCFTA has been lauded as a game-changer and ambitious project capable of lifting over 30 million people out of poverty on the continent, through trade liberalization and economic integration in line with the Pan African Vision (Agenda 2063) of an integrated, prosperous and peaceful Africa.
In terms of structure, the main Agreement is divided into 7 Parts and 30 Articles. In addition, there are Protocols, Annexes and Appendices which equally form part of the AfCFTA Agreement. Three of these Protocols are (i) the Protocol on Trade in Goods (ii) the Protocol on Trade in Services, and (iii) the Protocol on Rules and Procedures on the Settlement of Disputes. Article 8 of the Agreement is to the effect that the Protocols, Annexes and Appendices shall, upon adoption, form integral of the Agreement.
The Phase Two Negotiations for both Trade in Goods and Trade in Services include (i) the Protocol on Investment (ii) the Protocol on Intellectual Property and (iii) the Protocol on Competition Policy as well as the associated Annexes and Appendices. As common with most treaties, the AfCFTA Agreement is expected to be organic as future amendments and updates are possible, provided that any additional instruments deemed necessary are to be concluded in furtherance of the objectives of AfCFTA and shall upon adoption, form an integral part of the Agreement.
Modelled after the principles of the World Trade Organization/General Agreement on Tariffs and Trade and General Agreement on Trade in Services (WTO/GATT/GATS), the AfCFTA has some of the trappings of custom union and common market even though one of the AfCFTA objectives is the creation of Continental Customs Union at a later stage. Conceptually, economic integration is broadly classified into five stages, viz: free trade area, Custom union, Common market, Economic union (single market) and Political union.
One key feature of Custom Union being the acceptance of a unified external common tariff against non-members. The European Union presents a unique example of the Customs Union through the instrumentality of the Union Customs Code which applies a uniform tariff system for imports from outside the EU. Unlike the Custom Union, the AfCFTA under its rules on Most-Favoured-Nation Treatment allows member States to conclude or maintain preferential trade arrangements including different tariff arrangements with Third Parties provided that such trade arrangements do not impede or frustrate the objectives of the Protocol on Trade in Goods. By default, WTO member countries trade based on conditions laid down under GATT. It is in a bid to address the tariff and non-tariff barriers existing under the WTO, that some regions have opted for more favourable trade deals as seen in Europe, Asia, North America and now Africa.
As with any WTO-based trade treaty, there are key non-exhaustive underlying principles that underpin the AfCFTA. Some of these principles will form the subject of our discussions in subsequent publications. These include (i) the Most-Favoured-Nation Treatment and (ii) the Rules of Origin. Whilst the former mandates the State Parties to accord preferential treatment to one another, the latter spells out criteria for goods that will be eligible for preferential treatment under the AfCFTA. Equally important is the Anti-dumping and Countervailing Measure which provides trade remedies and remedial actions against imports which are detrimental to local industries. In relation to the Trade in Services, the Most-Favoured Nation exemptions afford State Parties a margin of leeway to exclude certain sectors or sub-sectors from their Schedule of Commitments and limit market access to those sectors or sub-sectors.
The overarching objective behind the AfCFTA is the elimination or reduction of tariff and non-tariff barriers amongst the 54 Countries that agreed to be members of the bloc by providing a single market for goods and services, facilitated by movement of persons in order to deepen the economic integration and prosperity of the African continent. This key objective is to be achieved through successive rounds of negotiations that are to be done in phases.
In specific terms, the Agreement also seeks to (i) lay the foundation for the establishment of a Continental Customs Union; (ii) promote and attain sustainable and inclusive socio-economic development, gender equality and structural transformation of the State Parties, (iii) enhance the competitiveness of the economies of State Parties within the continent and global market, (iv) promote industrial development through diversification and regional value chain development, agricultural development and food security, and resolve the challenges of multiple and overlapping memberships and expedite the regional and continental integration processes. In order to actualize these noble objectives, Article 4 of the Agreement mandates State Parties to:
- Progressively eliminate tariffs and non-tariff barriers to trade in goods;
- Progressively liberalise trade in services;
- Cooperate on investment, intellectual property rights and competition policy;
- Cooperate on all trade-related areas;
- Cooperate on customs matters and the implementation of trade facilitation measures;
- Establish a mechanism for the settlement of disputes concerning their rights and obligations; and
- Establish and maintain an institutional framework for the implementation and administration of the AfCFTA.
There is no doubt that the actualization of these objectives will put Africa on the part of economic posterity and industrialization. It is expected that each State Party should demonstrate commitment, sincerity, and integrity in dealing with other member States. The success of the European Union and other similar regional trade blocs has shown that with the right political will and commitment from member-states, regional trade deals as seen in AfCFTA often contribute to the economic development of the participating region.
The AfCFTA is the world’s largest free trade zone since the establishment of the WTO in 1994 and offers a lot of benefits to member States particularly those with competitive advantage and enabling infrastructures. Africa has a population of 1.3 Billion people and a combined GDP of over $2.6 Trillion (more than 6 times of Nigeria’s GDP). According to the Brookings Institution’s report, intra-African trade accounts for 17 percent of Africa’s exports compared to 59 percent in Asia and 69 percent in Europe.
The report projected that the removal of tariffs if well implemented could boost intra-regional trade up to 50 percent by 2040, from the current 17 percent. Nigeria has a competitive advantage in a number of sectors and stands in a position to benefit from the newly enlarged market. This will further increase investment in the distribution and logistics supply chain as cross-border trades will spiral up. Nigeria’s increasing unemployment rate of over 30% which has been made worse by the pandemic is expected to reduce when trading starts in commercial quantity.
The AfCFTA will progressively reduce trade tariffs by over 90% by 2022 and by extension address the increasing inflation and infrastructural deficits within the continent. Nigeria, being the largest economy in the continent with strong service sector should position itself to benefit from the economies of scale that will follow the localization of industries. Oil refineries, cement, agriculture, food processing, minerals, banking and financial services, aviation, information technology and legal services have been identified as some of the critical sectors where Nigeria has competitive advantage.
The fears around the issue of dumping and border security should not outweigh the huge benefits that AfCFTA offers to the member States. Rather, this should be a wake-up call for Nigeria to invest heavily in rail and road transport, port infrastructure, border security, internal security, electricity, education, and other enabling infrastructures. The last border closure was largely attributed to the issue of dumping and security as it was alleged that Nigeria was amongst other things being swamped with fake and sub-standard goods mostly from Asian countries through the Benin Republic.
The AfCFTA Rules of Origin provision is meant to address this, and it is hoped that the AfCFTA member States should demonstrate the political will to ensure strict compliance. While the regime of Trade in Goods appears to be taking shape, particularly with the commencement of trading early this year, the progressive framework for the negotiations of specific commitments by the member-states in the area of Trade in Services, should afford Nigeria the platform to ensure that the service sectors benefit from the huge opportunities provided under the AfCFTA.
Prince I. Nwafuru, MCIArb (UK)
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