Report: Lack of New Investments Degrades Oil Sector Infrastructure

Obinna Chima

The dearth of new investments in the oil sector has resulted in the degradation of infrastructure, causing frequent breakdowns, a report has revealed.

CSL Stockbrokers Limited, a research and financial advisory firm, stated this in its economic outlook for the second half of the year, titled: “Walking on Eggshells,” that was obtained yesterday.

The dearth of oil and gas infrastructure is visible in pipeline networks in the country, which because of deterioration, leaks while vandalism has led to the use of tankers to convey petroleum products, thereby putting pressure on roads across the country, especially at the Apapa area of Lagos State.

However, the new Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Mallam Mele Kyari, had pledged on Monday to make the nation’s refineries functional by 2023.

But the CSL Brokers said the Niger Delta region was prone to civil unrest and security challenges, both of which have continually posed downside risks to the country’s crude oil producing capacity.
It pointed out that in 2019 thus far, government’s revenue has been stable.

“Although, there have been reports of disruption to oil production in the Nembe Creek Trunk line with a capacity of 150,000 bpd, and Amenam field trunk with a capacity of 100,000 bpd, this has been offset by a higher pricing on oil in the international market as oil currently trades at a five per cent premium ($63/bbl) to the oil price assumption of $60/bbl in the 2019 budget.

“As at April 2019, oil revenue constituted about 60 per cent of total revenue to the government,” it added.
According to the report, in the last few years, the country’s fiscal profile has been characterised by colossal expenditure plans, optimistic revenue assumptions and substantial shortfalls in revenue, all of which resulted in huge fiscal deficits, which have been financed by both local and foreign borrowings.

In 2016 and 2017, Nigeria’s actual revenues fell short of their targets by 32 per cent and 48 per cent respectively, with preliminary data for 2018 showing a revenue shortfall of 45 per cent of the target.

The revenue shortfalls were said to have been accentuated by disruptions to oil production, “against an unrealistic benchmark of 2.3mbpd in the budget and an inefficient tax collection system.”
“Government spending in the first half of the year has been predominantly recurrent, salaries, interest repayment and election funding expenditure.

“Not much has been achieved with respect to capital expenditure owing to a shift in government focus to delivering a peaceful election, further exacerbated by the delay in the passage of the 2019 budget by the National Assembly.

“Upon passage of the budget.., the Senate approved the sum of N8.92 trillion for 2019’s expenditure plan, slightly higher than the initial proposal (N8.83 trillion) submitted by the President but lower than that of 2018 (N9.12 trillion). This increased the proposed budget deficit for 2019 by N58.83 billion,” it stated.

Details of the approved budget had revealed that allocation to recurrent (non-debt) spending (that is, personnel costs, funding for welfare schemes and amnesty programmes, etc.), was significantly higher in 2019 Appropriation Act by about four per cent at N4.7 trillion, compared to N3.5 trillion in 2018.

However, allocation to capital expenditure was the same as that of 2018 at N2.9 trillion.
“This year, the government has been a little aggressive with its borrowing. So far, the government has raised a total of N602 billion via the sale of local bonds- about four times the total amount raised in 2018 (N134 billion) through bond sales.

“The government also opted to extend the term of its domestic borrowings, as we had anticipated, with the introduction of the 30-year maturity in April.
“This will reduce the risk of redemption concentration in the short to intermediate term as the longest maturity on the FGN debt instrument was 2037, prior to the sale of the 2049 bond,” it added.

For the rest of the year, the firm anticipated that oil prices would continue trading above the $60/bbl budget benchmark amid deliberate efforts by OPEC to continue supporting the price of oil through production cuts.

“Hence our expectation of a $68/bbl average price for 2019. This is particularly positive for the government’s purse, in addition to stable production in the Niger-Delta.
“We also expect the country’s actual production to come in at two million barrels per day against a benchmark of 2.3 million barrels per day in the 2019 budget proposal.

“With respect to non-oil revenue, we agree that tax revenue could come under pressure due to the halt of the voluntary tax amnesty schemes and narrow profit margins to companies. “However, we expect the recent increase in Value Added Tax (VAT) to provide some support to government revenue.
“Also, the tax agency has been consistently making deliberate efforts to expand the tax net and we believe this tax drive will continue through the year,” it stated.

The firm said it did not anticipate an aggressive rise in government spending for the rest of the year as it envisaged that the president would be focused on re-structuring his cabinet for his second term.

It noted that the high cost of subsidies and the Niger Delta amnesty programme as well as the implementation of the new minimum wage would further stretch the government’s purse and could cause fixed income investors to demand a higher yield for their investments, thereby worsening the government’s fiscal profile.