Archive for the ‘corruption’ Category

Energy prices, to a great extent influence the global economy. For members of  the Organization of the Petroleum Exporting Countries, OPEC, the higher the prices of crude oil necessary for balancing their budgets, the greater their need to keep the commodity’s prices even higher. Subsidies as well as expenditure items — such as the “Arab Spring” palliatives — add to budgetary breakeven prices. According to reports, countries such as Saudi Arabia (US$80/bbl), Nigeria (US$70/bbl), Iraq (US$100/bbl) and Russia (US$110/bbl) all require certain crude oil price levels to meet budgetary provisions. In Nigeria, the recent unrest arising from gasoline subsidy removal, stirred global crude oil markets and caused a crash in the European 10 ppm gasoline market.  But that country’s subsidy regimes have also raised critical issues of sustainability.

Goldman Sachs includes Nigeria in its Next-11 group of countries which could potentially impact the global economy. The country’s outlook was recently upgraded to positive from stable by Standard and Poor’s Ratings Services. A member of OPEC, Nigeria is Africa’s largest crude oil producer and fifth-largest supplier to the United States. However, due to an abysmally low, refining capacity utilization, it currently imports between 80% and 90% of its petroleum product requirement. Import costs (product, freight, value additions, handling etc) and a rather nebulous pricing formula have led to much higher retail prices than if products were locally refined.

Consumption subsidy regimes aimed at mitigating the retail price burden have been in place for decades. The sudden removal, on the first day of the year, then saw gasoline prices spike from about US$0.41 per liter to about US$0.90 per liter. Ranked the world’s 133^rd in terms of income per capita by the International Monetary Fund, 63% of its people live on less than £1 (about US$1.5) per day according to the Department for International Development (DFID).

These subsidies have over the past few years become unrealistically high. Figure 1 for example, shows that between January and September 2011, a staggering 30.1% of total budgetary provisions was expended in subsidizing petroleum product prices alone. This substantially exceeds the combined provisions for education, health, housing and defence in the 2012 budget. According to the central bank governor, in 2011 a total of US$16.2 billion — approximately half the country’s foreign exchange reserves — was spent in foreign exchange sales to petroleum product importers and in subsidizing petroleum product prices. During a recent town hall meeting to discuss petroleum subsidies, the governor also revealed that ship-loads of refined product were often diverted to neighboring countries for sale at higher prices by “importers” who would also pocket subsidy payments from the government for the same diverted cargoes.

Figure 2 illustrates an even more staggering point: in 2011, more money was spent subsidizing petroleum products than was budgeted for capital expenditure. With rising public debt and declining foreign reserves, meaningful development becomes such a monumental task. In addition, recurrent-to-capital expenditure ratios (about 3:1) are often skewed by the bloated bureaucracy and its outsized emoluments.

 According to Punch, a Nigerian national daily, each serving Senator of the Federal Republic of Nigeria takes home about US$1.3 million annually — more than three times the salary of the U.S. president — while each serving member of the Federal House of Representatives takes home about US$840,000. There are also issues of corruption. For example, accounts of a US$16 billion power sector reform project reveal that for all that amount, not a single power plant was built; nor was the said amount accounted for. Worse still, the report of a hearing on the project by the legislature was shamelessly buried in a political cesspool.

 The government correctly argues that excising financial waste would enable the provision of infrastructure necessary for attainment of its Vision 20:2020 goals. It promised palliatives to cushion the impact of product subsidy withdrawal. But if the citizenry has been leery, it may be because previous promises proved futile.

The subsidy withdrawal drama has played out across successive administrations but three issues of denouement are noteworthy:

1. Phased Withdrawal

There is a limit to the “corrective shock” an economy can sustain without compounding problems. If Nigeria’s productivity for example, is adversely impacted by a one-step (immediate and total) subsidy removal, then the country could be burdened with more problems than it initially set out to address. In addition, a government severely challenged by the increasingly daring terror of the Boko Haram sect can ill-afford further conflicts let alone with trade unions and civil society groups.

Beyond withdrawal of subsidies, internal controls which encumber efficient product supply also need to be eradicated and provisions made among the most vulnerable for amelioration of withdrawal effects. Strictly adhered to, a phased withdrawal of subsidies along with structured milestones, would not only make for impact and conflict mitigation, but also lead to better product delivery.

2. Refining Capacity

The lack of adequate domestic refining capacity is a major driver for the high petroleum product prices. To spur investment in domestic refining, part of the withdrawn subsidy may be deployed in the R&M subsector as initial guarantees for refining margins. This would be a shift of subsidy from consumption to production. Such guarantees were successfully applied to the country’s upstream subsector a few years ago when low, global crude oil price regimes discouraged capital expenditure. The Refining and Marketing (R&M) subsector creates by far the most jobs in the oil and gas value chain.

Nigeria has a total installed crude oil refining capacity of 445,000 barrels per day; but at less than 30%, its aggregate refining capacity utilization over the past decade is abysmally low. (See Figure 3 below). 

3. Restructuring

Finally, the country’s oil and gas sector is in dire need of total restructuring. Transactions in the sector have been largely opaque. Issues of corruption and the environment (oil spills as well as gas flaring) go begging. Accounting records of the country’s state-controlled oil company (which largely oversees oil and gas activities) are rarely, if ever published and the colossal failure of its refining processes is symptomatic of the sector’s ills. The requisite matériel, personnel and will to carry out effective regulation are clearly absent; subjects of regulation are even relied upon for logistics and critical evaluations.

The Petroleum Industry Bill (PIB) which was supposed to provide an operational framework for that restructuring has been mothballed in the legislature, amid accusations and counteraccusations of bribery; and investment funds have sought more favorable climes.

The government of Bolivia last week issued a decree revoking consumption subsidies on some petroleum products. The action sparked a wave of strikes by trade unions as well as civil groups. Prices of diesel in the country increased by 83% while those of low- and high-octane gasolines increased by 73% and 57% respectively. Following meetings with various union and civil society groups, Eva Morales, the country’s president reportedly reversed that enabling decree .

The International Energy Agency, IEA, in a recent report estimated the total fossil-fuel subsidy for the year 2009 at US$312 billion compared with US$57 billion for renewable energy. It also estimated that eliminating fossil fuel subsidies by the year 2020 would reduce carbon emissions by almost 6% while reducing energy demand by about 5% at that time.

Many countries – developed and developing – retain subsidies for various products in sectors such as energy and agriculture. According to the Energy Information Administration, EIA, for example, total fuel-specific energy subsidies in the United States for financial year 2007 was US$7.435 billion; and fossil-fuels accounted for most of that.  For many of these countries then, the issue of eliminating both production and consumption subsidies constitutes a political minefield. Lobbyists and interests groups wield formidable influence in developed countries while for developing countries, the prospects of a “Bolivia” response are daunting; in Pakistan, a vote of confidence in parliament looms large as an ally in a tenuous coalition bolted citing the 9% increase in gasoline price just a few days ago.

That said, there are in the main, three energy subsidy issues that impact the global economy:

First, international crude oil prices. Energy demand by developing countries has been on the increase; for many of the oil-exporting countries among them, the hike in demand has been boosted by significant levels of consumption subsidy, according to the Center for Global Energy Studies, CGES in London. The CGES reports that during the period 1998-2010, while global crude oil demand grew by 1.2% per year, the demand growth for members of the Organization of the Petroleum Exporting Countries, OPEC, was 3% per year. The import then is that the increasing domestic demand would place constraints on export quotas, a possible driver for higher international crude oil prices. The head of Saudi Arabia’s Saudi Aramco, last year warned that domestic energy demand could rise from 2009’s 3.4 million barrels per day of oil equivalent to 8.3 million barrels per day of oil equivalent by 2028, citing inefficiencies; oil and natural gas are used for generation of heavily-subsidized electricity in Saudi Arabia.

Many of these producer-nations have also embarked on very capital-intensive, medium-term national development programs which require crude oil prices of between US$59 and US$76 per barrel for break-even. It is therefore unlikely that they would be averse to higher, international crude oil prices.  One frightful aspect of resource-driven boom is that for unprepared countries, price-collapse is usually devastating.

Secondly, the issue of inadequate energy prices among many oil and gas producer-nations, has stifled capital investment and therefore supply. In resource provinces where natural gas is associated with oil, operators elect to flare the gas and exploit the oil rather than invest in gas infrastructure which would not provide adequate returns. For mostly natural gas provinces, investment is almost non-existent for the same reason. According to Oil and Gas Journal, Nigeria for example held 185 trillion cubic feet, Tcf, of natural gas as at January 2010, giving her the world’s eighth-largest natural gas reserves. The country, however flares a significant proportion of her natural gas production. The amount of natural gas flared in one year could easily meet some countries’ total energy needs for the same period. According to EIA, the country flared 532 billion cubic feet, Bcf, of natural gas in 2008. The country herself consumed only a total of 430 Bcf of natural gas (about 65% of which was used for electricity generation) in the same year. Of the country’s gross natural gas production in 2008, only about 50% was marketed.

The result is that in Nigeria, only about 47% of the people have access to electricity; those manufacturing companies that are still standing – many have fallen away – have had to invest in private power generation and that has increased operation costs by as much as 20% to 40%. However, the current president, Goodluck Jonathan, has instituted a complete overhaul of the country’s power sector with a new investor-friendly gas roadmap; but the country’s poorly regulated oil and gas sector has also led to an acutely  notorious lack of transparency as well as gas flare problems and oil spills more severe than the April 20, 2010 Gulf of Mexico disaster.

Finally, the sustainability of excessive energy subsidies. The steeply rising proportion of energy subsidies in national expenditure for highly subsidized economies has challenged their economic viability. In Iran, for example, inherent energy problems associated with high subsidies – until just December last year, gasoline prices were only ten cents a liter – have been accentuated by the recent series of asphyxiating economic sanctions spearheaded by the United States. According to TheNational, energy subsidies cost the country a third of her GDP. The degree of infrastructural decay is such that the country, which has the second-largest natural gas reserves is a net importer and the third-largest consumer behind United States and Russia despite having a smaller population. The situation with her crude oil is not much better. The lack of capital investment means that the country with one of the highest reserves could soon become a net importer. Even with the new US$0.40/liter price, the allowable monthly gasoline ration for each motorist would be meaningless in many countries.

Venezuela, with the world’s sixth-largest crude oil reserves is also an unenviable paradigm. A grossly mismanaged energy sector which has witnessed nationalization of assets and gasoline prices as low as US$0.07/liter has left little revenue for President Hugo Chávez to finance his ambitious 21^st Century Socialism program. The result has been spates of food and power rationing and an inflation rate which the country’s own central bank put at 26.9% for 2010. The devaluation last week, of the country’s currency – one of several in the past and the second in the last twelve months – would probably add to her woes.

In Nigeria (the fifth-highest foreign supplier of crude oil to the U.S in 2009), the Petroleum Product Pricing Regulatory Agency, PPPRA, has reported that in the period between January 2006 and June 2010, about US$13 billion was expended to subsidize petroleum products. In comparison, provisions for total capital expenditure in the country’s 2011 budget amount to about US$6.4 billion. In that 2011 budget, recurrent expenditure takes about 59% of total outlay, boosted by politicians’ salaries and expenses. As reported, each Senator in the country’s legislature takes home about US$1.34 million per annum while a Representative takes home about US$848,000 per annum (not so sure how that stacks up with the U.S. Congress); and that in a country where about 7 in 10 people live on less than US$2 per day. The country’s central bank governor has at different fora inveighed against such massive fraud associated with her petroleum product subsidies and which make the exercise both meaningless and unsustainable. A Petroleum Industry Bill which was supposed to sanitize the country’s oil and gas sector has been languishing in the legislature; the Freedom of Information Bill, FOI, which is needed to enshrine transparency and good governance is also buried there in ten years of the chamber’s dust. One of the sponsors of that FOI bill has pointed out that the books of the country’s National Oil Company, are not subject to any legislative audit.

In countries such as India, China and even Pakistan, subsidy withdrawal processes have gained currency in bids to ease the rising burden on public purses.

For Nigeria’s legislature, the last few weeks have been somewhat unsavory: the National Assembly seemingly scored three own goals (to borrow a phrase from the passionately, soccer-loving nation) and in rapid succession.

First was the constitutional amendment process, which after ratification by the requisite number of State Houses of Assembly was deemed to be complete without the assent of the President of the federation. This was promptly challenged in the law courts by civil society organizations and a Federal High Court  ruled that the amendment process was still “inchoate”, to wit, in progress and required the assent of the President if it is to be deemed complete.

The nation was still trying to unravel the motives behind the first shot when the legislators fired another: they moved to enact a bill that would require all members of the National Assembly to be “automatic” members of their respective political parties’ National Executive Committees (NEC). In addition to the sheer potential unwieldiness of such NECs (there are more than four hundred and sixty members in the federal legislature), the situation would usurp the constitutional rights of parties to free association. In a recent public hearing held by the legislature, speaker after speaker repudiated the proposed enactment. There have been reports however, that the lawmakers are bent on speedy enactment of the bill, just in time for next year’s general elections. That would most probably provoke challenges in courts of law.

Then, just last week, for his comments to the effect that the National Assembly gulped a staggering and economically unhealthy 25% of the nation’s yearly overhead costs, an umbrageous legislature summoned, and stridently demanded an apology from Lamido Sanusi, the country’s Central Bank Governor; but if the lawmakers expected any repentance, they must have been taken aback. Sanusi resolutely defended his figures (which, reports show, tally with those of the Budget Office), and defiantly held that an apology was unnecessary.

The growing public disquiet over federal lawmakers’ earnings meant that in publicly summoning the Central Bank Governor, the lawmakers unwittingly drew public opprobrium and even accusations of coercion and selfishness. According to Punch, each serving Senator of the Federal Republic of Nigeria takes home N198.54m (about US$1.34m) annually while each serving member of the House of Representatives takes home N127.18m (about US$847,866.67). That said, Hamman Tukur, the recently retired boss of the Revenue Mobilization, Allocation and Fiscal Commission (RMAFC), the body charged with fixing remuneration of public officers, last week on a nationally televised program furnished what he called the official RMAFC-specified earnings (Table 1 below) for members of the National Assembly; he added that earnings by the said members above the given figures could be illegal.

Members of the National Assembly have over the past few weeks traded words with some State and Federal Government agencies over the former’s alleged interference in the affairs of the latter. Erstwhile president, Olusegun Obasanjo on August 4 ,2010, during a retreat for senior civil servants of Niger State, even reportedly “accused members of the National Assembly of corruption through the padding of the federal budget and collection of billions in unjustifiable allowances”. The Speaker of the Federal House of Representatives has also replied that “… for the record, all constituency projects are attached to the MDG fund and it’s the executive that awards the contract to any contractor. We have nothing to do with it. But we will continue to demand that projects are sited in our constituencies.”

The import of Sanusi’s thesis seemed lost in the miasma of the legislative branch’s apparent political one-upmanship. He, in expressing the need to stem the country’s rising debt profile, added that in terms of inflation, overheads were a crucial component of expenditure. He then spoke about the nation’s unsustainable petroleum subsidies  as well as the legislature’s proportion of the national overhead costs among other paradigms. Even the oil-rich Middle East countries (which incidentally have managed their oil proceeds better than Nigeria has) are currently establishing processes for the withdrawal of energy subsidies.

One financial analyst (Kenneth Ife) in underscoring Sanusi’s thesis, added that the percent increases in the National Assembly’s overhead between 2008 and 2009 (about 35%) as well as that between 2009 and 2010 (>20%) substantially exceeded inflation-indexed values.

The assembly members themselves admitted last week during their deliberations on the “Sanusigate” that their approval ratings among the citizenry had tanked substantially; and these three “own goals” most probably, did not help them. There are however, two pending bills that, if properly addressed, would certainly help their ratings. The first is the Freedom of Information Bill, trophied in ten years of the branch’s dust and which would ensure transparency and good governance; two development issues which have plagued Foreign Direct Investment (FDI) and Donor Agency initiatives for the country. The other is the Petroleum Industry Bill (PIB) which would ensure efficiency and transparency in the country’s economic mainstay. (Oil and gas account for more than 80% of the nation’s foreign exchange earnings).

Finally, in the light of recent political developments, unless the country’s Supreme Court is caused to determine (and sooner rather than later) the limits of the legislative branch’s oversight and appropriating powers, ghosts of the country’s past may yet reprise.

The oil major BP is currently preparing for a “total kill” (an industry expression meaning a permanent plug) of the disaster-stricken Macondo oil well in the Gulf of Mexico. Attention is now shifting to determination of liabilities, an exercise for which legal gladiators have since been readying their swords and shields. Preliminary estimates of total liability to BP have been put at between US$30 billion and US$70 billion and its impact on the oil major as well as some niche industries may be severe.

Some industries as well as their regulatory bodies have seemingly failed to learn from previous disasters, a situation that has often compounded the severity of subsequent incidents. Recent accounts show the Macondo well disaster to have been “all too foreseeable”.

While many lessons from that Gulf of Mexico disaster abound, four, with regard to due process, stand out:

First, a weak, regulatory regime conduces inevitably to poor service delivery. Many industries have proved incapable of self-regulation and the recent global financial crises constitute a painful testament to that. According to U.S. Department of Interior documents, federal officials with oversight duties for Gulf of Mexico drilling, used illegal drugs, watched pornography at work and accepted gifts from oil companies (which they were supposed to supervise). The Mineral Management Service MMS, as it was then called, reportedly rubberstamped BP’s drilling plans and exempted the oil major from oil-spill response and prevention plans. One of the worst mine disasters in the United States during the last four decades resulted in the main, from weak regulatory oversight as did the current salmonella outbreak which has seen the recall of over 500 million eggs.

Presentations at a committee of the National Academies of Science currently studying the April 20 explosion at the Macondo well in the Gulf of Mexico, have indicated gaping regulatory and operational loopholes that need to be properly addressed by proper regulations if such accidents must be prevented in the future. However, much more important than such regulations, is the will to enforce them and to make regulatory officers accountable for their assessments (or lack thereof). Unenforced regulations or opaque regulatory processes are as good as no regulations and often breed a culture of graft.

Secondly, for operators, the gains from skimping on due processes are often ephemeral and do not justify the much larger, associated losses of the medium and longer term. The oil major BP, racked up quite a disproportionately (if not notoriously) large number of safety violations; and while a final report of findings on the Macondo well disaster is yet to be issued, there are clear indications that due processes were not employed in some critical operational functions. For example, as reported, certain critical integrity tests were omitted while the design of some crucial systems was woefully flawed;  even supervisors aboard the ill-fated rig were reportedly aware one year earlier, of its disabled alarm systems, a situation that could prove crucial in liability considerations. The potential liability of that disaster would certainly be unsavory to BP and investors who saw shares slide by as much as 45% at one point.

Third, many oil producing companies, especially at their top management levels need to upgrade their public communication skills. They quite often bear such cavalier attitudes (even if unintended) that are inimical to the very corporate brands they represent. The verbal gaffes of Tony Hayward – CEO of BP – in the aftermath of the Macondo well explosion, made him a proverbial “stench in the nostrils” of Americans, compounding the woes of the BP brand in their country; and when an incensed president Barack Obama joined the fray, the fate of Mr. Hayward was sealed.

At a U.S. congressional hearing on the Macondo well disaster, Tony Hayward, when grilled by impassioned lawmakers who were driven perhaps by public umbrage in an election year, was rather subdued and seemingly out of sorts. Oil executives are often more at ease among political claqueurs; but for a rather ill-advised congressman who apologized to BP for a US$20 billion “shakedown” (his interpretation of the company’s initial outlay to cover liabilities in the Macondo oil well disaster), the sudden volte-face was not unexpected.

Finally, the woeful lack of a proper, disaster or crises mitigation template was all too evident in that Gulf of Mexico incident; as it was in that of Hurricane Katrina and even arguably, in the last U.S. financial crises. The need for adequate contingency procedures is often lost in massive political dunghills, especially when interest groups hold substantial financial or other influence. For many industries, advances in operational technologies have over the years outpaced regulatory capabilities – or perhaps more appropriately, regulatory functions have been mindlessly relegated for ease of progress in operational processes. The result is that when such disasters occur, functionaries are hopelessly unprepared and this adds to the severity of the incident.

Malaise

Notoriety