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Nigeria’s ‘rented foreign reserves’ increase risk perception

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ABUJA – The continued reduction in the accretion to Nigeria’s foreign reserves, currently at $41.5 billion, and foreign portfolio investments (FPI) accounting for about $20 billion of this amount raises the risk perception about Nigeria’s economy, BusinessDay interaction with economy watchers has revealed.

“The over $20.0 billion of the total foreign reserves being inflow from FPIs calls for concern, in view of the gradual phase-out of the US Fed stimulus programme in 2014,” say Afrinvest analysts. “Based on this development, it becomes imminent that the ‘rented reserves’ may depart the country sooner than we anticipate.”

Consequently, any portfolio reversal as a result of the United States quantitative easing will leave the country with no option than to borrow, with the resultant effect of higher yields on the Federal Government bonds and, consequently, increase in the level of recurrent expenditure.

For instance, government interest on domestic debt has been on the increase, from N495.1 billion in 2011 to N559.5 billion in 2012, to N591.8 billion in 2013 with N712 billion projected for 2014, in addition to the N300 billion CBN interest on T-Bills and Open Market Operations (OMO).

Some other analysts argue that the sustenance of foreign reserves on portfolio investments or ‘hot money’ portends more vulnerability of the economy to the whims and caprices of investors who may take advantage of the opportunities provided by the easing in the US market to embark on reversals.

Doyin Salami, a member of the Monetary Policy Committee (MPC) of the CBN, said at a recent meeting of the committee that he sees the deterioration in foreign reserve position as a reflection of a slowdown in inflows from foreign portfolio investors (FPI), adding that “FPI inflows, at $19.182 billion in 2013, accounted for approximately 82 percent of capital importation in 2013”.

Afrinvest analysts further say that if this happens, and coupled with the reduction in the accretion of the foreign reserves, then the risk perception about Nigeria would rise drastically.

“In addition, the reserves ($21.5 billion, assuming it remains at present level) may cover below three months of imports (below global requirement). This would also increase the country risk premium placed on Nigeria, hence an increase in the yields on FGN bonds,” say Afrinvest analysts.

“This increase will raise the cost of borrowing to the government, further snowballing its re-current expenditure (over 65.0 percent in 2014). The country may also find it challenging to raise additional funds through Eurobonds and may be lured to raise the coupon to what is commensurate with perceived risks,” they add.

Samir Gadio, emerging markets analyst at Standard Bank, London, observed that the accumulation of FX reserves in 2012 and early 2013 was a function of increased portfolio inflows which subsequently dried up and even turned negative recently.

Gadio wondered why Nigeria has been unable to rebuild its fiscal buffers despite the robust oil price over the past few years, which appears to reflect a moderate drop in oil output, stressing that possible revenue leakages and prior to this, the fuel subsidy scam, could be responsible.

“On top of the regular budget augmentation disbursements, the ECA funds have also been shared among the three tiers of government to fund ‘people-oriented projects’, but there is little tangible investment to account for,” said Gadio.

Gadio sees this as a serious problem as, according to him, the balance of the ECA declined to a low of USD2.5 billion in January, which is less than 1 percent of GDP (vs a median of 65 percent of GDP among major oil producing countries).

“Should this trend persist,” he added, “Nigeria will remain vulnerable to long-run oil boom and bust cycles, and a potential prolonged decline in the oil price below the USD100 pbl level at some stage in the future would seriously threaten the country’s macroeconomic position.”

Uche Chibuike, a member of the MPC, at the recent committee meeting, observed that recent international developments had already ensured a slowdown in the inflow of such speculative capital.

“Despite this, I find it prudent to continue to express my concern about speculative capital. This is because the vulnerability of the value of our currency in recent times has at least in part been as a consequence of the unstable nature of such speculative FDI. The earlier we begin to discourage such capital flows, the better. While FDI is desirable, it only makes sense when it is invested in the real sectors of our economy,” he said.

Ganiu Garba, also a member of the MPC, at the recent meeting attributed the problem to a non-forward-looking and non-strategic management of oil and gas resources with the consequent inability to sustain inflows of forex revenue to support and sustain some of the economic buffers.

“A strategic and forward-looking management of oil and gas resources is critical to building the forex reserves required to support a stable currency,” Garba said.

– BUSINESS DAY

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Adoption of AI Feature as NIPetGE Pays Courtesy Call at NNPC Ltd

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Enhanced adoption of artificial intelligence and other digital technologies to improve operations in Nigeria’s oil and gas industry is taking the centre stage in relevant circles.

The issue came up strongly when the President-elect of the Nigerian Institute of Petroleum and Gas Engineers NIPetGE, Prisca Kanebi, paid a courtesy call at the Nigerian National Petroleum Company Limited (NNPC Ltd), Abuja.

Biztellers reports that the Kanebi led delegation was received by the Group Chief Executive Officer of the NNPC Ltd, Bayo Ojulari, represented by the Executive Vice President, Gas, Power and New Energy, Olalekan Ogunleye.

According to a statement made available on Sunday, discussions at the meeting focused on the future of Nigeria’s hydrocarbon industry amid global energy transition concerns, technological changes and sustainability targets.

ALSO READ: NNPC Ltd, IOCs Raise Crude Supply to Local Refineries by 103% in 4 Months

The statement indicated that the NNPC Ltd acknowledged the role of NIPetGE in policy advocacy, technical development and innovation within the sector.

Speaking during the meeting, Kanebi highlighted recommendations from the institute’s recent conference, including the proposed establishment of a national centre for intelligent energy systems to support the deployment of artificial intelligence, the Internet of Things and robotics across the petroleum value chain.

She also commended the Federal Government’s decarbonisation efforts and reiterated the institute’s support for policies aimed at improving sustainability in the industry.

The institute also recommended the creation of a hydrocarbon-linked emissions trading system to allow Nigeria to take part in global carbon markets.

The institute also proposed fiscal incentives to support local manufacturing and service delivery in the oil and gas sector, as well as the expansion of the Energy Transition Plan to include measurable upstream decarbonisation targets backed by tax credits.

Other proposals included increased public-private partnerships in emission control infrastructure, carbon capture projects and hybrid renewable energy initiatives.

Both organisations also stressed the need for stronger collaboration between industry and academic institutions to improve professional capacity and align petroleum engineering practice in Nigeria with international standards.

The institute further disclosed that its bill seeking chartered status had passed second reading and was progressing towards a third hearing at the National Assembly.

It added that NNPC Ltd pledged support for future collaborations with the institute on initiatives aimed at improving efficiency and innovation in the energy sector.

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FHC Orders NUPRC to Comply with PIA

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Local Firms Lead Revival of Idle Oil Wells – SPE

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Nigeria’s indigenous oil and gas companies are reopening dormant wells and ramping up production from assets acquired from international oil companies (IOCs) to boost crude oil output.

The Society of Petroleum Engineers (SPE), Nigeria Council, made the assertion through its Chairman, Francis Nwaochie, on the sideline of the Offshore Technology Conference (OTC) which ended at the weekend in Houston, Texas.
Nwaochie said indigenous operators were already taking advantage of opportunities created by disruptions in the global energy market to increase production from existing assets.

According to him, local firms that recently acquired onshore and shallow water assets from IOCs were aggressively reviving inactive wells and maximizing available infrastructure to raise output levels.

“What we are seeing now is that indigenous companies are reopening wells from the assets they acquired from the IOCs. Some of them have almost doubled production from those existing assets,”.

He explained that the renewed focus on dormant wells and existing facilities had become critical at a time the global oil market was facing supply shortages triggered by geopolitical tensions in the Middle East.

The SPE Nigeria Council Chairman noted that Africa, particularly Nigeria, was well positioned to benefit from the supply gap because of the continent’s relative stability compared to some other oil-producing regions.

“There is a huge opportunity for Africa right now. The focus is gradually shifting to Africa because of the volatile environment in many other producing regions.”

He stated that indigenous operators were leveraging digital technologies, financing opportunities and local expertise to improve production efficiency and optimise existing fields.

He added that stronger implementation of local content policies was also helping to create a more stable operating environment for oil and gas investments.

“Local content is very critical. Once communities and local companies clearly understand their roles and benefits, then you create peace across the industry. Business only thrives in peaceful environments.”

ALSO READ: Nigerian Navy Recovers Large Cache of Illegal Refined Petroleum Products

Nwaochie also stressed the need for Nigeria to move beyond crude oil production and begin developing indigenous technologies for the energy industry.

According to him, SPE Nigeria Council was actively supporting innovation and technology development among young Nigerian engineers and researchers.

He disclosed that the association was engaging the National Universities Commission(NUC) on reforms to engineering curricula in universities to better prepare graduates for the future of the energy industry.

“One of our major focuses in SPE is technology development. We should not only import machines and equipment, we must begin to develop our own technologies locally.”

Nwaochie revealed that SPE was already supporting local innovators working on technologies such as remotely operated underwater vehicles (ROVs), noting that indigenous technology development will strengthen Nigeria’s economy and deepen local participation in the oil and gas sector.

“We may not get everything right immediately but we must start somewhere. That is how countries that dominate the global energy industry built their capacities.”

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