Just like the discovery of Texas’s Powell Field in 1901, Zuunbayan Oil Field in Mongolia in 1940, the Oloibiri Field by Shell in the Niger Delta region of Nigeria in 1956, and the Forties field in Aberdeen, Scotland in 1970; Lagos also makes its entrant into the league of Oil producing states around the world a few weeks ago. The most important question that comes to my mind is what this means for Lagos, Lagosians, and Nigeria as a whole. Even as celebrations erupts at the breaking of the news, can this be described as the road to self sufficiency in terms of wealth and economic development as in the case of Texas and Aberdeen, Scotland mentioned earlier, or a Curse as we may clearly say is the case in the Niger Delta region of Nigeria, and Mongolia today.
I have made deliberate effort in citing the above examples owing to the nature of contributions to the prosperity or otherwise of the respective states and countries. Today, despite the downturn in experienced in the industry, America as a country has liberated itself from Importation of Crude or Other associated product, this can be attributed to the level of technology and improvement invested in its Oil and Gas industry, which has contributed immensely to the advent of Hydraulic Fracturing of Shale Gas and Tight Oil deposits in the USA. Looking at the United Kingdom, Aberdeen is knows as the Oil and Gas capital of Europe. This accord is a consequence of the immense contribution of the Industry in Aberdeen to the development of the city and the country as a whole. Today, the whole world benefits immensely from Technology and Experiences emanating from the North Sea basin. Mongolia on the other hand, being the second largest land-locked country after Kazakhstan, bordered by China and Russia and with a population of c2.9million has experienced a consistent rise in GDP since the discovery of Oil deposits. However, the major challenge faced by Mongolia is the inability to sustain the socio-economic benefits of its resources windfall. Same as is currently applicable in Nigeria are a number of challenges faced by many resource rich developing countries. Some of these challenges include the “Dutch Disease” and its effects in increased public spending, high inflation, excessive borrowings, revenue volatility, poor infrastructures, corruption, political manipulation, and poor governance amongst others.
Lagos – The new Oil
It is estimated that 600,000 people are added to the population of Lagos annually, and the United Nations estimates that within a few years, Lagos could become the third largest city in the world following Karachi and Tokyo. With an estimated population of 21million, and a GDP that is bigger than that of Kenya, and 25 other African countries combined, it is safe to say Lagos is on its way to self-sufficiency. Unfortunately, just like the situation in Nigeria as a whole, inadequate infrastructures and poor management threaten the huge potential for growth in Lagos. This is not to undermine the very visible creativity and hunger for success exhibited at every corner of the state by its populace. It is therefore credit worthy that the current Governor (Gov. Ambode) is doing everything within his power to ensure Lagos exhibits the future the most powerful city in Africa truly deserves. With a possibility of increasing to 25,000bpd to 50,000bpd, the news of the discovery of the 12,000bpd production capacity at the AJE field by Folawiyo Petroleum Company revealed some light at the end of the tunnel for a long wait to be listed amongst the Nations oil producing states. The Governor said “this discovery has placed Lagos in history as the first state outside of the Niger Delta to become an Oil producing state”. He further said, “this discovery has opened up a new page for revenue generation in the state, and with the additional revenue, we would have more resources to provide infrastructure for Lagos residents.
This I must confess is a laudable effort by the E&P Company, and also a fantastic opportunity for the economic liberation of the state as clearly highlighted by the Governor. However, it is imperative to note a few pointers that would ensure the sustainability of this recorded success and the expected economic rent contributions to the state of Lagos. It is essential to learn from the Aberdeen of this world, and the Texas of this world, also the Kazakhstan, Saudi Arabia, Abu Dhabi, Mongolia, Ghana, and the Libya of this world to name a few. This is a time to sit back and reflect on the good news, evaluate and analyze other oil producing States and Nations around the world, learn from there mistakes, and build on there successes. It is very important to avoid the CURSE that accompanies Oil discovery, while taking full advantage of the inherent opportunities.
The Oil and Gas Landscape of 2016
It is recorded that the Oil and Gas Industry with its history of boom and burst is currently in its deepest burst since the 1990s (NY Times, 2015). Oil price has fallen more than 70% from its June 2014 level, and a lot of analysts and industry expert are of the opinion that it will take years before we see a significant rallying of the oil price.
The downturn has been mostly attributed to the supply glut which is aided by a number of factors ranging from the Shale Gas and Tight Oil Exploration in the USA, which has placed the USA as the largest producer and driven the country towards self sufficiency in terms of Oil and Gas to the agitations for the protection of our environment, which has gained even more grounds leading to the research and deployment of series of alternative energy sources like Wind, Hydro and Solar. Other factors that have contributed significantly to the supply glut can be traced to the plummeting Chinese economy where consumption by heavy industries have really suffered significant downturn, and the Saudis refusing to help stabilize the market by cutting down OPEC supply. The Industry has suffered a lot of defeat in the last 23 or so months, and this has led to the crumbling of economies (especially those like Nigeria whose FX revenue and export depends solely on Oil). The Industry, which is heavily characterized by inefficiencies, has seen a lot of drive towards cost control measures including Job cuts.
Even though the future is still bright for an inelastic resource like Crude Oil and its resulting products, the industry globally have taken a lot of steps in re-evaluating its position to remain relevant in the face of adversities. Will Oil and Gas remain a major drive for energy and economic liberation in 2100? This is a discussion for another day.
What do we need to do differently in Lagos?
It is no news that Lagos is the most vibrant economy in Nigeria, and even more so, a top ranking economy in the whole of Africa. Also, we have all witnessed the many wonders and/or woes that accompany the discovery of Oil and Gas deposits in a State or Nation. In my own words, I would clearly say this is a huge opportunity for a state like Lagos to become a true self-sufficient state in terms of the Economy, Social Welfare, Security, and all other factors that makes a true successful sovereign state. However, we must not get carried away by the jubilations of oil discovery, rather, we should focus on the value-add and how it will filter across the fabrics of Lagos as a State, and even Nigeria as a Country.
A number of factors to consider for us to reap the BENEFITS and not the CURSE of Oil discovery are as stated below:
Regulatory Framework
The myths and legends of how Africa has been raided of its resources, and how this has contributed immensely to the wealth of many developed Nations around the world is prevalent, however, haven studied the economic relationships and especially resource management in some of these Nations for some time, I can easily come to a conclusion that a major factor that has resulted in “Resource Blessing” rather than a “Resource Curse” for many of these Nations lies in there Regulatory Framework.
Success they say meets preparedness, and Lagos is right on track at a time when the Country is witnessing a lot of change and reforms in its Oil and Gas sector. It would do Lagos a lot of good to key into these developments and ensure an inclusive regulatory framework that not only benefits the Government and its people, but also ensures the sustainability, continued competitiveness and reserve base of its Oil and Gas deposits.
o It is essential for Lagos State to set up an autonomous regulatory body composed of Industry experts with backgrounds in Oil and Gas Strategy, Technology, Engineering, Politics, Health and Safety, and Community relations. This body “Oil and Gas Lagos” would work closely with the DPR, and other applicable regulatory body already in existent to ensure Lagos Interest is well protected.
o A key option to be considered by the State regulatory body is to set up a sovereign wealth fund, which is comprised of a certain percentage of the economic rent derived from Oil production in the State. This would be a key driver for the state economic activities in terms of investment in the “Future Lagos”, growing the financial reserve base, and ultimately, a drive towards the State’s self sufficiency.
o The State regulatory body would be structured with varying departments working closely with the existing regulatory bodies including the NOC with interests in the following areas:
• Licensing rounds and Exploration Rights (Competitive licensing rounds aimed at maximizing the successful and expeditious exploitation of Lagos’s Oil and Gas reserves. This department would also ensure that the State gets all its dues in form of Tax, Royalties, Production shares etc. from Assets.
• Transfer of Oil and Gas Exploration Rights, it should be further enforced that Licenses cannot be sold or transferred without necessary consultation with the regulatory body and ratification by the State and Federal Government.
• Operational regimes: A department of “Oil and Gas Lagos” would be responsible for protecting a mandatory portion of the exploratory operations that belongs to the State government in the form of Financial Investment.
• Health and Safety – in order to avoid the many hazards that comes from Oil and Gas exploratory activities and to protect the State, neighboring States and there populace, other resources like Land, and Water from related hazards, it is imperative to have a dedicated department ensuring compliance by all Oil and Gas operators and service providers in the State.
• Local Content; it is essential to encourage local participation across the value chain of Oil and Gas production in Lagos state. This would not only result in liberation of local service companies and local operators, but also help with improving the employment ratio.
• Technology, and Research and Development. The Oil and Gas industry is characterized with huge spend on technology; ironically, the industry is also one of the most hostile to innovations. This attitude can be attributed to the level of investment involved and the lack of appetite affords any system failure. Lagos State should encourage investment in research and development and incubators for testing technologies that result in better production efficiency, reduced cost and wastage.
• Cost regulations: The State in conjunction with the other existing regulators should be highly involved in structuring a cap to exploration spends. This would ensure the state maximizes its economic rent from its Oil and Gas Assets. The State should encourage collaborations, and process standardization amongst Operators of Oil and Gas Assets, and their Service Providers. This would result in better production efficiency, and reduced cost.
The above mentioned factors are a few, but very important points to note in ensuring the Oil discovery in Lagos State does not result in the “Dutch Disease”.
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