What Impact Will Nigeria’s Elections Have On Oil?

On February 16, 2019, Nigeria will start off its general elections during which voters will elect the President, National Assembly and an overwhelming majority of governors. Elections traditionally are a very messy business for Nigeria - the last one in 2015, considered to be one of the most peaceful, left more than a hundred people dead. The upcoming one has all the ingredients of a potentially highly explosive standoff - socioeconomic indicators worsening, disparities both at the regional and local levels becoming ever-manifest, corruption flourishing all contribute to this deadly cocktail. Even though the Nigerian oil sector is not the primary discussion topic of the candidates, the outcome of the ballot seems to have inevitable ramifications for it.

Oil amounts to roughly 9 percent of the Nigerian GDP, which seems good at first sight for a rentier state - however, it also takes up 88 percent of exports and up to 90 percent of Nigeria's foreign exchange income. Oil rents are a traditional feature of Nigerian politics and have been keeping the country's political elites together - at the expense of foreign investors who have not shied away from voicing their frustration over the ever-delayed nature of oil reforms in the country. It seems that the Nigerian populace is already ripe for thorough reforms, with one of the leading presidential hopefuls calling for the complete privatization of the Nigerian national oil company, NNPC. NNPC has warned Nigerian politicians against embroiling the national oil company in any sort of political machinations, even though sustaining the status quo would only render it even more loss-making than it already is.

The incumbent: Mohammad Buhari

Buhari's legacy is difficult, to say the least. Having started his tenure with the first GDP recession since 1991 (-1.6 percent in 2016, according to IMF data), he managed to get Nigeria back on the grow trajectory, albeit mostly due to rebounding oil prices, and forecasts on the upcoming 4-5 years seem to be quite positive - the IMF expects an average annualized growth rate of 2.5 percent for 2020-2024. However internal conflicts, driven by the division between the northern Muslim and southern Christian states and Nigeria's ever-increasing number of people in abject poverty, are on the rise. Add to this incessant rumors about the President's ill health - Buhari has spent almost 6 months in London to receive medical treatment in 2017 - and the probability of a leadership change starts to loom on the horizon.

Attesting to Buhari's rather weak accomplishment of his 2015 election pledges is the current status of the oil sector reforms he himself launched four years ago. The reform package stipulated the enactment of four bills that could reshape the energy sector by updating upstream procedures, revamping the tax code (a Petroleum Income Tax instead of the Petroleum Profits Tax) and incentivizing gas development, Nigeria's main energy-related shortcoming. Yet President Buhari has vetoed the Petroleum Industry Governance Bill, a product of his own initiative, in the summer of 2018 (without providing any explanation to it) in defiance of the National Assembly, bringing the whole reform drive to a grinding halt. Since the other three bills - the Administration Bill, the Fiscal Bill, and the Impacted Communities Bill -  are way more contentious that the Governance Bill, they have stalled as a result.

Main opponent: Atiku Abubakar

The candidate of the People's Democratic Party (PDP), Atiku Abubakar, seeks to bring PDP back to the center stage after ruling Nigeria for much of the 21st century (consecutively from 1999 to 2015). Amidst pledges of creating 3 million new jobs per year and stamping out poverty, Abubakar has publicly voiced his intent to renegotiate Nigeria's main production sharing contracts (PSCs) - currently accounting for about 40 percent of the nation's total output - so that they contribute more to the Nigerian people. Abubakar has some energy-sector relevant knowledge to boast as he co-founded Intels, an integrated logistics company that is heavily involved in Nigeria's oil and gas operations. From the point of view of a prospective oil investor, it is Abubakar who is of interest due to the changes he proposes. The 72-year old has vowed to be staunchly pro-investment by selling all government-owned refineries and stakes in the state oil company.

The refineries of Nigeria present an illustrative case of what went wrong generally in the past 20 years. Nigeria currently has three refineries (the 150kbpd Port Harcourt, the 125kbpd Warri, and the 110kbpd Kaduna) which, according to the last officially published NNPC statistics from September 2018, operated throughout last year at 15-20 percent operative capacity. One of the refineries, the 125kbpd Warri site, went into shutdown in January 2018 due to an alleged "lack of crude" and has not come back online ever since. The refinery's management has simultaneously stated that after "vandals" damaged the refinery's pipeline system, there was no easy way out due to severe underfinancing. Ironically, the Warri refinery had the highest capacity utilization over the past years of all Nigeria's refineries, in some months of 2017 even surpassing 40 percent.

On the one hand, it is difficult to imagine an investor eager to place their money in such an endeavor. On the other, if the next Nigerian president succeeded in doing so, it would be a tremendous feat. Generally, the winner of the February 16 elections will have a tremendous opportunity to make his mark in Nigerian history and become a laurel-wreathed president. First and foremost, the start of the Dangote refinery will become a national landmark moment for Nigeria, elevating it from importer to net exporter status within a couple of years - all the more so important as the privately-owned Dangote Group is a Nigerian company, i.e. difficult to blame for stealing the nation's wealth. The Nigerian Oil Ministry expects Dangote to start in H1 2019, even though the full completion of the refinery is not expected until 2022.

Second, oil production is expected to increase in the upcoming months. Should the (re)elected President keep the Niger Delta attacks under control, output volumes could skyrocket as Nigeria has a plethora of ambitious projects in the pipe - the 200kbpd Egina already started producing in early January 2019 and should be supplemented by the 200kbpd Bonga North, the 225kbpd Bonga Southwest (Aparo), the 32kbpd Ikike and potentially also the 140kbpd Bosi during the 4-year mandate. This in itself would not be enough to reach the 3mbpd production capacity the Nigerian government has been setting itself for years, but still would move up the production interval from the current 1.8-2mbpd to 2.3-2.5mbpd (it's more politic to talk about intervals as Nigeria production numbers are notoriously in disarray).

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Thus, securing the presidential position holds promise for the future of the Nigerian oil industry. Despite some similarities between the two main candidates - both presidents are Muslim Hausa speakers, pretty much negating the will of Southern Christian voters to have a Christian lead the country - international oil investors would most probably be better off with Atiku Abubakar. Nigeria needs someone who would push through all the long-delayed petroleum bills (so that oil majors do not postpone investment) and someone who would render NNPC more of a business entity (instead of using it as an oil rent redistribution center). Sometimes it seems better to have a reportedly fraudulent president intent on opening up the country to international investment than an apparently honest man incapable of changing the country to the better.