Shell’s Exit: Taking on Diversification from Oil With Renewed Urgency

Recently, Nigeria’s number one multinational oil giant, Shell revealed its intention to withdraw from Nigeria’s onshore oil sector. Analysts believe this can compound the economic challenges of Nigeria’s mono-product economy.

Making this known Shell’s CEO, Van Beurden, said his organisation was in talks with the Nigerian government to work out how to drop its onshore licenses and exit all onshore platforms.

Mr Beurden explained that Niger Delta oil is no longer suitable for its business, adding that the incessant cases of oil theft and sabotage and spillage do not fit with the organisation’s risk appetite.

“The balance of risks and rewards associated with our onshore portfolio is no longer compatible with our strategic ambitions,” Mr Beurden said. “We cannot solve the many community problems in the Niger Delta.”

He further disclosed that Shell proposed disengagement from Nigeria’s onshore sector will not affect its offshore operations, adding that the organisation is still very much interested in exploring the country’s deepwater and natural gas.

Shell, had in the cause of its onshore operations in Nigeria, encountered numerous problems ranging from oil theft and pipeline sabotage, as well as lawsuits instituted by local communities over oil spills.

In February, Mr Buren while decrying the increasing sabotage and theft of oil in Nigeria disclosed that the multinational giant was considering sales of its onshore assets in Nigeria.

Clearly, Nigeria’s predicament can be traced to her continuous dependence on oil since the OPEC crisis of the early 1970s, which led to significant changes in the world oil market as the price of crude oil skyrocketed from $3 per barrel to $12 per barrel in 1974. In the wake of the oil boom, the Iranian revolution of 1979, and subsequently the Iraq-Iran war that began in 1980 both contributed in further increasing the price of crude oil from $14 per barrel in 1979 to $35 per barrel in 1981.

The most provocative policy of the Nigerian government was the dependence on oil resources as a source of foreign exchange earnings to the detriment of agriculture. However, the collapse of oil prices in 1986 produced severe consequence such as a shift in the global economy that triggered a crash of the stock market, soaring inflation, and a high unemployment rate in Nigeria. By implication, the dependence on oil revenue to finance national development has made the Nigerian economy highly susceptible to oil price volatility.

Following the decline in oil revenues in 2015, the Nigerian government was forced to seek economic diversification and has identified agriculture as one of its key goals to help address the country’s dependence on food imports. There has also been significant progress as the Telecoms industry seems to carry the weight of employment in Nigeria.

A report from the National Bureau of Statistics shows that Nigeria’s economy grew 1.81 per cent in the third quarter of 2018. In the quarter under review, Nigeria recorded an average daily oil production of 1.94 million barrels per day, lower than the average daily output of 2.2 million barrels per day.

The oil sector contributed 9.38 per cent to real GDP in the third quarter of 2018, while the non-oil sector added 90.62 per cent. The non-oil sector grew by 2.32% during the third quarter, driven mainly by the Telecoms industry, in addition to agriculture, manufacturing, trade, transportation and storage, as well as professional, scientific and technical services. Despite the rhetoric on economic diversification, crude oil still accounts for an 81.1 per cent share in Nigeria’s total exports.

Arguably, the growth in the non-oil sector has not translated to improvements in the living standard of Nigerians. For example, data from the National Bureau of Statistics show that the total number of Nigerians classified as unemployed increased from 17.6 million in the fourth quarter of 2017 to 20.9 million in the third quarter of 2018.

Similarly, the national unemployment rate rose from 18.8 per cent in the third quarter of 2017 to 23.1 per cent in the third quarter of 2018. When compared against the 87 million Nigerians living on less than $1.90 a day according to The Brookings Institution’s report, the evidence is overwhelming that millions of Nigerians are living in extreme poverty.

Analysts have attributed the collapse of oil value in Nigeria and other parts of the world to surging global supply-driven mainly by the “hydraulic fracking” revolution in North America. “Hydraulic fracking” is an innovative well-simulated and environmentally friendly drilling technique that makes it possible to extract natural gas from shale, which was once impossible with conventional drilling technologies.

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Nigeria has experienced a significant drop in its crude oil exports to the U.S. as domestic production rises in America following the fracking revolution. Prior to this moment, there has been a growing concerns that shale production has the potential to drive down the price of crude oil, which will plunge Nigeria into a macroeconomic crisis.

Oil price volatility is accentuated by rising commodity prices, the devaluation of the naira against the U.S. dollar, and the effect of poor economic performances on unemployment, poverty, crime, and insecurity.

In the midst of this, Shell is disengaging from Nigeria’s shores. Presently discussions are ongoing. There is the possibility that NNPC may take over the oil wells in partnership with some foreign partners. There are also bids from Europe, Asia, and China waiting by the wings to take over the oil wells. What is key for Nigeria is effective management to ensure fewer frictions with local communities and improved profitability. Thus, the management of this transition is very vital as billions of dollars are at stake.

However, it is still very important for handlers of Nigeria’s economy to break from oil dependency and emerge as a progressive society through innovation. This innovation can be the modernisation of the Agricultural Sector. These developments are clear indications that oil is gradually becoming a depreciating source of energy and will continue to lose its global relevance.

The country’s economic managers can also promote entrepreneurship in order to break away from the nation’s dependency on oil. This requires the government to redefine its role in economic transformation and its strategic relationship with the business sector.

Innovations in the agricultural sector should be explored, as well as empowering local farmers. There is also the urgent need to develop other areas like the nation’s tourism sector. Nigeria is endowed with rich natural ecosystems and cultural diversity that could be harnessed to drive economic diversification. If this is aggressively and creatively pursued, the impact of sudden changes in the petroleum sector would have very limited effects on the nation’s economy.

Categories: Economy