Nigeria boasts abundant natural resources, yet its failure to crack down on endemic corruption and constant thievery has eroded its status to such an extent that, in May, it lost its title as the continent’s leading oil producer to Angola (see Fig. 1). A reluctance to enact tough-enough reforms or revise the fiscal terms under which the industry operates has cost the country dear. And the threat posed by issues such as theft and civil unrest threatens to destabilise an industry teetering on the brink of a crisis.
Undoubtedly, the nation’s oil wealth has been instrumental in unlocking growth and development in years past, but with Nigeria’s oil losses snowballing and the price of oil spiralling downwards, there’s never been a better time to double down on reforms.
Five-finger discount
Recently, a resurgent militancy in the oil-rich Niger Delta region inflicted untold levels of destruction on key oil sites and put a serious dent in production. Given that the Niger Delta brings in around 90 percent of the country’s foreign exchange earnings and 80 percent of government revenues, any threat to it is a threat to Nigeria’s economy as a whole.
No stranger to controversy, the area has a somewhat chequered past, with confrontations between oil firms and residents all too common. According to government figures, the region was the site of more than 7,000 oil spills between 1970 and 2000, and locals are concerned the state is reaping outsized rewards from the site’s resource wealth, while the region itself has received very little in the way of material benefit.
Theft alone cost the country a reported one million barrels a day – of a 2.5 million maximum daily capacity – under the last government, according to President Muhammadu Buhari, who, in a speech, called the extent of the damage “mind boggling”. The lower figure of 250,000, which Buhari mentioned in the very same speech, is surely closer to the mark – and that’s including losses due to pipeline vandalism. Regardless, the truth of the matter is that nobody really knows with any degree of certainty how much is being stolen, nor do they know exactly how much is being produced.
Given that the Niger Delta brings in around 90 percent of the country’s foreign exchange earnings and 80 percent of government revenues, any threat to it is a threat to Nigeria’s economy as a whole
A Chatham House study entitled Nigeria’s Criminal Crude suggested the problem has reached an “industrial scale”. In the study, the institute wrote: “Officials outside Nigeria are aware that the problem exists, and occasionally show some interest at high policy levels. But Nigeria’s trade and diplomatic partners have taken no real action, and no stakeholder group inside the country has a record of sustained and serious engagement with the issue. The resulting lack of good intelligence means international actors cannot fully assess whether Nigerian oil theft harms their interests… Nigeria’s dynamic, overcrowded political economy drives competition for looted resources. Poor governance has encouraged violent opportunism around oil and opened doors for organised crime.”
According to Stephane Foucaud, Managing Director of Institutional Research at FirstEnergy Capital, “growing security issues in the Delta” mean that production has been plummeting and “as much as 500 million barrels per day are now shut down”. Keen to avoid the accompanying reputational and financial hazards, producers have been quick to distance themselves from the conflict.
As far as the Niger Delta is concerned, Royal Dutch Shell shut its Forcados export terminal earlier this year, its withdrawal costing the country 250,000 barrels a day. A Chevron closure not long after cost another 90,000 barrels following a security breach at one of its facilities. The intention on the part of the aggressors is clear. In a statement, they wrote: “This is what we promised the Nigeria government, since they refuse to listen to us.”
The result, according to OECD data, is a landmark 20-year low in oil production, at a time when the economy is struggling to contend with falling oil prices. The claim of Angola – where disruptions are rare and the political hurdles lower – to the continent’s top spot looks all the more assured. Nigeria, on the other hand, is watching its reputation as a world-beating oil exporter hang in the balance.
Resource curse
Nigeria is still the biggest economy on the continent, thanks in no small part to its oil wealth, though a continuing failure to address the problems facing the oil industry could see previously strong growth fall in line with the wider Sub-Saharan region.
Between 2005 and 2010, Nigeria’s GDP at purchasing power parity more than doubled, yet its human capital and living standards leave much to be desired. As of 2010, the proportion of people living in absolute poverty rose to nearly 60 percent, up from 54.7 percent in 2004, according to the National Bureau of Statistics. And this, alongside World Bank estimates that 80 percent of energy revenues benefit just one percent of the population, has given observers real cause for concern.
Perhaps more than any other African nation, Nigeria has fallen foul of the so-called ‘resource curse’; a situation where an abundance of natural resources can breed corruption, stagnation, and even economic contraction.
“Managing natural resource wealth is fraught with difficulties – some economic, many political – and if not done well, can adversely impact macroeconomic performance in the short and long runs”, according to an IMF report entitled Boom, Bust, or Prosperity? Managing Sub-Saharan Africa’s Natural Resource Wealth. “Data from the sub-region suggests that such a curse has been present to some degree, but has diminished since 2000, although the broad economic and social indicators point to continued weaknesses that could be attributed to poor natural resource management.”
Africa, particularly Sub-Saharan Africa, is an example of how abundant resources can stifle development and distract governments from the central task of ensuring long-term prosperity. Looking at the past 50 years, the continent has made a name for itself as a region rich in natural resources, though also one in which citizens are severely handicapped by a low-growth climate and endemic corruption. With little incentive to raise taxes or focus on other sectors, plentiful resources have been known to cripple once-fruitful economies and shrink government responsibility.
Nigeria’s wealth means there’s potential for those in senior positions to profit personally, and the widespread perception that they are doing just that has bred resentment and mistrust among the population at large.
“The greater the value of the resources, the greater the incentive for corruption, so fossil fuel resources, particularly crude oil, are of course often associated with poor governance”, Chris Beaton, Research and Communications Officer at the International Institute for Sustainable Development, told The New Economy. “But it’s only a question of increased risk; it isn’t guaranteed the two will come hand-in-hand. Some oil-exporting countries, such as Norway, score among the least corrupt in the world.”
Crude reform
It’s no secret that the oil price collapse has been felt keenly across Nigeria, and declining revenues threaten to slow the economy’s momentum and unearth inefficiencies that have, in years past, been allowed to pass unseen and unchallenged. According to energy consultancy Wood Mackenzie, the cost of declining royalties and tax revenues between 2014 and 2018 is projected to amount to around $75bn, and, without swift and decisive action, the country’s finances will stray into the red.
Fears the ruling authorities are not competent enough to contain the situation are far from uncommon, and investors are withdrawing their holdings at quite an alarming rate. President Muhammadu Buhari, nicknamed ‘Baba Go Slow’, has been famously reticent to react to the situation, for fear of upsetting a population in the midst of a major fuel shortage and record budget deficit. More than that, any meaningful attempt at reform will have consequences for Nigerian investors and fundamentally change the relationship between state and big business. The situation for the time being is such that policymakers must expect that any reforms made now will not be without consequence.
“President Buhari was elected on an anti-corruption platform and is doing his best to make institutions more transparent and accountable, which is vital”, said Gail Anderson, Research Director at Wood Mackenzie for Sub-Saharan Africa Upstream Oil and Gas. One reason for Buhari’s recent election success is the perception that his predecessor, Goodluck Jonathan, allowed corruption in the oil industry to run rampant. Another is that Buhari was one of very few Nigerian leaders to crack down on corruption over the course of his military rule (1983-85). Knowing this to be true, the newly elected Buhari can ill afford to stand still on this point, and has made tackling structural issues in the oil industry his first priority, ahead of underlying fiscal concerns.
Last year, Nigeria’s budget deficit grew twofold, while exports were down 40 percent on the previous year. The result, according to PwC estimates, was a loss of approximately $18bn in oil-derived income in 2015. Senior figures at the Nigerian National Petroleum Corporation (NNPC) issued a warning to its venture partners, and cautioned that a failure to make good on arrears worth between $8bn and $10bn “could cripple” the industry, according to a letter seen by the Financial Times.
According to Buhari: “Given the previous levels of waste and corruption, if we spend what we have more wisely and effectively, we can achieve a great deal more.” What’s needed now is not necessarily a change in spending, but a full investigation into the business of oil itself and an anti-corruption drive of epic proportions. By targeting the NNPC, illegal crude theft, and the fiscal terms under which the industry operates, policymakers can at least begin to stem the industry’s decline.
NNPC power
Arguably the biggest bone of contention is the NNPC itself, which has for years stood as a symbol of all that is wrong with the oil sector. Should it, after sustained pressure from senior figures in government, choose not to apply stringent and far-reaching reforms, the oil behemoth could well erode the national economy from the inside out.
The news in March that the NNPC had failed to pay $16bn in suspected fraud payments is characteristic of how the company operates. The audit, carried out by Auditor General Samuel Ukura, appeared to show that officials from the previous administration were engaged in wholesale corruption to the tune of billions of dollars. Worse is that the situation in 2014 was far from the exception; prior to that, the company was found guilty of withholding payments of $1.48bn.
Arguably the biggest bone of contention is the NNPC itself, which has for years stood as a symbol of all that is wrong with the oil sector
“The NNPC’s approach to oil sales suffers from high corruption risks and fails to maximise returns for the nation”, said a study by the Natural Resource Governance Institute. “Over 38 years, the corporation has neither developed its own commercial or operational capacities, nor facilitated the growth of the sector through external investment. Instead, it has spun a legacy of inefficiency and mismanagement. Its faults have been described by a number of scathing reports, many commissioned by government itself. Despite the NNPC’s debilitating consumption of public revenues and performance failures, successive governments have done little to reform the company.”
This – at least theoretically speaking – is where the difference between then and now lies. Buhari has wasted no time in upending the NNPC’s management team. In August 2015, he removed the company’s group managing director and group executive directors. Most important of all, the outgoing MD, Joseph Dawha, was replaced by the former vice chairman of ExxonMobil Africa, Emmanuel Kachikwu, in the hope that a new helmsman might inject a new lease of life into the struggling oil giant.
Aside from the changes to personnel, the government is going above and beyond to dismember the unwieldy beast and inspire change on the scale of a cultural overhaul. In what proved a surprise move, in March the Minister for Petroleum Resources and Group Managing Director of the NNPC unveiled plans to unbundle the company into 30 independent companies, each with their own managing director. “Titles like ‘group executive director’ are going to disappear, and in their place you are going to have CEOs and they are going to take responsibility for their titles”, he said. “At the end of the day, the CEO of an upstream company must deliver an upstream result.”
Anderson said the government’s intentions are “sensible, to create a transparent and accountable NNPC that is commercially focused and profitable”. Listing the changes, Anderson highlighted the replacement of the board and the fact that an outsider with industry experience was appointed to lead it – a first for the NNPC. The restructuring of the organisation into separate business units, each to be run for profit, is also notable, and the fact the company is looking at ways to pay back its join-venture cash call arrears to the IOCs and agree a sustainable funding model in the future is a positive sign.
“All of this is very commendable”, Anderson said. “However, as with everything, it depends on how exactly you implement the changes, and the people in the organisation. There are some major barriers to profitability, such as regulated fuel prices and gas prices, so if the goals are to be achieved, issues such as these will need to be looked at, otherwise you could end up with only one part of your business being profitable (i.e. upstream), while the rest (downstream, refining and gas/power) stagnate.”
Commendable as the reforms are, the majority of them stop short of the promised transformation, and the fact remains that the company’s debts – not to mention its links to corrupt powerbrokers – remain intact. According to Quartz Africa, Matrix Energy was identified as one of several oil traders to have defrauded the government of $11.5m, yet it received a license last year to import refined products. The same applies to Eterna Oil and Gas, despite having cheated the government out of $9m in fuel subsidies. Other questionable names include Shorelink Oil and Gas, Northwest Petroleum and Emo Oil, and an unwillingness to do away with the services of such firms is proof that the cleanup is not as far along as senior government figures claim.
Risky future
Aside from the issue of corruption, Nigeria’s concerns are made all the more problematic by the issue of subnational debt, which, in the wake of spiralling oil prices, is eating away at the balance books. Speaking about the steps taken to uproot corruption, Foucaud said: “So far this has not really dealt with the mounting debt problem and the capability to pay contractors.” The NNPC’s mounting debt, he added, “is crippling the ability of foreign companies to invest in projects”.
Arguably, the issue is more important than militancy or corruption, for the fact that it threatens Nigeria’s future oil output, and lack of funding severely limits the nation’s ability to keep production online. Already, Wood Mackenzie has revised its output forecast for Nigeria, slashing it by more than a fifth to 1.5 million a day for the next decade.
Government promises of an overhaul have done little to slow investment leaving the country, and for as long as the reforms fail to materialise, Nigeria’s economy will suffer. Restoring confidence in Nigeria’s oil industry is most certainly a priority, and the longer these issues are left to fester, the greater the chance the country has of getting caught up in a crisis.
