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Buyers wanted

And now the Crude Crunch

US President Barack Obama seeks energy independence for his country, which buys almost half of Nigeria’s crude oil exports. Militants disrupt production and slow down fresh invest- ments in the Niger Delta. Crude oil prices take an incredible plunge in the international market. Is the end nigh for Nigeria’s oil-fuelled economy?

ENERGY EXPERTS must be fum- ing by now. Last year, they predicted crude oil could be going for $200 per barrel by December. They were spectacularly wrong. From a height of $147 in July 2008, oil is now gasping for dear life at a third of that price. Indeed, the protracted dilemma in fixing a benchmark for Nigeria’s 2009 federal budget said it all – things are falling apart with the country’s fabled oil wealth and its fiscal health is no longer at ease. This is a major consequence of the global economic crisis which has hurt crude oil prices.



When the budget was being drafted in the last quarter of 2008, crude oil prices hovered in the vicinity of $100 per barrel. The drafters felt they were being con- servative with a benchmark of $62.50. After all, the 2008 budget was benchmarked against $59 yet crude oil eventually hit $147.

$1 billion

Nigeria’s foreign reserves in 1983 as crude oil prices crashed. The reserves were $10 billion in 1980

Source: THISDAY Database

In no time, however, prices began to wither; the $62.50 mark was no longer realistic. The bud- get drafters adjusted it to $45, thinking again that it was a wise, conservative decision. But a week after the Appropriation Bill was presented to the National Assembly by President Umaru Musa Yar ’Adua, oil was selling for $40. There was,

expectedly, panic – Nigeria was los- ing both in price and quantity. Countries like Russia have enough capacity to make up for falling prices with higher quantity. Nigeria was limited on the two fronts. With

the onset of militant activities in the

oil-rich Niger Delta, production is no longer guaranteed to hit the 2005 level of 2.7 million barrels per day (mbpd). Energy Information Admin- istration (EIA), the statistical arm of the US Department of Energy, esti- mates that Nigeria currently has a capacity to produce 3mbpd, but for the shut-ins. Nigeria’s plans of hit-


Inside... Page 22 Okonjo-Iweala on how Nigeria can beat the oil crisis Exclusive: Nigeria is still
Page 22 Okonjo-Iweala on how Nigeria can beat the oil crisis Exclusive:
Page 22 Okonjo-Iweala on how Nigeria can beat the oil crisis Exclusive:

Page 22

Okonjo-Iweala on how Nigeria can beat the oil crisis


Nigeria is still battling with the appro- priate sharing of its oil revenue as agitations for ‘resource control’ fester in oil-rich regions. What can the country learn from others?

What does the future hold for Nigeria if crude oil goes out of fashion?

Dependence on foreign oil compa- nies often under-develops indige- nous capacity and denies the local economy enormous benefits, but, thankfully, Nigeria is now fighting the cause of local content.

Many state-owned oil companies are doing very well all over the world. Nigeria’s NNPC offers a peculiar case study.

Nigerians believe they should natu- rally enjoy cheap fuel because their country is well endowed with hydro- carbon but the government insists that full deregulation is non-nego- tiable. Crisis looms then.

Oil windfalls flatter to deceive, creat- ing a false sense of unlimited wealth. Nigeria has a lot to learn from other countries on how they manage their windfalls.

Very Backward Integration

Why are IOCs deeply involved in downstream activities, specifically power generation and refining, in other countries but stick mainly to upstream in Nigeria?

Deregulation Dilemma

A Future Without Oil?

Local Discontent

Resource Cross

Dwarfed Giant

Windfall Pitfall












ting 4mbpd by 2010 are also in peril as mil- itants disrupt operations in the industry. The 2009 budget projected a production of 2.292mbpd at a time the country was doing a little less as a result of shut-ins of nearly 400,000 bpd owing mainly to mili- tant activities. That was crass optimism. As the budget was being considered by the federal lawmakers, the Organisation of Petroleum Exporting Countries (OPEC), at its 151st extra-ordinary meeting in Oran, Algeria, agreed to cut 2.2mbpd from its pro- duction of 29.045mbpd from January 1, 2009 to stem falling prices. Nigeria’s share of the cut: 319,000mbpd. The 2009 budget was already in turbulence before take-off. As if the twin trouble of militant activities and falling crude prices were not enough, the United States – Nigeria’s biggest oil cus- tomer – is embarking on a comprehensive drive to reduce energy imports and protect the country from the uncertainties in the international market. Energy is a security issue for the world’s largest economy. Its military activities in the Middle East, which have brought it into drawn-out conflict with the Muslim world, owe partly to the country’s desire to secure its sources of oil supply. With Obama seeking to re-create the image of the US and lessen its involve- ment in such conflicts, the energy indepen- dence policy of his administration does not bode well for Nigeria. US buys about 46 per cent of Nigeria’s daily output. European countries account for nearly 20 per cent, while South America buys about 7 per cent. These figures should alarm Nigeria’s economic managers. A pro- gressive drop in demand by the US in the next 10 years, coupled with the quest for “clean fuel” by Western countries, would hurt Nigeria which depends on oil rev- enues for survival in the absence of diversi- fied economic base. Crude oil (and gas) brings in about 95 per cent of Nigeria’s for- eign exchange earnings. Over 80 per cent of budgetary revenues also come from oil. Except Nigeria develops alternative sources of income, and quickly too, the unpleasant reality is that its overdependence on oil will

Castro Castigates Obama on Energy Plans PRESIDENT OBAMA’S energy plan is not likely to make him

Castro Castigates Obama on Energy Plans

PRESIDENT OBAMA’S energy plan is not likely to make him many friends outside the United States, certainly not Fidel Castro, the former leader of Cuba. In an editorial on the Juventud Rebelde.cu website, early February, entitled “The Contradictions Between Obama Policy and Ethics”, Castro wrote:

“When Mr. Obama promises to invest considerable amounts of money to achieve oil independence, what will those countries do whose main income is from the export of that energy; many of them without another important source of revenue?” He added:“All nations in the world, big or small, base their development dreams on the exchange of goods and services, of which without a doubt only the biggest and wealthiest have the privi- lege of survival.”

Audacity of Alternatives

US PRESIDENT Barack Obama has a string of proposals to cut down oil impor ts and make his countr y “ener- gy independent ” •Cleantech Venture Capital: A $150 billion, ten-year plan to develop “green” energy – biofuels, hybrid cars, wind, solar and clean coal, etc. • Cap-and-Trade on Carbon: To reduce greenhouse gas emissions, Obama wants polluters (including drivers of cars using fossil fuel) to

pay for the pollutions. Funds raised will be invested in developing cleantech. Target: 80 per cent reduc tion in emis- sions by 2050 from the 1990 levels. • Clean Coal: America is rich in coal. But coal itself is fossil and non-renew- able, and it will take a lot to make it clean of the carbon dioxide content. • Auto Standards: The auto industr y is to be encouraged to produce more fuel-efficient cars that will reduce emis- sions.

US PRESIDENT Barack Obama has a string of proposals to cut down oil impor ts and

sooner or later cripple the economy. But the country can take solace in the fact that no matter what Obama says, it will still take

several years to find cheaper and abundant alternatives to crude oil. The recent oil boom had seen the Nigerian government take on extra respon- sibilities, perhaps on the presumption that the petrodollar would keep flowing. Many of the 36 states of the federation had begun to make heavy investments in mega pro- jects such as construction of airports and refineries, often seen as the drainpipes for public funds under the guise of spending the petrodollar on infrastructure. Most states had embarked on employment sprees, often for political reasons. The emerging realities, however, portend that except oil revenue increases – through a decent recovery in the price of crude – many of the states would be in deficit in


The governor of the Central Bank of Nigeria (CBN), Professor Chukwuma Soludo, recently revealed that 30 states have combined deficits of N700 billion (nearly $5 billion) in this year ’s budgets. The likely consequences: suspension of projects, delay in payment of salaries and retrenchment of workers. To avoid all these unpalatable consequences, some states will

resort to borrowing, either internally or

externally, to finance the deficits. Are we going back to 1982 then?

Spend to no end

In 1982, Nigeria ran into a major glitch, the consequences of which it may still be suffering. The 1970s were particularly mouth-watering for the nation’s managers

as crude oil brought a flood of dollars into the economy. Nigeria had discovered oil in


It began to export its entire produc-

tion of 5,100 bpd in 1958 and was among

the world’s oil elite by 1972 with a produc- tion of about 2mbpd, making the country the world’s 10th largest producer then. The bumper breakthrough started in 1973 with the Arab-Israeli war, following the Yom Kippur (October 5) attack on Israel by Egypt and Syria. The Western world opposed the onslaught and, in retaliation,

Arab countries placed an embargo on sup- plies to Israel’s sympathisers. That meant a cut in production by about 5mbpd. Prices rose by 400 per cent between October 1973 and March 1974. In fact, from an average price of $3 in 1973, oil was selling for $12 by December


Nigeria began swimming in a flood

of petrodollars. From modest oil earnings of about $200 million in 1970, Nigeria earned $32 billion between 1973 and 1978, averaging over $6 billion oil earnings per year. But crude oil prices began to take a tumble as the consuming world devised strategies to curtail their appetite. Some of these strategies were: use of pool cars in offices rather than everyone having an official car; development of fuel-efficient cars; provision of fast lanes for cars carrying two or more passengers to encourage



fewer number of vehicles on the road; new, lower speed limits; development of fuel-

efficient heating systems; increased empha- sis on use of mass transit systems such as buses and electricity-powered trains; and an increasing drive for local oil exploration (the United States commenced production in the Gulf of Mexico). The result was a moderate decline in crude oil prices by 1978, by which time Nigeria had become entirely dependent on oil. Agriculture and tax revenue had become insignificant and neglected. The then Gen. Olusegun Obasanjo government began to preach the virtues of prudence (“tighten your belt”) and launched “Operation Feed the Nation” to return the country to agriculture, address food short- age and cut down on food import. Meanwhile, there was a lot of expenditure on the bill as mega projects took over the landscape with little or no provision for alternative funding in the event of declin-

ing government revenue. Everyone thought the rain of petrodollars would pour forever. They were correct to some extent: ten- sions in Iran and Iraq in 1979-80 helped to cut oil production and push up prices again. Between 1979 and 1981, prices rose first to $14 and peaked at $35. The Shehu Shagari government (1979-1983), an experi- ment in democracy after the 1966 military take-over, was at first overwhelmed with too much money. There were no significant savings for the “rainy day”. Spend, spend, spend was the philosophy of governors and the Federal Government. But the world was not asleep. Stability in the Middle East as well as increased supply

and lower demand in the oil market hit prices below the belt. The downward jour- ney was sustained, unlike in 1978. Nigeria earned $22.4 billion from oil in 1980 and, by contrast, $9.6 billion in 1982. The rug had been pulled from under Shagari’s feet. By 1982, the economy was fully on its knees. The foreign reserves, built mainly by the Obasanjo administration, were depleted to maintain the official exchange rate of N1:$1. Nigeria had $10 billion in its reserves kitty in 1980; by 1983, it was down to $1 bil- lion. The naira, grossly overvalued by the

oil boom, was a living corpse, kept on its feet only by decree. Imports were now cur- tailed to ward off the pressure on forex, and food prices subsequently rose by as much as 25 per cent within a year. Industries suf- fered shortages of raw materials and spare parts. Many factories cut back production and laid off workers. The government resorted to import licensing for the supply of basic commodi- ties such as rice and milk, nicknamed “essenco” (essential commodities) as they were no longer readily available in the open market. Nigeria’s creditworthiness had been severely hit by the depleted reserves. State governors, meanwhile, went

on a foreign borrowing spree ostensibly to

finance important projects, but it turned out

that most of the loans were not effectively utilised. Nigeria became heavily indebted, with interest rates hitting the roof following the global financial crisis of the era. Shagari’s austerity measures cut down on social spending and general expendi- ture, and drastically downsized public expectations. The results? Hyper inflation, declining productivity, unpaid wage bills, growing unemployment, public disen- chantment… the stage was perfectly set for a military coup. The Gen. Muhammadu Buhari government that came in was faced with a grim reality – low revenue, an econ- omy devastated by corruption and mis- management, heavy foreign debts that needed to be serviced and rescheduled, unpaid salaries, comatose industrial sector and high crime rate stemming from unem- ployment. Subsequent governments battled with these problems, from Ibrahim Babangida and Sani Abacha to Abdulsalami Abubakar and Olusegun Obasanjo (on his second coming). The fortunes of Nigeria seem eter- nally tied to the swing of the petrodollar. An upward swing brings smiles, a down- ward one sorrow. The resurgent post-2000 oil boom saw Obasanjo build up reserves again, from which the odious debts accumulated main- ly during the Second Republic were paid off and Nigeria exited from the dreaded Paris Club. There were controversies over the huge one-off payment of $12 billion to secure a write-off of $18 billion (Nigeria started borrowing heavily in the oil-boom years) but, nevertheless, it offered Nigeria a somewhat clean slate and stopped huge annual interest payments. But the events of the 70s and 80s seem to be repeating themselves today. High crude oil prices are coming down, countries are devising means of cutting consumption and Nigeria’s economy is taking a hit again. There are still quite a number of differ- ences though. Nigeria’s foreign reserves are more now – about $46 billion as against $1 billion in 1983. The country is virtually debt-free, significantly saving Nigeria from heavy interest and penalty payments it had to go through in the past. And, perhaps




most importantly, Nigeria has a past to learn from. That alone should serve as a deterrent factor.

Obama’s energy plan

The present and the future do not look too promising, in any case. To reduce dependence on foreign oil, President Obama has proposed various strategies. If adopted into a policy, Nigeria could be a major victim if it succeeds. He wants to pump $150 billion into developing “green” energy in the next ten years. This is meant to overhaul the energy system and break the country’s “addiction to oil” (his words). That would mean development of hybrid cars, wind and solar power, clean coal and more fuel-efficient appliances. By 2012, he hopes that the use of renewable energy in the US would have doubled. In addition to fuel efficiency and green energy, Obama is also in favour of releasing millions of barrels of crude oil daily from the Strategic Petroleum Reserve (SPR) to keep the prices within a band. The SPR, established in the 1970s during the cata- strophic Arab oil embargo, currently holds about 700 million barrels. In the last eight years, the US has been saving 70,000 barrels per day in the reserve. There are plans to expand the capacity to 1.5 billion barrels. Obama is also in favour of “limited” off- shore drilling to increase local oil output in the country. This is no good news for Nigeria and other oil-producing countries hoping for another era of oil boom. The US seems to have learnt from events of the past and is bracing to forestall or minimise a recurrence in the future. The global move to cut down on the use of fossil fuels in favour of bio-fuels is also bad news for Nigeria. Climate change has become an all-important topic in global dis- course. Carbon emissions are being discour-

aged. The whole world is now discussing alternative, renewable sources of energy. With more and more countries working at achieving its carbon emissions target, the projections for the future of crude oil are not flattering at all. Nigeria can take solace in two things: one, it would still take ages to relegate crude oil to the background; and, two, Nigeria still has time to diversify its economy and avoid being held to ransom by oil.

Austerity measures again

Nigeria’s response to the latest crude cri- sis has been surprisingly sober. Unlike in the past when massive borrowing went into bridging budget gaps, there has been a somewhat realistic approach. President Yar ’Adua has proposed pay cuts for politi- cal appointees and public offices holders. This is expected to cover all tiers of govern- ment – federal, state and local. The emolu- ments for this category of public office hold- ers cost about N1.3 trillion (about $884 bil- lion) yearly. In August last year, Revenue Mobilisation, Allocation and Fiscal Commission (RMAFC) had raised some emoluments by 100 per cent, justifying the increases on certain indices, including “external reserves, GDP, growth rate, rate of inflation and the need for a living wage”. Many states are also responding to the crunch by scaling down their budgets and slicing some percentage off some fringe benefits. Another pile-up of foreign debts, as it happened in the Second Republic, may also not be entertained because of two signifi- cant developments: one, with Nigeria’s ordeal in the hands of the Paris Club, the Federal Government would be more reluc- tant to grant country guarantees to states seeking foreign commercial loans (as distin- guished from concessionary loans granted by development agencies such as the World Bank); two, Nigeria’s financial sector is now more developed, opening ways for states to patronise the capital market rather than bor- row abroad. But the notion of a fresh debt


New rulers of the Niger Delta


Back to the future

pile-up itself – domestic or external – is not something Nigerians want to contemplate again, although domestic borrowing is a global phenomenon. These consolations notwithstanding, the handwriting on the wall is getting larger and clearer: Nigeria’s dependence on oil just has to stop. A country that nervously monitors movements in oil prices in order to know whether to smile or sigh is living dangerously. Oil contributed about 19 per cent to the nation’s revenue in 1970, 80 per cent four years later, and about 82 per cent or more since 1989. When every budget has to be benchmarked against the forecast price of an unpredictable commodity, the country is effectively boxed into a corner.

Hope in the horizon?

Nigerians are quietly hopeful that there would soon be a recovery in crude oil prices. It is not based on any data or informed predictions; it is just that it must happen to save the country’s economy. The signs are not very encouraging though, as forecasts cast doubts on any optimism in the short run. The global economic meltdown – which has seen a sharp rise in business fail- ures, unemployment and fall in demand globally, with the world’s biggest compa- nies declaring record losses – means demand for oil would continue to fall, at least until measures being adopted by vari- ous governments begin to bear fruits.

At the Annual Meeting of the World Economic Forum in Davos, Switzerland, in January, the Premier of the People’s Republic of China, Wen Jiabao, revealed that China had stored up enough oil that would last for the next 22 months. With oil imports also dropping in the US, the demand for crude oil is unlikely to rise in the nearest future. If demand does not rise, price is not likely to rise. Indeed, global oil demand is expected to crash further this year amid untamed worldwide recession. EIA predicts that there would be a drop of 450,000bpd this year. US oil demand, according to its fore- cast, will drop to the lowest level in 11 years. The World Bank’s Global Economic Prospects report said the five-year com- modity boom has “come to an end”. Nevertheless, some analysts are of the opin- ion that there would be a price recovery between now and the next three years, but prices are not expected to rise above $75 during the period. For Nigeria, it should not matter whether or not price would recover in the future. The urgent task is to cut out wastages, scale down mega projects, improve infrastruc- ture, entrench transparency in economic management and pursue diversification of the economy with commitment. Easier said than done, but better said than not.

ᝓᛰ෴ ᝓᛰၙ ᥴ፼ၙ ޱ࿏Ᏼᥴᝓᢩ ᝓ჻ ൯ ᏴᇹၙᢩᏴ෴ Ᏼ᜶ᥴၙᢩ᜶෴ᥴᏴᝓ᜶෴ᛰ ᜶ၙ ᝳ෴ᝳၙᢩ ࿏ၙ ၙᛰᝓᝳ᜔ၙ᜶ᥴ ᝳၙÿ ໝᏴ෴ᛰᏴ ᥴ ፼ၙ ፼ᝓᛰ࿏ ۿ૱ໝ ݏᝓ᜔᜔ ᜶Ᏼໝ෴ᥴᏴᝓ᜶ ჻ᢩᝓ᜔ ᥴ፼ၙ ௺᜶Ᏼ ၙᢩ Ᏼᥴ ᝓ჻ ෴ᇹᝓ  ᏴᇹၙᢩᏴ෴ ෴᜶࿏ ෴᜶ ၙᢩ᜶෴᜶ໝၙ ෴᜶࿏ ၙᛰᝓᝳ᜔ၙ᜶ᥴ ჻ᢩᝓ᜔ ᥴ፼ၙ ௺᜶Ᏼ ၙᢩ Ᏼᥴ ᝓ჻  ᜔෴ᙶᝓᢩ ෴ໝ෴࿏ၙ᜔Ᏼໝ Ᏼ᜶ᥴၙᢩၙ Ᏼ᜶ ᥴ፼ၙ ჻Ᏼၙᛰ࿏ ᝓ჻ ၙᛰᝓᝳ᜔ၙ᜶ᥴ ૱ᥴ ࿏Ᏼၙ ᥴ፼ၙ ᢩၙᛰ෴ᥴᏴᝓ᜶ ፼Ᏼᝳ ๛ၙᥴ ၙၙ᜶ ᥴ፼ၙ ᢩໝၙ ᝓ჻ ᥴ෴ᥴၙ ᢩၙ ၙ᜶ ၙ ෴᜶࿏ ᥴ፼ၙ ෴ᛰᏴᥴ ᝓ჻ ᇹᝓ ၙᢩ᜶෴᜶ໝၙ ෴ᛰ ෴᜶ ၙ᜶ᥴ፼ Ᏼ෴ ᝓ჻ ᝓໝᏴᝓÿᝳᝓᛰᏴᥴᏴໝ෴ᛰ ᜔෴᜶෴ᇹၙ᜔ၙ᜶ᥴ ᝓ჻ ၙᥴ፼᜶ᝓÿᢩၙᛰᏴᇹᏴᝓ ໝᝓ᜶჻ᛰᏴໝᥴ ᢩၙໝၙ᜶ᥴᛰ ᜶෴᜔ၙ࿏ ෴᜔ᝓ᜶ᇹ ჻ᢩᏴໝ෴ ᜶ၙ ᇹၙ᜶ၙᢩ෴ᥴᏴᝓ᜶ ᝓ჻ ᛰၙ෴࿏ၙᢩ ୱ፼ၙ ۿ෴᜶᚜ၙᢩ ᜔෴ᇹ෴ Ᏼ᜶ၙ ๛ᛰᏴ ፼ၙ࿏ ᥴ፼ၙ Ᏼ᜶෴᜶ໝᏴ෴ᛰ ୱᏴ᜔ၙ ᝓ჻ ᝓ᜶࿏ᝓ᜶ ᝓᛰ෴ ᝓᛰၙ ᢩᢩၙ᜶ᥴᛰ ᝓᢩ᚜Ᏼ᜶ᇹ ᝓ᜶ ፼Ᏼ ჻Ᏼᢩ ๛ᝓᝓ᚜ ॰Ᏼᛰ ᝓᝓ᜔֊ ෴᜶࿏ ᝓ჻ ৺ၙᥴᢩᝓ࿏ᝓᛰᛰ෴ᢩ Ᏼ᜶ ᏴᇹၙᢩᏴ෴











A journey into petro-dynamics


TO QUOTE the inimitable ex-US President George W. Bush, I “misunder-

Yar’Adua: Change agent?

Yar’Adua: Change agent?

MD of World Bank, magnanimously squeezed out time from her hectic sched-


Nduka Obaigbena

estimated” the challenges ahead of me when I embarked on this survey June

ule to answer my questions despite her reservations about me.


Group Executive Directors:

last year. It sounded so exciting to my ears to say I wanted to survey five oil- producing countries on a “comparative

The good people at OPEC helped tremendously with securing appoint- ments while also allowing me to use the

Eniola Bello, Deji Mustapha • Divisional Directors:

scale” with Nigeria to draw lessons for the country’s policy makers in the areas

library. The Head of PR, Dr. Omar Farouk Ibrahim, and Angela Agoawike,

Simon Kolawole, Emmanuel Efeni, Israel Iwegbu, Benjie Ihenyen

of “policy environment, windfall man-

made my stay in Vienna, Austria, head-


agement, upstream-downstream link-

quarters of OPEC, worth the while.

Associate Directors:

ages, local content, operations of nation- al oil companies” and all that. With the

THISDAY Washington DC Bureau Chief, Constance Ikokwu, helped me secure


Peter Iwegbu, Biodun Aminu, ‘Gbayode Somuyiwa

benefit of hindsight, it was a suicide

use of IMF/World Bank libraries, where I


attempt. Thankfully, I survived it.

was overwhelmed with materials in two

General Managers:

This report was originally scheduled to be published in September 2008. That,

key areas of my study. I value the very useful inputs of Waziri Adio, who was


Martins Egboh, Fidelis Elema, Ayo Oresegun, Labake Yembra,

again, was a product of “misunderesti- mation”. By that time, the work had only

the first person I discussed the idea with in 2006 and who received it with enthusi-

Dele Ogbodo, Patrick Eimiuhi •

been half-done, only to be undone by the

asm. He kept sending materials to me.

Deputy General Manager:

events in the international crude oil mar-

Adio, who is currently doing a graduate


Angela Okhakume

ket. Crude prices were heading for the skies when I launched out. By the time I

programme at Harvard University, US, even sent me his lecture notes pertaining

Group Heads:

finished, they were diving for the abyss. So while the original intention was to emphasise how to manage the windfall by learning from other countries, there is an extended intention now to appraise the dangers ahead. The good thing, it can be said, is that Nigeria can learn

to the oil industry. Richard Swann, Managing Editor of UK-based Platts, broadened my horizon by suggesting that I look beyond my cho- sen case studies. Deputy Editor of THIS- DAY, Tunde Rahman, always ably held fort each time I had to travel. Tunji Bello,


Femi Tolufashe, Sola Obisesan, Morooph Alli, Peter Bakare, Ugo Nnakwe • Art Director: Obi Azuru • General Counsel: Jane Inyang-Disi, Chinwe Izegbu (Nation’s Capital) •

from both scenarios. The idea of Vision 20-2020 is that Nigeria will be among the biggest 20

forever an inspiration, never failed to

Director of Photography:

Sunmi Smart-Cole,

economies in the world by 2020. No one knows how this will be achieved in a

remind me how important this study was. Bisi Ojediran went through the

draft reports even when it was inconve-

nient. Gboyega Akinsanmi and Bunmi


Contributing Editor:

Funke Aboyade

country that is literally still living in the

Olsen Erik Just, spent hours with me, letting me into the world


Oni, both my colleagues at THISDAY,



Dark Age as a result of seemingly intractable electricity problems. The world’s seventh largest oil exporter is a net importer of petro- leum products as its refineries have, for decades, been epileptic at

contributed their own quotas. Austin Avuru, Mike Oduniyi and Hector Igbikiowubo offered invaluable “technical” advice. Peter Bakare handled the graphics at short notice. Abdulmumin Bello,




best and have become a very lucrative drainpipe for public funds under the guise of maintenance. Yet we should not be left in doubt about how the country can attain its ambitious Vision 2020: it must properly harness, manage and invest its petrodollars to the advantage of other sectors of the economy in order to get out of the hole of resource curse. Many petroleum-rich countries are tackling the new reality of economic diversification, but Nigeria is behind. The most tragic aspect of the Nigerian situation is that while many oil-rich countries may not be able to boast of a liberal democratic polity, they can at least point to excellent infrastructure as a benefit of petroleum riches. Nigeria is far, far behind in this area. This survey is, in any case, intended to be a wake-up call. Nigeria compares too poorly to its mates in oil riches. It is not just about the poverty in the country. It is also about the structural deficiencies in the oil economy. It is about the triumph of politics over common sense. It is about gross underdevelopment of a sec- tor that can galvanise Nigeria’s rise to economic power. Former President Olusegun Obasanjo, it must be acknowledged, made commendable efforts to change the industry. He might have been caught up in his own contradictions on transparency and accountability, but he ranks way above others in trying to put a proper structure in place to make the industry function better. But his efforts were not enough, and not many radical changes result- ed from them. President Umaru Musa Yar ’Adua, if he can break the vicious circle, has a lifetime opportunity to put things right once and for all. Meanwhile, the most difficult aspect of this work was not the survey itself. It was fixing interview appointments with govern-

my Abuja “uncle”, helped facilitate my Saudi visa. He often called me “oil sheikh”. How I wish! The sponsors of this survey were marvellous – without fund- ing it would have been difficult. The research was proudly sup- ported by (in alphabetical order) African Petroleum Plc, Diamond Bank Plc, Nigerian National Petroleum Corporation (NNPC), Oando Plc, Rivers State Government, United Bank for Africa (UBA) Plc and Zenith Bank Plc. I am aware of my debt of grati- tude to those who facilitated the funding – Mofe Boyo (Deputy CEO, Oando), Tony Elumelu (CEO, UBA), Dr. Edmund Daukoru (former Minister of Petroleum Resources), Shaka Momodu (my colleague), Malachy Agbo (Diamond Bank), David Iyofor (Rivers) and Timeyin Ejoor (Zenith Bank). I, eternally, value the support and motivation of THISDAY Chairman/Editor-in-Chief, Nduka Obaigbena, who apart from offering invaluable insights, kept on challenging me to deliver on the project and always granted me the freedom to embark on trips at short notice. He is one in a million. At THISDAY, you can be what you want to be. Talents are allowed to flourish. I have worked in eight media outfits in my career – THISDAY stands out. Meanwhile, I would like to remind the reader that this is essen- tially a journalistic survey – not an academic research – so the pre- sentation is more journalistic, simplified and ready to use. I made every effort to verify my facts in order not to mislead the reader. All errors, or inaccuracies, are regretted. The exchange rate kept changing during this research, from N119:$1 to N150:$1. It was difficult keeping track and altering figures all the time, so what you would find in this report is a rate that is N145:$1.

THIS RESEARCH benefited from the fol- lowing works: Facts, The Norwegian Petroleum Sector 2008 (Norwegian Petroleum Directorate, 2008); Nigeria and OPEC: 36 Years of Partnership (Nigeria Ministry of Petroleum Resources, 2006); Wikipedia; Nigeria Sweet Crude (Yakubu Lawal and Hector Igbikiowubo, 2007); Oil Revenue Assignments: Country Experiences and Issues (Ehtisham Ahmad and Eric Mottu, IMF Working Paper, 2002); Issues in Domestic Pricing in Oil-Producing Countries (Sanjeev Gupta, Benedict Clemens, Kevin Fletcher and Gabriela Inchauste, IMF Working Paper, 2002); Universo (Sonagol, Angola); The Economist and Financial Times of London; websites of Energy Information Administration (EIA) and OPEC; Covering Oil: A Reporter’s Guide to Energy and Development (Open Society Institute, 2005). Norway’s Oil Fund Shows the Way for Wealth Funds (IMF Survey magazine, 2008).

ment officials in the selected countries. E-mails upon e-mails went unreplied. Text messages were ignored. I had travelled for OPEC

Finally, I had a “scary” but lovely tune on my iPod which I somehow often played on my flights. It’s a song by the poet,



meeting in March 2007 and met with officials from the countries I wanted to sample. We exchanged cards. And that was it. Every attempt to even communicate, much less fix appointments, failed. At a stage, I almost gave up. There was no way I could do this kind of work thoroughly without getting first-hand information. I got a big relief when I sent an e-mail to the Ambassador of Norway in Nigeria, His Excellency Ambassador Tore Nedrebø, who replied me in a matter of hours and detailed Havlor Musaeu to help me. In a few days, I got appointments fixed and my visa secured. In Oslo, Norway, an official of the Petroleum Ministry,

of petroleum in his country and giving me all the documents I needed. Eddy Rich of the Extractive Industries Transparency International, also in Oslo, was very helpful with materials. Dr. Ngozi Okonjo-Iweala, Nigeria’s former Minister of Finance and

Beautiful Nubia, entitled “Ife Oloyin”. It says: “Flying off in the air/Slicing through the clouds/Any moment from now could be my last…” My wife, Abimbola, hated the lyrics! But I calmed her down with the other lines which she now likes: “Such a lonely world/Can’t find no one to trust/You’re the only who under- stands/Wipe away your tears/Take me in your arms/This is where I belong/I’m here to stay/I’m coming back home/To give you all my love/To give you what you want/You will never be lonely/I will always be there for you.” For flying safely thousands of kilometres around the world almost every month, I just have to thank God for journey mercies and the special grace for the conception, execution and delivery of this project.

Page 1: Dreamstime (main picture), World Economic Forum (Okonjo- Iweala); Page 2: AFP (Castro and Obama); THISDAY; Page 3: Corbis.com (main picture), slate.com (illustration); Page 5: THISDAY ; Page 7: Flickr.com; Page 9: THISDAY; Page 11: Dreamstime, AFP; Pages 12-13: Dreamstime; Page 15: AFP; Page 17: AFP; Page 19: Dreamstime; Page 20: AFP; Page 21: AFP; Pages 22-23: World Economic Forum; Page 24: Universo.










Oil windfalls flatter to deceive, creating a false sense of unlimited wealth. Nigeria has a lot to learn from other countries on how they manage their windfalls

IN THE 1960s, The Netherlands discov- ered superabundant natural gas in the North Sea. The rents were enormous. In no time, the Dutch manufacturing sector began to suffer as foreign exchange from gas rents flooded the economy, shoring up the value of the Dutch currency, then called guilder. The economy was inevitably intoxicated with a strong guilder. Imports became cheaper. The local industries became less and less com- petitive as their products could no longer compete with imports. The industries started dying one after the other. The Economist of London (November 26, 1977) used two words to describe the develop- ment – “Dutch Disease”. This was also the era when Nigeria made unprecedented revenues from oil. The Arab-Israeli face-off of 1973 had led to high oil prices following the embargo on Western countries by the Arabs. Nigeria benefited from the boom and was soon awash with foreign exchange. In one year, Nigeria recorded a 350 per cent increase in revenue – thanks to oil. The country earned $32 billion between 1973 and 1978, and $16 billion in 1979 alone. In 1980, the country grossed $24 billion. The naira was consequently one of the world’s strongest currencies, exchanging at 80 kobo to $1. It was, for instance, cheaper to import bot- tled water than produce it locally because of the favourable exchange rate. But the local industries suffered as a result. In two famous words, Nigeria became afflicted with the “Dutch Disease”. Since the trauma of the post-oil boom era of the 1970s, Nigeria has gone through different adjustment phases as it struggles with deindustrialisation and underdevel- opment. The initial consequences, follow- ing the crash in crude oil prices, were pret- ty ugly – job cuts in private and public sectors, withdrawal of various forms of subsidies, heavy external borrowing, col- lapse of industries, etc etc. However, there was a lingering feeling that Nigerians had to suffer because the oil boom was not well managed by the government. Too many projects were being pursued at the same time, some of them with little or no

$420 million

Nigeria’s foreign debt stock in 1973 when oil boom started

$14.7 billion

The debt stock in 1982 when the oil windfalls started drying up

Source: THISDAY Database

economic benefit but based purely on political considerations. The projects were also concentrated in urban areas, further worsening urbanisation. There were no adequate savings for the rainy day. This led to the near total collapse of the econo- my as soon as crude oil prices took a tum- ble.

Déjà vu?

Cue another boom. After a prolonged lull in crude oil prices, there was a rebound starting from 1999. From as low as $10 in 1998, the prices began to pick up, hitting a record $147 ten years later. This

time around, Olusegun Obasanjo, who was also military head of state (1976-1979) in the boom-bust era, began to encourage savings for a “rainy day” through robust external reserves in his second coming (1999-2007). In 2003, his government cre- ated the Excess Crude Account in which the difference between the budget price (called “benchmark”, usually lower) and the actual price is saved. However, this generated a heated debate in the polity. Why should Nigeria be keeping huge sums in reserves when there was a glaring lack of infrastructure at home? Of what use is the Excess Crude Account when Nigerians are hungry? What is “excess” when there is “scarcity”? These were the most asked questions in the new era of oil boom. They inevitably provoked a feeling of déjà vu. Haven’t we been through this before – spending oil windfall ambitiously and suffering the consequences disastrously? Whereas Obasanjo built some reserves when he was military head of state in the 1970s, the subsequent crash in oil prices led to an economic downturn and a mas-


Seeing no evil: Is oil economy all good?

sive drawdown on the reserves. The Shehu Shagari government (1979-1983) which succeeded Obasanjo had to dip hands into the reserves to finance its bud- get. The consequences were dire. From a modest foreign debt of $3.3 billion in 1978, Nigeria’s profile had hit $14.7 billion in 1982 following a renewed turmoil in the oil market and the global financial cri- sis which pushed up interest rates. This time around, if Nigeria went the way of heavy spending and little savings again, there was the danger that the crunch of the 1980s might repeat itself. The Obasanjo government (1999-2007), which met modest reserves of $3.7 billion in 1999, left office in 2007 with $45 billion sitting pretty in those coffers. However, the question is still being asked: why save so much when there is so much to spend money on at home? Nigerian state gover- nors, in particular, have been querying the legality of the Excess Crude Account, arguing that the Constitution does not recognise it. They also argue that because of the enormous challenges of develop-

ment in the country, the money should be shared out to the three tiers of government (federal, state and local) to spend on poverty-alleviation projects.

To spend or not to spend

There are several issues thrown up by this argument. Economists will argue, for instance, that spending the windfall has fiscal implications. Whereas the Federal Government is charged with maintaining macro-economic stability – through healthy exchange, inflation and interest rates – a lack of control over spending by the other tiers of government will harm whatever measures are in place. The biggest threat would be inflation, caused by excessive public spending. Inflation, not well managed, can discourage invest- ment. Secondly, it is feared that the wind- fall may be mismanaged through white elephant projects and outright stealing. In the opinion of development analysts, cor- ruption and misappropriation of the oil windfall are responsible for Nigeria’s


Meanwhile, in Other Lands...

SEVERAL OIL-PRODUCING countries have special savings from windfalls. They are classified under the “Sovereign Wealth Funds”. They are invested in stocks, bonds, proper ty, among other securities, world- wide. These funds not only yield interests, they are also expec ted to provide for the future and protec t local economies from excessive public spending. Nigeria’s Excess Crude Account is not a per fec t example because it is not invested like other SWFs.

Algeria: The Revenue Regulation Fund was set up in 2000 and is estimated to

hold over $50 billion. The excess earn- ings from crude oil sales go into the account, designed mainly to finance debts. The account is kept in dinar, the Algerian currenc y.

Norway: The Government Pension Fund of Nor way was established in 1990 to provide for “generations unborn”. The fund currently holds over $400 billion. It is invested offshore to protec t the econ- omy from excessive public spending.

Saudi Arabia: In 2008, the Saudi Arabia Sovereign Wealth Fund was set up with a

seed capital of $5.2 billion. However, the foreign assets of the government are estimated at over $300 billion. They are not treated as reser ves but investments.

Kuwait: The Kuwaiti Investment Authority has saved $264 billion so far. It was established in 1953, the first by any countr y. KIA, which is headed by a Managing Direc tor, has $5 billion invest- ment in two US banks, Citigroup and Merrill Lynch. The Kuwaiti parliament per forms an oversight func tion on the fund. The funds are invested locally and internationally. It is mandator y that 10

per cent of all revenues be saved, irrespec- tive of market price and produc tion levels.

Qatar: With $50 billion in its k itty, the eight-year-old Qatar Investment Authority is investing all over the world.

Russia: Russian National Wealth Fund has saved $32 billion in the first year of its establishment.

UAE: In 1976, United Arab Emirates estab- lished the Abu Dhabi Investment Authority. Its current assets are nearly $900 billion.







Is Norway’s Way the Best Way?

WHEN IT comes to prudent manage- ment of the petroleum resources, Nor way is the global poster boy. All the diseases associated with “resource curse”, such as neglec t of manufac turing sec tor, bloated public ser vice, poor social infrastruc ture, environmental degradation and pseudo-democrac y/outright dic ta- torship, are alien to this Scandinavian countr y. Its Government Pension Fund (GPF, savings from oil windfall) is hailed as a model for sovereign wealth funds. It was set up in 1990

and has so far saved over $390 billion – which is almost the equivalent of

the countr y ’s GDP. Nigeria can draw useful lessons from the Nor wegian experience. One, the Fund aims to save as much money as possible from the

oil windfall and fund public pension in the future, given the demographic struc ture of the countr y which shows an aging population in the years to come (in Nigeria, though, pensions are no longer defined/paid by gov- ernment. Pensions are now contribu-

tor y – you get what you contributed while work ing, in addition to your employer ’s matching contributions). Two, the Fund’s investment strate- gy is ver y transparent. The finance ministr y, officially the owner of the fund, regularly repor ts on the goals, investment strategy, ethical guide- lines and results. Quar terly and annu- al repor ts are published by the cen- tral bank, the fund’s manager, on the management and per formance of the fund in a ver y detailed manner. Three, the fund is like an endow-

ment fund – the long-term returns are invested in financing the non-oil sec tor. In a way, the capital, derived 100 per cent from oil revenue, is intac t while the interest is spent to develop the non-oil sec tor. Four, the fund is par t of the budget – ever y net allocation to it and pro- jec ted returns are reflec ted in the overall budget of the government. Five, to protec t the local economy from getting “overheated” with petrodollars, the fund’s assets are invested abroad.

slow-paced development. The other side of the coin, however, is that given the poor state of infrastructure in Nigeria, the pace of the country’s devel- opment will be too slow except govern- ment spends on infrastructural develop- ment. Without reliable power and trans- portation infrastructure, for instance, eco- nomic activities will continue to be ham- pered. Investors will continue to incur unnecessary costs (building roads, haulage, fuel etc etc) which could have been channelled towards real invest- ments. Small- and medium-scale busi- nesses, which employ millions of Nigerians, will also continue to bear unnecessary costs, while real incomes will continue to dwindle as cost of living remains high. It is also argued that huge foreign reserves and excess crude savings will lose value overtime: what $1 can buy today may be less than what it can buy tomorrow. However, the argument may not be a case of black or white. Economists such as Paul Toungui, Gabon’s former Minister of State and Minister of Economy, Finance, the Budget and Privatisation, favour a pragmatic approach. He advanced a somewhat broad perspective in an article in F&D, a quarterly magazine of the IMF, published in December 2006. He argued that a portion of the windfall should be used to finance “social spending” – such as education and healthcare – while a por- tion should be saved to cushion the impact of future external shocks. Toungui endorses spending part of the windfall to get out of debt (Obasanjo paid $12 billion to secure Nigeria’s exit from the Paris Club in 2005) so as to strengthen public accounts and make the economy attractive to foreign investment. “Paying down debt early brings greater benefits than building up savings that earn a low rate of return,” he wrote. But to attain the Millennium Development Goals (MDGs), there must be investment in “basic social and production infrastructure”, he said, warning: “The pace of spending has to be commensurate with the economies’ capacity to absorb large additional spend- ing…”

Saving grace

Several oil-producing countries, such as Qatar, UAE and Norway, have made enormous savings from the oil boom. Kuwait’s savings are in excess of $260 bil- lion. Norway has over $390 billion, which is almost the size of its GDP. The Abu Dhabi Emirate in the UAE has a mind- blowing $900 billion in boom savings. Nigeria, in contrast, has $15 billion which is being shared monthly to make up for the low oil revenue. Whereas other oil- producing countries operate their savings as sovereign wealth funds (SWFs) which are invested in shares, bonds, property and other securities across the world, Nigeria shares its own savings on a regu-

lar basis among the various tiers of gov- ernment. The windfall savings are kept as part of foreign reserves. Political consider- ations have limited the country’s ability to derive maximum value from it. The sav- ings are not invested as other oil-produc- ing countries do. In 2006, the government of Obasanjo decided to draw down from the fund to finance power infrastructure following the lack of success or speed in the attempt to get private investment to boost the country’s power supply. Various power plants were to be built under the National Integrated Power Project (NIPP). This, in a sense, represented a productive use of the oil windfall. In the years to come, Nigeria could look back and celebrate utilising the windfall to address the electricity problem once and for all – in addition to the exit from the Paris Club. The actual costs of these projects are still a subject of conjec- tures, but figures ranging from $2 billion to $16 billion are being quoted. Accusations of corruption and improper planning are still hanging on the project. However, a bigger problem is dogging the use of the windfall. It is being argued that operating a windfall account is unconstitutional and should be discontin- ued – a development that may mean there would be no special savings any more, which is indeed very dangerous, especial- ly when compared with the experiences of other countries who now have enormous savings for the years ahead. Some politi- cians argue that Section 162 of the Nigeria Constitution provides that all revenues of the government must be pooled and put in the Consolidated Revenue Fund and shared by the various tiers of government. This argument, which sounds very legal and democratic, is nonetheless viewed as a ploy to transfer the windfall into the hands of politicians from where it is highly susceptible to mismanagement. Social critics and activists are apprehen- sive that the country may end up with lit- tle or no benefits from the oil boom by the time the constitutional argument is employed to share the savings. It would

appear, however, that a political solution may be applied to address the constitu- tional question – since it could never be the intention of the framers of the consti- tution that the country should have no savings. The various levels of govern- ment can strike an agreement to save rather than spend everything. The com- promise, at the end of the day, may be to spend some and save some.


Beyond the peculiar political environ- ment of Nigeria, however, the UAE or Norway example does not really suit the country. Norway, for instance, was a developed country before it found oil wealth. It had a tax system in place. This was not eroded by the oil wealth. The basic infrastructure to keep the economy growing was already in place. Also, its population is small – a little over 4.6 mil- lion. Nigeria, by contrast, has a popula- tion of 140 million with poor social and economic infrastructure. While Norway can afford to stash billions of dollars away for the future generations, the same can- not be said of Nigeria which is in dire need of the fundamentals to grow the economy. Indeed, it is very difficult to find any country that is very similar to Nigeria in terms of oil wealth per capita, state of infrastructure, a teething democracy and, most critically, a complex ethno-political configuration which is a major factor in the way economic resources are man- aged. What would work very well for UAE would be exposed to the politics of Nigeria. Politics almost always triumphs over economic commonsense, and there is always this feeling of the country being locked up in a vicious circle.

Spend, save and invest

Nigeria’s means of livelihood is crude oil. The government has spoken quite encouragingly about diversifying the eco- nomic base – but oil still accounts for over 80 per cent of government revenue and 95 per cent of foreign exchange. The country

also has one of the world’s biggest gas reserves – which are more than its oil. Therefore, it appears that for a long time to come, the position of oil and gas in the revenue profile will be predominant. What is not sure is the price of oil. Sudden oil windfall flatters to deceive, as the country has experienced in the past. The urge to spend and spend and spend is ever present with little consideration for the rainy days. Despite the horrendous post-boom experiences of the past, the Nigerian political leaders do not seem to have learnt their lessons. Much of the oil wealth is still being mismanaged. “Resource curse” theorists will easily cite Nigeria as a perfect example of the dam- age oil rents can do to the economy and the polity. Nigeria’s precarious revenue situation is worsened by militant activities in the oil-producing Niger Delta. New invest- ments in the sector are hampered. Crude oil prices, meanwhile, have peaked and are on a downward spiral. Falling pro- duction and falling prices portend doom for Nigeria. It makes a whole lot of sense for the politicians to pause and think of the dangers that lie ahead if the oil wind- fall is not reasonably managed to avoid a crippling fiscal crisis. Subject to the necessary legal backbone, a large percentage of oil windfalls ought to be saved and invested for the sake of the future. The remaining portion could be shared by the tiers of government only periodically – like when there are serious shortfalls. The portion to be shared should be targeted at social and economic infra- structure within assessable timelines. The government should also continue to pur- sue the public-private initiatives in infra- structural development. This has the potential of containing excessive public spending with all its side effects, as well as creating wealth and jobs, in addition to efficient management, given that govern- ment institutions are still undergoing reforms intended to make them more capable in service delivery.

Post Script: Oil Savings to the Rescue

billion was shared from the $20 billion fund, although over $5 billion has already, been pledged
billion was shared from the $20 billion fund, although over $5 billion has already, been pledged

billion was shared from the $20 billion fund, although over $5 billion has already, been pledged to fund the National Integrated Power Project (NIPP). The foreign reserves have also been dwindling as the central bank tried to save the naira from falling. But the naira eventually depreciated as the apex bank also tried to avoid washing away the reserves. If crude oil prices do not wit- ness a significant improvement, the reserves and excess crude oil revenue sav- ings stand the risk of being completely depleted. That would be very catastrophic for Nigeria, in the short run, at least.

NIGERIA’S ECONOMY could have been in greater trouble today but for the savings from oil windfall in the recent years of boom. Dwindling oil revenue has seen a freefall in federal allocation which is shared monthly among the federal, state and local governments. N435.40 billion was shared in December 2008, down to N285.58 billion in January 2009 – repre- senting a 34.4 per cent drop. This further dropped by N50 billion in February. To make up for the deficit, the three tiers have agreed to share gradually from the Excess Crude Account. In February, $1.5









Deregulation Dilemma

Nigerians believe they should naturally enjoy cheap fuel because their countr y is well endowed with hydro- carbon. But government insists full deregulation is non-negotiable. Unions are ready to bring the countr y to a halt. Crisis looms then

A REDUCTION in petrol pump price should be eagerly applauded, shouldn’t it? Not in Nigeria. An announcement by the Petroleum Products Pricing Regulatory Agency (PPPRA) in January 2009 that the pump price of petrol had been reduced from N70 (about half a dollar) per litre to N65 was initially met with cynicism and then outright rejection. Why? Politics. Petrol pricing in Nigeria has a long political history. For decades, the governments and the citizens have been engaged in fierce battles over what the prices of petroleum products should be. Under the coinage of different terms, petrol prices have always gone up. Sometimes it is referred to as “appropriate pricing” and other times “deregulation” and “liberalisation”. The PPPRA, in announcing the reduction of petrol price, tied the decision to the falling prices of crude oil in the international market (Nigeria imports virtually all the petrol it consumes). It then dropped in the word “deregulation”. This triggered an alarm among Nigerians, especially the unionists, who immediately sensed that the govern- ment was preparing ground for a rise in fuel prices as soon as crude oil prices picked up again. The debate is taking different shapes, in any case: some even argued that petrol should be cheaper than N65 if prevailing crude prices were to be taken into account; others expressed the belief that the decision was too late as marketers had already made a kill since the crash in oil prices. One of the biggest battles any government in Nigeria faces is the pricing of petroleum products. In the last couple of decades, it is one of the major crises an infant government runs into. Gen. Ibrahim Babangida, who took over as military president in 1985, increased fuel prices in his first budget of 1986 as economic recession continued to hit public finances. It became an annual ritual as the economy’s managers sought to reduce government spending and provide for “effi- cient” consumption of petroleum products. Most violent protests Babangida’s govern- ment faced emanated from increases in fuel prices. When he left office in 1993, the issue was as hot as ever. Gen. Sani Abacha, who ruled from 1993 to 1998, also increased fuel prices and faced the wrath of organised labour. When Abacha died in 1998 and Gen. Abdulsalami Abubakar assumed office as head of state, he too preached the virtues of “deregulation”, increasing the prices of petroleum products in his first fiscal mea- sures. The public outcry remained. The Olusegun Obasanjo government waited for a year after assuming office before increasing the prices, citing, also, the need to “deregu- late” the downstream sector of the economy. For the eight years that he was in power, the sensitive issue of product pricing was ever a source of constant face-off between his gov- ernment and organised labour. The current government of President Umaru Musa Yar ’Adua started off badly – it had to contend with the crisis of another labour face-off over the issue of fuel pricing. He didn’t increase the prices by himself – Obasanjo had done so shortly before hand- ing over to him. But faced with a crippling industrial action by the unions, Yar ’Adua eventually reversed or toned down the price increases. It was the most difficult way to


At what price?

start for a new president, but Yar ’Adua is not alone. Most of the previous presidents and heads of state always had to confront the thorny issue on assumption of power.

“Subsidy can kill”

The government of Yar ’Adua, who had a socialist bent as a student and as a lecturer, had been hinting since last year that the

price of petrol would be increased. The ener- gy minister, Mr. Odein Ajumogobia, had said by December 2008, the bill for fuel sub- sidy would hit N700 billion (about $5 bil- lion). This was unbearable, he said, and was of no benefit to the ordinary people on the streets. Indeed, it has been argued over the years that the ultimate beneficiaries of fuel subsidies are the contractors who import the

products on behalf of the Federal Government. According to the government, the money is better channelled to providing social infrastructure from which the ordi- nary people will benefit rather than the “fat cat” contractors. Several arguments have been canvassed against subsidy – any form of subsidy at all. The neo-liberal economists argue particular- ly in the case of fuel subsidy that it brings market distortions. Since the pump price is not a true reflection of the cost and the eco- nomic value to be derived, the market is operating at an “artificial” and unrealistic level. It allows for inefficient use of resources, they also posit. Another point of discussion is the smuggling of products which this can engender. If the cost of fuel is N70 in Nigeria and N200 in Benin Republic, the fuel seller would rather take the product to Benin to take advantage of the price difference. But if the forces of demand and supply are allowed to determine the price, there would be no distortions between the Beninoise and Nigerian markets. There will be no incentive for smuggling as a result. Another argument is pursued by conser- vationists. If the price of fuel is too low, the tendency to waste is there. Charging a high price will force people to conserve energy and reduce demand, especially since fossil fuels are non-renewable and reserves are not limitless. Closely related to this argument is the concern of environmentalists that fossil fuels contribute carbon emissions to the atmosphere, thereby worsening global warming. In Nigeria, a few individuals, most of them fronting for their principals in govern- ment, have amassed enormous wealth just importing petroleum products on behalf of the government. Before the 2007 elections, excessive contracts were believed to have been awarded just to build up funds to finance political campaigns. Many ships were stuck offshore, unable to offload because of limited reception facilities. Anything between N50 billion and N100 bil- lion is said to have been incurred in demur- rage over the years as a result. Fuel import contracts are about the most lucrative source of rent collection in Nigeria. The refineries are down or inefficient. Even if they are working at full capacity, they cannot meet the consumption requirements of the coun- try. Importation is therefore unavoidable.


Lessons from Iraq

IRAQ, STILL smarting from an internal war, has managed to put a new refiner y on stream despite its political and eco- nomic fragility and the cli- mate of instability. This is the inside view of the new refin- er y built by the Czechs in record time. This crude oil distiller y unit at the Dura refiner y in southern Baghdad was inaugurated on Januar y 26, 2009. It will produce 70,000 barrels per day. At the

official opening ceremony, Iraq’s Minister of Oil, Hussein al-Shahristani, said his coun- tr y would increase its oil refining capacity to become self-sufficient in oil produc- tion by the end of this year. The Nigerian government is still clueless on when it would achieve self-sufficien- cy as all refineries are not only down, they are inade- quate to meet increasing local needs.

IRAQ, STILL smarting from an internal war, has managed to put a new refiner y on





Nigeria is still battling with the appropriate sharing of its oil revenue as agitations for “resource control” fester in oil-rich regions. What can the country learn from others?

CRUDE OIL fuels dissent and war – ask the Nigerian government. The contending issue: Who controls the resources? In the oil-rich Niger Delta region, peace has been at a premium for this reason. The wealth of Nigeria comes from the region. The people of the region have been at logger- heads with the Federal Government over the “control” of the petroleum resources. They argue that they bear the brunt of the environmental damage caused by oil exploration activities. Their livelihoods – agriculture and fishing, to be specific – are perpetually under threat from oil spills, gas flaring, acid raid and other forms of despoliation. Their terrains need special attention. The costs of building and main- taining infrastructure in the very swampy areas are far more than in the rest of the

country. Most states of the federation depend virtually on the monthly sharing of oil earnings. Most states do not generate enough revenue internally to pay monthly salaries, much less maintain roads and buy office stationery. Take away the oil revenue from the central pot and at least 27 of the 36 states would fold up. Oil con- tributes at least 80 per cent into this feder- ation pool. The Federal Government takes 47.19 per cent from the pot, which is shared monthly, while the states share 31.10 per cent and councils 15.21 per cent. National Priorities Services Fund, which is jointly administered by all tiers of govern- ment, gets 6.50 per cent. Nigeria operates a heavily criticised fed- eral system – a central government, 36 states and 774 local councils. And because the power over petroleum resources is granted to the centre, many are wont to argue that Nigeria operates a unitary, not a federal, system. This is not an argument to be pursued or analysed in this report. Rather, the questions here are: how are other countries sharing oil revenue? What

can Nigeria learn from them? Given that the ethno-political and economic dynam- ics of each country are different, there is no such thing as one-prescription-for-all. Every politics, Thomas “Tip” O’Neill said, is local.

Resource out of control

Nigeria’s oil-rich region has, for decades, been campaigning for “resource control”. The agitation has taken a violent turn in recent years, leading to bombings, kidnappings and production shut-ins. The clamour for resource control has been interpreted in many ways; there seems to be no consensus on what it actually means. One interpretation is that the oil states want to “monopolise” the resources. That is, they would take all the revenue coming from oil, while the 28 non-oil states would have to make do with what- ever they have in their own territories – as it was in the colonial days. A second inter- pretation is that the oil-rich region wants its share to increase from the current 13 per cent to 25 per cent or 50 per cent or even more. They believe this would com- pensate for the years of neglect and ruin caused by exploration activities. A third interpretation: let the states preside over the entire processes of exploration and sale of crude oil in their territories and then pay taxes and royalties to the central gov- ernment. The first scenario, which some may argue is tantamount to secession, has some historical background. Before the oil boom, especially in the colonial era, Nigeria operated a three-region (later four) political structure that allowed each

region to control its resources. At a time, every region was allowed to keep the taxes and royalties from its natural resources. But this was when the wealth was from cocoa, cotton, coffee and palm oil (see box on page 13). Petroleum had


Flames of hell

not started contributing much to revenue then. The distribution of wealth was fairly balanced in the federation and each region was primed to compete against the other in economic terms. However, the fabulous wealth that came with the oil boom in the 1970s significant- ly altered the revenue sharing structure in Nigeria. While cocoa and other products generated just millions of dollars, oil flooded the economy with billions of dol- lars. The military government, which had overthrown democratic rule in 1966, did not want to contemplate retaining the old formula, especially with the petroleum resources concentrated in a few states in the same geopolitical axis. This most cer- tainly led to a series of decrees and laws that gradually transferred ownership of petroleum resources into the central pot for onward redistribution. In the opinion of the policy makers, this was to allow for a balance of economic power and even development across the federation. But in the opinion of the minorities from the oil- producing areas, this was another evi-

dence of hegemony: when the majority ethnic groups had the mining wealth, they allowed “resource control” but as the tables turned in favour of the minorities, there was suddenly a need to balance eco- nomic power. The second senario is an increase in the derivation payment. Currently, the Constitution stipulates that not less than 13 per cent should be paid to the states where the production takes place. This was a major development, given the fact that since the oil boom of the 1970s, derivation had nose-dived from 20 per cent to as low as 1 per cent. The provision in the 1999 Constitution for 13 per cent owed largely to the agitations and inten- sive lobbying by the oil-producing region. By the time the Constitution was being finalised in 1998, the Niger Delta had changed dramatically: Ken Saro-Wiwa, later executed in controversial circum- stances, had internationalised the cam- paign for justice and equity in the region, while the youths had made a famous “Kaiama Declaration” demanding

Learning from Others...

HOW ARE other oil-producing countries han- dling this critical issue of who controls what? Different countries have different histories and political systems. This makes it difficult to draw a like-for-like experience for Nigeria. However, a few countries operating federal and unitary systems are sampled here and there are rea- sonable arrangements which Nigeria can adopt or adapt.

Federal Systems

United Arab Emirate (UAE): This is a federa- tion of seven emirates – Abu Dhabi, Ajman, Dubai, Fujairah, Ras Al-Khaimah, Sharjah and Umm Al-Qaiwan. Unlike Nigeria which was coupled together by the British colonialists, the emirates pre-defined the terms of their federal- ism. Each emirate has political and economic autonomy and is vested with the ownership and control of all resources within its boundary. The central government is run with “donations” from the emirates. Abu Dhabi is very rich in oil, while Dubai and Sharjah are rich in commerce and tourism, with some little oil wealth too. These three emirates make the biggest “dona- tions” to the central government. The contribu- tions are revised every year to reflect the reali- ties of need. Notably, too, oil-rich Abu Dhabi has

embarked on a massive project to depend less on oil income and rival Dubai in tourism and commerce. Talk about healthy competi- tion.

Canada: Oil provinces control their own resources. Petroleum taxes are theirs, in addi- tion to royalties. Because only very few provinces have oil (Alberta and Saskatchewan) – which, ironically, is NOT their major source of income – the Federal Government has an equalisation fund from where grants are given to other provinces to allow for “economic balance”, very similar to the Nigerian case where non-oil states are compensated through principles such as “land mass”, “population” and “terrain”. In Canada, the oil-producing provinces have long set up oil funds where the bulk of oil revenue is saved to protect their local economies from the volatility of petrodollars.

United States: The US is very similar to Canada. All states own the resources in their lands, with the exception of federal territo- ries. They have a variety of tax bases assigned to them. These allow them to charge different taxes and collect royalties.

However, all taxes and royalties do not go to the states alone – they are subject to federal income tax. That is an essential part of the states’ obligation to the federation. It must be noted, however, that every state in the US fends for itself. They do not have to be as rich as other states and no state owes the other any obligation of keeping it economically alive. Alaska is the richest in oil and has set up a fund for the future, in addition to pay- ing oil sector “dividends” to its citizens regu- larly.

Mexico: The central government is virtually in charge of the oil revenues. All the states receive 20 per cent as transfers, irrespective of whether or not they are oil-producing. However, municipalities (called councils in Nigeria) where oil-production and shipping activities take place receive an extra 3.17 per cent from the federal purse as compensation for the environmental damage.

Venezuela: Like Nigeria, oil is the major source of income of Venezuela. Oil is concen- trated in the hands of the central govern- ment, but states are entitled to between 20 and 30 per cent of oil royalties. The central

government is not convinced the states are spending their share of the oil revenue judi- ciously, while the state and councils are clam- ouring for more given the responsibilities they are saddled with.

Unitary Systems

Indonesia: Resources are owned by the central government and, until 2001, were fully under its control with no provision for derivation. However, like in Nigeria, the oil-producing regions campaigned vigorously for greater share of oil revenues. The government decided to devolve powers and cede more revenues to the component units of the state. Education and health, among others, are now wholly financed by provinces and districts. As part of the reforms, onshore oil and gas revenue are shared with the centre. Oil-producing provinces and districts receive 15 per cent and 30 per cent from oil and gas revenues respectively as derivation.

Norway: The central government is fully in charge of the petroleum resources. Oil and gas revenues are managed in a different way – there are significant savings for future generations while transfers are made to public utilities such as schools and hospitals.




they enter with the oil companies. Since Captured scapegoats

they enter with the oil companies. Since

Captured scapegoats

Captured scapegoats

the people are the ones going to suffer the environmental consequences of oil explo- ration, they ought to be part and parcel of the negotiations and decision-making.


For or against?

There are various propositions on how resources should be controlled and how the rents should be shared. Ehtisham Ahmad and Eric Mottu, in their essay enti- tled “Oil Revenue Assignments: Country Experiences and Issues” (2002), argued strongly against revenue-sharing. Rather, they want the revenue to be centralised (in the case of Nigeria, the Federal Government would be in charge) because of macro-economic stability. The alterna- tive, they argued, is for stable oil-tax bases

to be assigned to the oil-producing areas,


“supplementing these with predictable transfers (allocations) from the center”. They argued that oil revenue-sharing has never solved the problem of keeping sep-


Trouble Formula

aratist groups happy because oil-produc- ing areas would always feel they would be better off by keeping all their oil revenues

A brief histor y of Nigeria’s allocation arithmetic

anyway. From the economic perspective, Ahmad

such bases if they are also assigned oil rev-

enues – this can lead to internal beggar-



and Mottu wrote: “Arguments for central- isation of oil revenues are based on a num- ber of considerations. A central govern- ment can better absorb the uncertainty


Pre-independence Nigeria depended on taxes and mining rents. The Phillipson Commission, set up by the Sir Richards colonial government, recom-


Federal Military Government took con- trol of all offshore rents and royalties via Decree No. 71.

and volatility of oil prices because it usu- ally has a broader tax base, less correlated with oil prices, than subnational (state) jurisdictions. And if subnational govern-

mended that the three regions (North, East and West) should keep direct taxes, mining rents and licensing fees, while


ments do have other assigned taxes, oil- rich regions may have less incentive to use

federally collected import, export and excise duties and company taxes should be shared among the regions. The colonial government received a fraction for administrative purposes.

Decree No. 6 transfers all revenue to the central, providing 20% for derivation.


resource control and threatening to take

thy-neighbour outcomes within federa- tions and a misallocation of factors of pro-

Akwa Ibom, N13.7bn; Bayelsa, N9.6bn;

Aboyade Committee recommended


the law into their hands to actualise their

duction. Moreover, a central government can contribute to horizontal equity by


Federation Account where all revenues would be pooled for onward sharing

demands. Attempts to increase the derivation per- centage over the years have met brick walls and worsened the relationship between the region and the hardliners from outside the region. Since revenue allocation in Nigeria is a zero-sum game – one state’s gain is another ’s loss – the Niger Delta is not short of antagonists in its campaign for more money. The most

redistributing oil revenue between resource-rich and resource-poor regions.” In Nigeria, the current horizontal shar- ing formula already creates a big gulf among the states. Various principles are employed – equality of states, need (popu- lation, land mass, terrain) and internal rev- enue generation efforts. Based on these principles, every state would get similar

The Hicks-Phillipson Commission sought broader tax bases for the regions and proposed a sharing formu- la based on three principles – one, import/excise duties to be shared based on derivation; two, population; three, special grants to police and edu- cation to be transferred to the regions. Every region seemed to like the


Chick Commission altered the arrange-

among the three tiers of government – the first time local councils would be considered. Each tier of government was also to have its own tax base. Recommendations rejected by the Constituent Assembly in 1978.

frequently asked questions are: what have Niger Delta leaders achieved with the 13 per cent they are collecting? Why should they be asking for more? However, this has not helped the debate, because the people from the region also maintain that it is nobody’s business what they do with their money. We demand fairness, they often argue. Changing the provisions of the Nigerian constitution is a very difficult, almost

allocations from the pool. The differences would not be massive. However, the derivation principle (13 per cent) alters the figures significantly. Take, for instance, the federal allocations in December 2008, which represents a general pattern. These were the gross allocations to four oil states:

Delta, N9.4bn; and Rivers, N20.6bn. And these were the gross allocations to four non-oil states: Ebonyi, N2.4bn; Ekiti, N2.4bn; Bauchi, N3.3bn; and Zamfara,

arrangement because each benefited differently: West liked derivation, North liked the transfers based on population and East liked the special grants.

ment, recommending that mining rents, royalties and personal income tax should be shared among the regions

Okigbo Commission wanted the Federation Account and three-tier shar- ing as recommended by Aboyade. The panel wanted revenue shared on the principles of population, social services and equality of states. Was against the derivation principle, but this was reject- ed.


impossible task because of the highly divi- sive political undertones. But if the deriva-

N2.8bn. The gap is enormous. Rivers gets nearly ten times what Ekiti gets – even

while derivation should be applied and expanded to export duties.

Revenue Allocation Act allocates 3% to derivation

tion is to be increased, it does not require a constitutional change. The constitution did not put any upper limit on what the

with derivation being 13 per cent. If derivation were to go up to 25 per cent or 50 per cent, the oil-rich would get richer



derivation should be. Section 162 (2) states that “…the principle of derivation shall be constantly reflected in any approved for- mula as being not less than thirteen per cent of the revenue accruing to the

while the rest would get poorer. On this score, many are against “resource con- trol”. But these explanations are dismissed on various grounds, both emotionally and

Nigeria’s year of Independence. The Raisman-Trees Commission allowed regions to retain personal income tax. A central pot (“Distributable Pool

Act nullified; a new derivation of 1.5% introduced


Federation Account directly from any nat-

Account”) was created for major rev-

New derivation: 1.33%

ural resources”. The Ledum Mitee Committee set up by the present govern- ment has recommended an increase in

logically. The arguments range from “we’re not the ones who said you should- n’t have oil in your ground” to “why not

enue items to be distributed among the regions and the federal govern- ment.


derivation, reportedly to between 25 and

be creative with how you can make

Derivation reduced to 1%

50 per cent over a period of time. The third senario, which can in any case

money rather than depend on our oil?” Nigeria as a whole suffers from overde-


supplement the second interpretation, is that states should have power over the resources in their lands. The entire process of production and sale should be under the jurisdiction of the states – which would now pay taxes and royalties to the

pendence on oil, but most non-oil states have virtually gone to sleep since the shar- ing of oil revenues is guaranteed every month. Many states are rich in agriculture – which can generate more jobs than oil – but there is no incentive to develop it since

Binns Commission abandoned deriva- tion. Distribution now to be based on internally generated revenue efforts and quality of service provided by each region.


New principles introduced to revenue sharing: landmass/terrain (wetlands, plain and highlands). This was obvious- ly designed to achieve “balanced redis- tribution”

federation account. In other words, the states still do not need to get more than the

they are not under pressure to feed them- selves independent of oil revenues. In the pre-oil boom era, regions were somewhat



current 13 per cent derivation (although they can get more), but they should be the ones to decide what oil blocks to auction, what companies would handle explo- ration and under what conditions. The

self-sufficient, generating income from agriculture and taxation. These veritable sources are no longer treated as priority. In addition, many states are rich in solid min-

The beginning of trouble? Nigeria was starting to earn good money from oil. A military government had taken over power in 1966. Decree No. 13 was pro-

– now 12, created from the four-region

Derivation increased to 3%; Oil Mineral Producing Area Development Commission (OMPADEC) created to manage the funds.

good aspect of this proposition is that states would take their own destinies into their hands. A major cause of the animosi-

erals which are left undeveloped, not for any strategic reason but for the easy flow of petrodollars. It is argued that if every

mulgated to vest petroleum resources in the hands of the central government. Derivation principle was abandoned.


ty in the Niger Delta is that decisions are taken above their heads by the Federal Government which does not think it is under any obligation to negotiate the


state is allowed to control its resources, non-oil states will be forced to develop alternative sources of revenue. The resource control camp has a com-

Allocations to be based on need (as defined by the population of each state

Constitution 162 (2) makes derivation of “not less than 13 per cent” a key prin-

ciple of the sharing formula for oil rev-

pelling argument, obviously.

structure), along with lump-sum trans-


interests of the people into the agreements








However, the excessive rent collection would not be so if there was no subsidy. If the pump prices are free of official ceiling, importers can bring in products and charge economic prices. Government would not need to import, and there would be no infla- tion of import contracts encouraged by the payment of subsidies. It follows, logically, that private enterprise will grow as investors are allowed to operate freely in the market. But with the subsidy regime, a few individ- uals are handpicked and given government patronage. In the end, they make billions of naira at the expense of ordinary Nigerians. This line of argument has been canvassed over the years by those who are against the subsidy regime.

“Subsidy can heal”

But there is also a robust cache of argu- ments deployed to counter the anti-subsidy campaign over the years. One argument has it that as citizens of a country endowed with oil wealth, Nigerians do not have to pay the market price for fuel. It’s God-given and the citizens are not being done any favour through subsidy. Consumers in most oil- producing countries pay lower prices (see box), so Nigerians are not benefiting any- thing unknown to mankind. The official argument that the huge sums of money expended on subsidy could have gone into financing social infrastructure such as health and education is often frowned on by this group, which says education and health budgets have never been well managed and pouring more money into those sectors is no guarantee that anything would change as long as corruption is pervasive. It is easier, faster and more realistic to feel the impact of fuel subsidy than budgetary allocations to social sectors which are often mismanaged, this group believes. Another pro-subsidy argument is anchored on the poverty level in Nigeria. Transportation is a major component of cost of living. Any slight increase in fuel price provokes an equal or higher increase in the costs of goods and services. By keeping fuel prices low, the government will contain the inflationary pressure on the poor people who make up between 50-70 per cent of the Nigerian population. This would seem to knock off the argument that the ordinary people do not benefit from fuel subsidy. Whereas it creates a few “fat cats” in the process, subsidy still trickles down to at least 100 million Nigerians. There is definitely a difference between buying fuel at N70 per litre and N100 per litre. For the ordinary peo- ple, the difference will be reflected in daily costs of public transportation and feeding, in the least. This appears to be one of the strongest arguments of the pro-subsidy camp.

Removing fuel subsidies to curb smug- gling, in the opinion of this camp, is an attempt to inflict pains on millions of Nigerians because of the activities of a few criminals who ordinarily should be check- mated by the state were its institutions not weak. A strict control of the borders and full applications of the laws against the criminals and their collaborators are seen as better ways of checking smuggling rather than fre- quent fuel price increases. While this view- point seems to ignore the “natural policing” that uniform cross-border prices can bring about, it nonetheless tasks the state on the effectiveness of its own institutions since it is not only fuel that is smuggled. The Nigeria- Benin borders are by far one of the most active smuggling routes in Africa. The government has long abandoned its age-old argument that removing subsidies would eliminate product scarcity. There has been massive importation of products under the subsidy regime for over eight years now and fuel queues have disappeared. They only emerge owing to non-subsidy-related issues, such as strikes, long public holidays and accidents at the import reception facili-

ties. But then, the massive importation and availability are at a heavy cost. Even at that, the pump price is not uniform nationwide. In remote parts, petrol is sold in cans at prices way above the pump price. Filling stations in many states also sell above the official price. There are therefore obvious leakages and exploitation internally.

Should there be subsidy at all?

The issue of fuel subsidy in Nigeria is not one that can be addressed conclusively, it would seem. Perhaps the starting point of the debate should be: should there be any form of subsidy at all in any country of the world? If the answer is yes, what should be subsidised? If the answer is no, how do you address glaring imbalance, disincentive and wealth redistribution in the economy? Should government fold its arms and hand over every aspect of the society to market forces in the hope that the market will sort out itself and redress every imbalance in the system? This seems to be the direction of fresh debates following the financial crisis that has been torturing the global economy, leading to government intervention in capi- talist countries such as UK and US. The first part of the question on the desir- ability of subsidies is better answered with the fact that in every country of the world, even the most capitalist, there is one subsidy or the other. In the US, agriculture and steel sectors enjoy generous subsidies running into billions of dollars yearly. In the EU, farm subsidies are ever present. In the UK, farm and transport subsidies are critical to the economic stability of the country and the government does not shy away from that fact. Essentially, then, subsidy is no perfidy, but an economic strategy.

The Nigerian aspect of the argument, however, is a bit different. It is being argued that government should channel fuel subsi- dies to the agricultural sector instead because the sector is the biggest employer of labour and the biggest contributor to the country’s GDP. Indeed, agricultural subsi- dies already exist in the form of cut-price fer- tilisers and tractors sold by government to farmers. It is highly political, though, as ben- eficiaries are most often members or sup- porters of the ruling party in a state. It is therefore a tool of political patronage, like fuel contracts. More so, scams often sur-


Petrol prices per litre in OPEC countries as at February 2009







Per capita





































































Sources: THISDAY Database, CIA Handbook, GTZ

round the purchase and distribution of the fertilisers. By some accounts, the fertiliser scandal is next to fuel in the siphoning of public funds into private pockets.

Local refining first…

The debate on fuel subsidies in Nigeria is poorly structured at present. Government often bases its argument on the high cost of importation of products. This begs the question. Is subsidy related to just importa- tion? If Nigeria achieves self-sufficiency in local refining and importation stops today, would there still be a budget for subsidies? These questions are often taken for granted by government officials, whereas they may be at the heart of the debate. The focus has always been on the amount spent on importation of products without any atten- tion to several other issues that are critical to answering the question. In opposing the pump price cut in January, labour argued that basing local pricing on imported products is not a feasi- ble way of calculating subsidy. The first step is to achieve local sufficiency in refin- ing in order to be able to determine the actual economic price of the products. This argument, however, is subject to criticism on two fronts. One, the major difference in

the prices of imported and locally refined product will be the cost of shipping – which some say is negligible. For as long as the local refineries buy crude oil at the international prices, the prices of end prod- ucts would be similar. Two, subsidy is defined in two ways, the first being the dif- ference between the cost of production and sale price, and the second being “opportu- nity cost”, that is: at what price can I sell my product in another market?

In the abundance of water

All the economic arguments about sub- sidy, however, will face stiff opposition from the evidence from the “OPEC region” – all members subsidise petroleum prod- ucts in their local market. Their logic has nothing to do with any arguments about market forces, appropriate pricing, efficient consumption, smuggling, deregulation, lib- eralisation and such like. To them it is sim- ple: we have crude oil in super abundance and our people must enjoy the benefits. Whatever the arguments may be, how- ever, the Yar ’Adua government appears determined to lay the subsidy ghost to rest as it seeks to reform the oil industry. But the battles ahead, with unions in particular, promise to be fierce.


The old excuse for deregulation







Higly inflammable corporation

NNPC: The Dwarfed Giant

Many state-owned oil companies are doing very well all over the world. Nigeria’s NNPC offers a peculiar case study

THE NIGERIAN National Petroleum Corporation (NNPC), Norway’s Statoil and Malaysia’s Petronas were all set up as state-owned oil companies in the 1970s. But that is where the similarity ends. Today, the now renamed StatoilHydro is the biggest offshore oil and gas company in the world. Last year, it was ranked by Fortune magazine as the world's 11th largest oil and gas company by market capitalisation, and the 59th largest compa- ny in the world. Petronas is ranked by Fortune as the 95th largest company in the world. It is the 8th most profitable compa- ny in the world and the most profitable in Asia. Petronas now has business interests in 31 countries. And NNPC? Veteran joint venture part- ner, that’s it. Without its partnership with Shell and other oil majors upstream, NNPC is just an empty shell, a giant tod- dler. Downstream, NNPC has a clutch of “mega” fuel stations and four refineries which are perpetually in a rotten state. NNPC is seen as Nigeria’s most sleaze-rid- den organisation through which politi- cians and their cronies have been milking the national treasury for decades. It had metamorphosed from Nigeria National

Oil Company (NNOC), which was set up by the military government in 1971 “to participate in all aspects of petroleum, including exploration, production, refin- ing, marketing, transportation and distrib- ution”. In practice, all NNOC was doing was forcefully acquiring interests in the interna- tional oil companies operating in Nigeria. That was arguably the wrong foundation that was laid, because it never saw itself as a potential global player. It first acquired 33.33 per cent in Agip. Then 35 per cent in Safrap, the Nigerian arm of Elf. It later “seized” 35 per cent in Shell-BP, Mobil and Gulf. It went on and on, increasing its stake to 55 per cent in each company. The estab- lishment of NNPC in 1977 was part of a supposed reorganisation of the sector. A Crude Oil Sales Tribunal had been set up to investigate the activities of NNOC. The tribunal found out that in three years, the company had failed to collect 182.95 million barrels of their equity share of oil being produced by Shell, Mobil and Gulf. The loss was estimated at $2 billion. (This sum was mistakenly understood by the public to mean “missing” or “stolen”). However, the loss was as a result of

NNOC’s inability to find buyers for its share of the oil production at a price it desired, after having paid its full share of the production costs to the JV partners. NNOC had also failed to produce audited reports for the same period under review. Its successor, NNPC, has not fared bet- ter. It has always been under the control of government officials who realised quite early how massive a honey pot it is. The structure of the NNPC itself was and is cumbersome. It was not only Federal Government’s vehicle of participation in the oil industry, it was also the regulator of the sector. In one breath, it was a player. In another, it was a referee, through the Department of Petroleum Resources. Attempts have been made to reform the corporation over the years. It was first decentralised into nine units in 1981. In 1988, the corporation was “commer- cialised” into 12 strategic business units – all under three broad areas of responsibili- ty, namely Corporate Services, Operations and Petroleum Investment Management Services. But the symptoms and the dis- eases remained the same.

Separating oil from politics

After decades of indisputable inefficien- cy, the NNPC is finally facing the needed surgery. Nigeria seems to be learning from the rest of the world already with the tone of the reforms proposed for the oil indus- try. The aim, it has been said, is to separate oil from politics. It may sound unthinkable in Nigeria, but this is the stated objective. Many energy analysts have often can- vassed that nothing short of full liberalisa- tion of the oil sector will suffice; they are about to get their wish with the institution- al change on the cards. Ex-President Olusegun Obasanjo had set up the Oil and Gas Sector Reforms Implementation Committee (OGIC) in 2000 to produce a National Oil and Gas Policy. It came up with radical recommen- dations, chief among which was the need to separate the commercial institutions from the regulatory and policy-making ones. Obasanjo did not act on the report, but President Umaru Musa Yar ’Adua is going ahead with the reforms. He reconsti- tuted OGIC under the leadership of indus- try veteran, Dr. Rilwanu Lukman. Its report, submitted last August, has been packaged as a bill and sent to the









National Assembly for the enabling laws. The report suggests solutions to the prob- lems affecting the industry in the country, highlighting operational strategy and action items necessary to drive the nation- al oil company to a global status. It also proffers solutions to fiscal policy problems and community issues affecting all seg- ments of the industry. The major highlight of the reforms is to make the national oil company indepen- dent of government finance and run as a proper business entity which can leverage on its assets to source funds for its projects. This would effectively put an end to the era of Federal Government paying cash calls on JV projects. The bill listed the objec- tives of the fiscal regime to include “the creation of an economic climate that encourages stability, the observance of the rule of law, and the elimination of corrup- tion” and “the gradual elimination of sub- sidies in all areas of the petroleum indus- try”.

Other objectives include:

•The establishment of a regime for taxa- tion on petroleum products for the pur- pose of financing infrastructure in and around the entire federation; •The establishment of appropriate rules to discourage the consolidation of down- stream projects with upstream fiscal regimes; •Ensuring that the licensee, lessee or contractor utilises cost effective measures in the course of petroleum operations in order to ensure efficient cost savings and maximum economic benefits to the state.

A new structure

The structural problems are to be

addressed through the creation of new

institutions as contained in the bill.

The Nigerian Petroleum Directorate (NPD):

This will function as the secretariat of the

Minister of Petroleum Resources and take over any functions previously undertaken by the Ministry.

The Nigerian Petroleum Inspectorate (NPI):

It will be the successor to the assets and lia- bilities of the Petroleum Inspectorate of the NNPC and the Department of Petroleum Resources of the Ministry of Petroleum Resources.

Petroleum Products Regulatory Authority (PPRA): This will regulate the downstream

sector of the oil and gas industry. The National Petroleum Assets Management Agency (NAPAMA): The agency will be in charge of monitoring and approving costs of ventures in which Nigeria has investments or participating interests, with the objective of maximising the total revenue accruing to the govern- ment from the upstream petroleum indus- try in Nigeria and ensure that all operating contractual arrangements in the upstream, including but not limited to joint operating agreements, production sharing contracts, and service contracts, achieve the objective of realising or achieving optimal financial returns. National Petroleum National Oil Company (NNPC Ltd): It will be the holding compa-

ny and successor to the assets and liabili- ties of the Nigerian National Petroleum Company of Nigeria (NNPC).

National Petroleum Research Centre

(NPRC): This will be responsible for research and development in the petrole- um industry in Nigeria, specifically upstream exploration and development matters.

Speaking to the press late last year, the Chairman, OGIC Sub-Committee on Policy Framework, Dr. Mohammed M. Ibrahim, said once passed into law and fully implemented, it would have a “seis- mic impact” on the oil and gas industry. He said the bill is “transformative” and would have an impact of heightening pro- portion in the way the business of hydro- carbon is carried out and done in Nigeria. “We discovered that, there are four fac- tors that are responsible for the disrepair state of the Nigerian oil and gas industry and these are what this bill has come to address. “Number one, we discovered that, there is lack of designation of functions and responsibilities in the Nigerian oil and gas sector – there was no clear separation of the policy framework for the Nigerian oil and gas industry, a complete absence of a clear cut policy for the Nigeria hydrocar- bon industry. “Secondly, we discovered there was political interference in the function and functioning of the various institutions in the Nigerian oil and gas industry. “Similarly, we discovered lack of capaci- ty by the operators of the Nigerian oil and

Dwarf among equals


Comparing and contrasting NNPC with its peers in the world is not exactly heart- warming. The gap is too wide. A fair call would be that Nigeria is yet to start. It is all

StatoilHydro (Norway)

associated companies, is involved in broad petroleum activities. It has about 100 sub- sidiaries and 40 joint-venture companies in which it owns 50 per cent stake.

the more worrisome because countries such as Brazil and Malaysia, which are not

Aramco (Saudi Arabia)

bigger petroleum producers than Nigeria, have national oil companies that are con- quering fields across different countries.

State-owned Aramco has the largest proven crude oil reserves of 260 billion barrels. It leads in production with 8mbpd and operates the world's largest single hydrocarbon network, the Master Gas

Petrobras (Brazil)

Statoil was established in 1972 but has now merged with Norsk Hydro to create StatoilHydro. It was privatised in 2001, and was listed on both the Oslo Stock Exchange and the New York Stock Exchange as Statoil ASA, with the Norwegian government retaining a 64 per cent stake. It merged with Norsk Hydro in 2007 and became the biggest offshore oil and gas company in the world. It is

System. Its annual production of crude oil alone is in excess of 4 billion barrels. It manages gas fields with 253 quadrillion scf reserves. It manages the world’s largest oil field and the largest offshore field. Aramco is by far the world's most prof- itable company, according to several esti- mates.

involved in production in 13 countries, including Nigeria, and has 2000 retail out- lets in eight. The government still retains 62.5 per cent in the company and collects dividends from it every year.

The company, founded in 1953 by Brazil, was the country’s oil monopoly until 1997 when the government liberalised the sec- tor. It has an output of over 2 million bar- rels per day, as well as being a major dis-

Petronas (Malaysia)

tributor of oil products. Petrobras is a world leader in the development of

Petroliam Nasional Berhad (Petronas) was founded by the government of Malyasia in 1974. It is still wholly owned by the gov-

advanced technology, covering deep- water and ultra-deep water oil production. It is in 18 nations in Africa, North America,

ernment and is in charge of the entire oil and gas resources in the Asian country. The Petronas Group, which has 103 sub- sidiaries, 19 part-owned outfits and 57

South America, Europe and Asia. Petrobras is the third largest company of the Americas, after Exxon Mobil and General Electric.

gas industry. “We also discovered a complete sever- ance between the oil and gas industry and the larger economy in which case the Nigerian oil and gas industry has not served as a catalyst to developing the Nigerian economy as a whole which will now transform into socio-economic bene- fits to the Nigerian masses,” he said. Ibrahim, who was the Special Assistant on Petroleum to the former Head of State, General Abdulsalami Abubakar, was opti- mistic that if the bill is passed into law, for

the first time in the history of the country, “there will be a clear-cut policy for the oil and gas industry… It is a bill that is a prod- uct of almost a decade of hard work that has carried stakeholders in the industry along. It is a bill that is a product of holistic and audit of serious hydrocarbon terrain all over the world”. However, there are still questions over how much accountability and transparen- cy should be expected from the reformed structure because of a seeming lack of an institutionalised mechanism for openness.


NNPC depot of confusion




Local Discontent


Making money for foreign companies

Dependence on foreign oil companies often under-develops indigenous capacity and denies the local economy enormous benefits, but, thankfully, Nigeria is now fighting the cause of local content.

THE PETROLEUM Decree of 1969 (now an Act of Parliament) is notorious on many counts, especially for transferring ownership of oil minerals to the Federal Government – at the expense of the regions/states. But the Act tried to do something good: it required that “within 10 years of operation”, oil companies must Nigerianise their most senior positions up to 75 per cent and 100 per cent for other cadres. By 1971, the Federal Government started acquiring stakes in the International Oil Companies (IOCs) on the suspicion that they were reluctant to transfer skills and tech- nology to Nigerians. To show government’s seriousness in empowering Nigerians for bigger participa- tion in the petroleum sector, the military gov- ernment set up the Petroleum Technology Development Fund (PTDF) in 1973 with a specific mandate: “To ensure the develop- ment of highly skilled indigenous manpower, through the training of Nigerian students, graduates, professionals, technicians and craftsmen in the fields of geology, engineer- ing, science and management of the oil, gas and solid minerals sectors.” But what have solid minerals to do with petroleum technol- ogy development? Perhaps that was one of the indications that the government was not too sure of what it wanted – and it was no surprise that PTDF did not set sail until 27 years after, with nothing significant to show as achievements to date, apart from granting hundreds of scholarships. The local content policy of 1969 and the set targets of 1979 turned out to be unrealistic. Successive governments did not show much commitment to it. The IOCs continued to dominate the sector, in the process recruiting Nigerians as “casual workers” not entitled to certain benefits such as pensions. These mea- sures saved them costs, sure, but it has also cost Nigeria full participation and full benefits in the sector. Even the national oil company, the Nigerian National Petroleum Corporation (NNPC), established in 1977, is still a toddler. The majority of the country’s critical oil and gas projects are operated by Shell Petroleum Development Company (SPDC), which produces nearly half of


Various estimates of the local content of oil and gas industry in Nigeria


Local content in Algeria

Source: Nigeria Sweet Crude

Nigeria's crude oil, under joint venture (JV) partnerships. Other JV partners are ExxonMobil, Chevron, ConocoPhillips, Total and Agip. But NNPC remains an onlooker.

Contents and intents

Former President Olusegun Obasanjo, to his credit, revived the local content policy, set- ting new targets and recording some level of success. He directed the IOCs to Nigerianise their contents by at least 45 per cent by 2006 and 70 per cent by 2010. Unlike in the 1970s, however, the oil companies themselves had started accommodating Nigerians in their top echelon. In fact, SPDC, for the first time, appointed a Nigerian, Basil Omiyi, as Managing Director during Obasanjo’s regime. Another Nigerian, Mutiu Sumonu, is now MD. The local content policy is not just about appointments, however. Nigerians and Nigerian companies are now to be involved in a broad range of activities, including oil and gas servicing, trading and finance. Detailed engineering designs for all projects are to be domiciled in Nigeria and project manage- ment teams and procurement centres for all projects must also be located in the country. Fabrication and integration of all fixed plat- forms (both offshore and onshore) weighing up to 10,000 tonnes are to be carried out in Nigeria. For the fixed platforms greater than 10,000 tonnes, pressure vessels and integra- tion of the topside modules are to be carried out in Nigeria. Fabrication of all piles, decks, anchors, buoys, jackets, pipe racks, bridges, flare booms and storage tanks including all galvanising works for liquefied natural gas and process plants are to be done in the coun- try – same as all flow-lines and risers.

Other directives are: assembling, testing and commissioning of all Subsea valves, “Christmas Trees”, wellheads and system integration tests are to be carried out in Nigeria; all Floating Production, Storage and Offloading (FPSO) contract packages are to be bid on the basis of carrying out topside integration in Nigeria; a minimum of 50 per

cent of the total tonnage of FPSO topside

modules must be fabricated in Nigeria; and all low voltage earthing cables of 450/750 V grade and Control, Power, Lighting Cables of 600/1000 V grade must be purchased from Nigerian cable manufacturers. There are about 23 items on the list of direc- tives, including local insurance content and a

provision that “all operators and service providers must make provisions for targeted training and understudy programmes to maximise utilisation of Nigerian personnel in all areas of their operations. All operators must therefore submit detailed training plans for each project and their operations”. The Obasanjo government added action to its words by adopting competitive bidding for most of its projects. The country’s JV part- ners were also encouraged to share knowl- edge with their indigenous contractors through enlightenment programmes. The IOCs were asked to domesticate their reser- voir management and seismic processing projects. They are encouraged to break their major projects into small, manageable pack- ages so that Nigerian contractors can benefit. The age-long habit of the foreign compa- nies taking the whole money out of the coun- try and leaving the local people high and dry is expected to be broken gradually as these measures are applied to the sector. All these measures mean a lot for the local economy – actually billions and billions of naira will be ploughed back through these backward link- ages. Radically, in 2005, the “local content vehicle” concept was introduced into the licensing round for oil and gas blocks. These vehicles are aimed at fast-tracking and con- cretising the Nigerianisation policy: Nigerian companies would participate more in engi- neering procurement, fabrication and other services; development of strategic plans for the transfer of technology; and development of a legal framework to ensure compliance and progress monitoring, among others.

Journey of a thousand miles

Are you seeing the doughnut or the hole? The local content in the Nigerian oil industry is still low, with various estimates suggesting between 3-9 per cent. Oil accounts for virtu- ally all of government revenues and foreign exchange, yet contributes just about 15 per cent to the real Gross Domestic Product (GDP) as most of the productive activities take place outside Nigeria. The country is just an end-user, a consumer, as it were. The local content policy, if it succeeds, will address this major deficit. Thousands of jobs will be creat- ed locally, directly and indirectly. The finan- cial sector will be a major beneficiary as com- panies seek local financing for billion naira

projects. What’s the progress report? Some good news. Engineering design, seismic, fabrica- tion and financing now have local contents, and in sizeable proportions, but still far too insignificant to be regarded as a victory. Although some local operators still complain about the reluctance of the IOCs to fully accommodate them, any progress at all should be treated as progress. After all, the previous decades yielded virtually nothing. Nigerian companies, for the first time,


In Other Countries


The National Iranian South Oil Company (NISOC), a subsidiar y of the state-owned National Iranian Oil Company, accounts for 80 per cent of local oil production. Private ownership of upstream activities is constitutionally prohibited, but the government allows buyback contracts:

IOCs can participate in exploration and development through an Iranian affili- ate.


The oil industr y is run by the state- owned National Oil Corporation (NOC). Along with the subsidiaries, they account for 50 per cent of the countr y's

oil output. IOCs, such as Repsol YPF (Spain), Eni (Italy), OMV (Austria), and Total (France), are also involved in explo- ration and production.


The government of Nor way holds the

major stake in the oil sector. It has 62.5 per cent stake in StatoilHydro, which controls over 60 per cent of Nor way ’s oil and gas production. The government directly owns part of the countr y ’s oil production through the State Direct Financial Interest (SDFI). The major IOCs are big players such as ConocoPhillips, ExxonMobil and BP are also in Nor way but, by law, in partnership with StatoilHydro.


Petroleos de Venezuela S.A. (PdVSA), the countr y's state-run oil and natural gas company, took control of Venezuela’s oil industr y in 1975 when the government nationalised the sector. In the 1990s, 22 foreign oil companies were allowed in as part of government reforms. Venezuela is tr ying to attract foreign national oil companies, including those from China, India, Iran, and Russia, to invest in the sector.



were given the preferential position with the licensing round of marginal fields in 2005. The government

were given the preferential position with the licensing round of marginal fields in 2005. The government awarded 24 such fields to them. The fields are marginal and are not as lucrative as the ones handled by foreign companies, but it was no doubt a step forward in local content development. Over time, Nigerians are expected to devel- op their technical and management skills in these fields before moving on to higher grounds. The Niger Delta Company was the first to go into production; others soon followed suit. Nigerian companies – such as Oando Plc – are now more involved in upstream activ- ities. Oando Energy Services Limited won competitive oilfield service contracts in excess of $150 million in Nigeria in 2007. It commenced its $500 million five-year investment plan with the acquisition of two oil drilling rigs for approximately $100 mil- lion for use in the Niger Delta. It has also acquired a third oil rig. Oando Exploration and Production is the operator of two oil blocks – OPL 278 and OPL 236. Oando is also a Nigerian content partner with Agip Oil on OPL 282 and has a 45 per cent inter- est in a marginal field, OML 56. It recently bought two offshore oil licences from Shell for $625.7 million and is in talks with two other foreign oil majors about buying three more oil licences. In the downstream sector, more Nigerian companies are gaining prominence. Zenon, AP Oando, Obat and Ascon are leading indigenous players. It must be added, how- ever, that Nigeria relies heavily on imported products as the refineries continue to per- form epileptically. Many Nigerian compa- nies have been licensed to go into product refining – a critical area foreign companies have shied away from for ages for one rea- son or the other.

In a 2007 essay entitled “Inter-sectoral Linkages and Local Content in Extractive Industries and Beyond – The Case of São Tomé and Príncipe”, Ulrich Klueh et al sug- gested policy considerations based on lessons drawn on the principles to foster local content in the oil industry. They pro- posed: “Accountability… the creation of a dedicated and independent government authority responsible for monitoring local content in oil industry and securing that local vendors are guaranteed the opportu- nity to apply and compete for contracts. International examples include the UK’s Offshore Supplies Office (OSO) and Norway’s Goods and Service Office (GSO), with their qualified accounting personnel knowledgeable of industry practices. “Adequate metric/definition… the development of an unambiguous definition of what constitutes local content. Monitoring of employment and value added gains, as well as project expenditure impacts on the local economy (including tax payments) are good proxies for assessing local content at the different phases/stages of the projects. “Efficiency considerations… Local con- tent assessments and targets need to take into account technological considerations. Technical/capacity constraints define the level of economic benefits that can be cap- tured within a particular region at a particu- lar point in time. Policymakers must realize that, at any point in time, there may be some areas of operation beyond the technical reach of local vendors.

“Information dissemination… the estab- lishment of a public outreach and analysis office to (i) develop a registry of competent and qualified local vendors, (ii) advise locals on potentials for joint ventures and other mechanisms of cooperation with foreign companies, and (iii) support plans for local capacity building, training, and R&D. “Acknowledgement of spin-off bene- fits… monitoring and public dissemination of complementarities between the oil indus- try and the rest of the economy. Examples include spillover effects from oil into agri- culture (e.g., fertilizers production) and hos- pitality industry (e.g., hotels and entertain- ment).” Nigeria seems to have drawn a lot from these lessons. The latest drive for local con- tent may not fade out.

Monitoring Progress

Why are IOCs deeply involved in downstream activities – specifically power gen- eration and refining – in other countries but stick mainly to upstream in Nigeria?

Very Backward Integration

Why are IOCs deeply involved in downstream activities – specifically power gen- eration and refining –

government is already paying for the differ- ence between cost and market price to mar- keters, no company loses money at the end of the day. However, the biggest hole in the argument can be found in other member countries of OPEC. Fuel prices are heavily subsidised there, even more than Nigeria does, yet IOCs build and run refineries in those countries. Why should Nigeria’s case be different? In the course of this study, this writer wit- nessed the signing of an agreement between the Saudi Arabian Oil Company (Aramco) and Total in Jeddah, Saudi Arabia, last June, for the establishment of the Jubail Refining and Petrochemical Company. The refining will have capacity for 400,000 barrels per day – about the same capacity of Nigeria’s four refineries put together. The refinery will, when inaugu- rated in 2012, process Arabian heavy crude for global consumption. The full-conver- sion refinery is expected to maximise the production of diesel and jet fuels – in addi-

FACT: NIGERIA, the world’s seventh largest exporter of crude oil, survives on imported petroleum products. The refineries are not working and are grossly inadequate. The four refineries – Warri, Kaduna and Port Harcourt I and II – have a combined name- plate capacity of 438,750 barrels per day, but this is purely on paper. Nobody really knows the output from these refineries at any point in time as they have become sub- ject of political manipulations. At best, they operate at half-capacity. The country contin- ues to rely on product import. Incidentally, all the refineries are government owned. Fact: Nigeria’s economy runs on genera- tors as the country generates less than half of its installed capacity of 3500 megawatts – even though it currently needs close to 10,000mw to achieve a semblance of stable supply. Some estimates put the require- ments at double that figure. But for country that is talking about industrialisation, no fig- ure is too much to target. However, govern- ment owns almost all the generating plants, mainly because of ancient monopoly laws and partly because foreign companies, which have the wherewithal, are not very enthusiastic about getting involved. For a country so rich in oil and gas, the refining and power generation statistics are damning. The blames for the backward can be distributed to a range of doorsteps. One:

the government has not been enthusiastic to open up these critical areas of the energy sec- tor for private investment. Two: politicians and their cronies feed fat on the inefficiencies that are associated with public ownership of power plants and refineries. Three: the labour unions get irritated anytime privati- sation is discussed because it has come to represent downsizing. Four, and most rele- vant to this report: the International Oil Companies (IOCs) feel their business inter- ests are better served if they concentrate their energies on drilling crude oil – it would appear they want minimum contact with Nigeria and Nigerians as much as possible. Their philosophy, as it were, is: take the oil and run. Apart from Agip’s involvement in power generation through its 450mw Kwale plant, no IOC is active in this key sector. The immediate past administration of Olusegun Obasanjo tried to tackle this prob- lem, although quite late, by emphasising “backward integration”. For ages, Nigeria’s premium oil blocks were given out to IOCs without any strings attached. There was no deliberate attempt by successive govern- ments to take full advantage of Nigeria’s prized assets to encourage – or even enforce – investments in the country. But Obasanjo came up with a rule in 2005: if you want to get Nigeria’s oil blocks, you must also pro- vide a comprehensive proposal on the investment you would plough back into the downstream sector. Top on the list were power generation and refinery.

fully deregulated and government no longer determines the prices of petroleum prod- ucts, no international company will build a refinery in Nigeria. This is also cited as the reason why investors who have acquired licences for refineries are reluctant to start work. This argument, as convincing as it sounds, is actually not fool-proof. If any- thing, the oil companies can only enjoy pro- tection under the subsidy regime. Since the

The regular excuse for the lack of interest of IOCs in the downstream sector is that it is government regulated. Until the sector is

tion to producing 700,000 tonnes per year of paraxylene, 140,000 of benzene and 200,000 of polymer-grade propylene. Initially, Saudi Aramco will own 62.5 per cent of Jubail, while Total will own 37.5 per cent. It is planned that later, Aramco’s shares will be reduced to 37.5 per cent, while 25 per cent will be made available to the public to buy. Perhaps the real reason many IOCs are running away from the refinery business is the gestation period for the business. In the United States, for instance, no new refinery has been built since 1977. The strict envi- ronmental requirements apart, the return on investment in the best of markets is around 5 per cent per year – while cost of building a big-size refinery is estimated at $2 billion. There are 149 refineries in the US, nearly half the number about 20 years ago. The upstream market is already capi- tal-intensive. Maybe this explains the IOCs’ non-committal attitude to the busi- ness in Nigeria.

Shell retail outlet, anywhere but Nigeria

Deregulated excuse




Okonjo-Iweala on Nigeria and the crude crunch

Managing Director, World Bank, Dr. Ngozi Okonjo-Iweala, is arguably Nigeria’s most respected Minister of Finance since Chief Obafemi Awolowo. She served the country between 2003 and 2006 under ex-President Olusegun Obasanjo



CRUDE OIL, Nigeria's major source of income, is under serious threat with the global quest for alternative sources of energy and President Obama’s energy independence policy. What do you fore- see in the next 5 to 10 years?

I am of course not an energy expert but it is fair to say that Nigeria and other oil-exporting countries are indeed facing

difficult times in the context of the pre- sent global financial crisis. With global demand down due to the deep recession in most oil-importing countries and oil prices hovering presently at around $40 a barrel and with the country's produc- tion down to 1.9 mil barrels a day, Nigeria's fiscal situation is a challenge now and will be for as long as oil prices are on a downward trajectory. The developed countries and in particular, President Obama [United States] have made clear their desire for greater ener- gy independence based on the develop- ment of alternative energy sources. Nuclear power is back in consideration as are cleaner coal technologies. There is increasing use of wind, solar and bioen- ergy sources. I believe that these trends can only accelerate in the coming five to ten years notwithstanding lower oil prices. As such Nigeria has to pay great attention to this in terms of accelerating the diversification of its economy away from oil.

Nigeria has been talking about grow- ing the non-oil sector for decades, but only little progress has been made. Why

is this so? How may we overcome the obstacles?

Nigeria has tremendous potential to grow its non-oil sector in both tradeable sectors such as agriculture and mining as well as non-tradables such as real estate and construction. But apart from the growth of the agriculture sector, little progress has been made in putting in place the infrastructure and consistent microeconomic and sectoral policies needed to encourage private sector investment to induce this growth. This has largely been due to serious corrup- tion and governance issues. Little progress will be made as long as monies intended to upgrade and install new infrastructure are not directed to their intended uses.

There are always debates on what to do with oil windfalls - spend or save? You

advocate savings for the rainy day, but how do we develop infrastructure with- out taking advantage of windfalls?

Yes I advocated saving the oil windfall for a rainy day and I am very glad I did

despite the challenges at the time with some policymakers saying we should spend everything because the rainy day was already upon us. If it was raining





“I believe the key issue with the private refineries like with any other business is that
“I believe the key issue with
the private refineries like
with any other business is
that they would like to
charge a price that will
enable them cover their
costs and make some
amount of profit on their


then in 2004-2006, then you must admit it is pouring now and the good thing is that the country has had a little umbrella in the form of the excess crude account to cushion the negative external shock of the steep fall in oil prices. When I came into office in July 2003, our reserves were only $7 billion and falling. There was nothing like excess crude savings. We put the fiscal rule in place and budgeted at oil prices lower than the prevailing price and saved the difference allowing the sums to be managed with our reserves. By the time I left office in August 2006 reserves were at $38 billion. Presently reserves stand at $53 billion of which about $20 billion or so is excess crude. The excess crude account has come in handy to make up for the deficits state, local and Federal Government are experiencing due to lower oil prices. Though states are seeing falling allocations, they would have been much worse off if there had been no excess crude account to draw on. The key question now is if the global recession lasts a couple more years and oil prices remain low, how far will the excess crude stretch at present levels of expenditure? All levels of government will have to use resources more efficient- ly and prioritise. It may even be neces- sary to scale back or postpone less impor- tant expenditures. In doing this, care should be taken not to scale back expen- ditures related to the provision of basic services for ordinary people. In particu- lar, education-and health-related expen- ditures should be maintained. With regard to using excess crude to finance infrastructure, this can be done and in fact monies from the excess crude account were already used to finance some of the power sector investments. Infrastructure finance is a good use of these monies provided the investments are made to benefit the population.

You're known not to favour fuel sub- sidy for several reasons. However, in the

course of my research, I discovered that virtually every OPEC member subsidises local pricing of petroleum products. Why do you think Nigeria's case should be dif- ferent?

You are wrong to say I do not favour fuel subsidy. I have no problem with subsidies be they for fuel or fertilizer or other goods provided the subsidies go to those who are less well off in our society. What happens so often in our country is that we say we are subsidising something for the benefit of those of our population who are poorer but if you do proper research to see who is benefitting you will see that the very poor among us do not benefit. So the issue is how do we design a subsidy programme that will

properly reach intended beneficiaries? We need to be able to design "smart sub- sidies".

One issue with building private refiner- ies in Nigeria is that licensees are demoti- vated by regulated pricing. But since gov- ernment already pays the subsidies - which means refineries can indeed recov- er their costs through such payments - do you think such fears are valid?

I believe the key issue with the private refineries like with any other business is that they would like to charge a price that will enable them cover their costs and make some amount of profit on their ven- ture. If government wants a regulated price at the pump for refined products which does not cover their costs then government will need to sit with the refiners and agree on a cost plus arrange- ment that pays them a reasonable margin and then make it up to them for those unrecovered costs. Such subsidies as you say – if they receive the payments – should enable them to continue operat- ing.

You were at the forefront of the debt relief Nigeria got from the Paris Club. Although some critics (including me) argued that we should have got a more

lenient deal from the creditors, do you now have a sense of "thank God we did it" in the face of this global financial crisis and crude oil crunch? What scenario would have emerged by now if we hadn't paid then?

It is magnanimous of you to admit that, as a critic of the debt deal at the time, you can now see that this may have been a very good thing that we did for the country and we got an unprecen- dented deal. Nigeria got a 60 per cent write-off of its debt a whopping $18 bil- lion write-off – at a time of high oil prices. It took a great deal of work – blood, sweat and tears to do it. If you had hired consultants to do this work they would have charged the country a great deal of money. Yet those of us who worked on it did it as part of our normal a s s ignment looking a t the bene fit it w ould b ring the c ountr y. Thi s de a l enabled us to bring the external debt down from $35 billion to $5 billion at the time I left government and it is even slightly lower today. I can tell you that even now, highly laced officials among whom I move in international circles cannot quite believe that their countries accorded Nigeria this debt deal at a time when the country was experiencing high oil prices. Can you imagine just how dif- ficult it would have been now with such low prices of oil, and diminished income for the country if we had to take $3 bil- lion a year to pay our debt service? And if we said we wouldn’t pay we would only have accumulated more debt with increased penalties and interest. By now our debt could have ballooned to $50 bil- lion or more leaving a heavy load for our children to deal with. I am very thankful to God that despite the criticism from some quarters, we did our best and many Nige ri ans , inc luding from the National Assembly, saw the wisdom of this act and supported us. It is good we pressed ahead and got the deal done

because it is one of the most critical things tha t i s he lping our e conomy today. It i s one of the suc c e s s e s of reforms that people in and out of the country cite today! It opened the door to investors, it lifted a burden from the neck of Nigerians, it left us space to finance activities in our budget other than debt payment. Now at this time of global crisis it has given us more budget space to focus on essentials. I hope Nigerians never forget the freedom that lifting the debt burden has brought us. We must never incur such high levels of debt again.

If you were to see President Yar'Adua today, what suggestions would you offer to him on the way forward as crude oil prices continue to impact negatively on our fortunes?

My answer could fill several pages of an essay. So I cannot do it justice here–maybe in another forum. Essentially I would to say to Mr. President: act on those things within your control so as to stabilise the econo- my, remove uncertainty and point to clear and consistent policy directions. Make clear how you are going to finance the budget deficit; be clear and transpar- ent on the status of the financial sector and how any issues arising would be dealt with. Give clear indications on the direction of the exchange rate and show credibility in how you intend to manage it. Use the little fiscal space the country has for counter cyclical measures financ- ing infrastructure development and other employment generating activities. Focus also on school feeding, vaccination programmes, and other such activities benefitting our children and our preg- nant and nursing mothers because we need to support the most vulnerable in our society at this time of crisis. Above all, begin to seriously put in place mea- sures to diversify our economy away from oil.




HYPOTHETICAL QUESTION: “If the world finally finds a feasible alternative to oil, what would become of Nigeria’s economy?” Answer: “God forbid, the world will always need crude oil; noth- ing can replace it, no matter how hard the world tries.” It may not sound like a convincing answer, but that is the unspoken response in the minds of the political managers of Nigeria who cannot just contemplate a future without oil. As far as they are concerned, there must be demand for crude oil, period. It needs repeating: oil is the soul and spirit of Nigeria. Take away the oil earn- ings and the country will go prostrate. As much as 95 per cent of the country’s exports are oil and gas. Government rev- enues are almost entirely from oil. Yet, it is not that the country lacks other sources of livelihood, but the easy flow of petrodollars has effectively tamed the Giant of Africa and buried its potential. Take agriculture, for instance. It is com- mon knowledge that a delegation from Malaysia, on a visit to Nigeria in the 1960s for an agricultural workshop, took palm seedlings back home and today the country is the world’s leading palm oil producer while Nigeria, which used to produce a third of world’s total output in 1962, has disappeared from the palm radar – because it found oil wealth. The country is also not short of good tourism potentials. Neighbouring coun- tries such as Ghana, Gambia and Cote d’Ivoire, and other African countries such as Kenya, Morocco and Mauritius, have developed their tourism to the level of foreign exchange earners. Above all, the human resource base is grossly underdeveloped. The public edu- cation system in Nigeria has suffered years of neglect. Inadequate infrastruc- ture, antiquated teaching methods, insuf- ficient teaching staff often lacking in motivation and probably needing to be taught themselves, and inept administra- tion have all conspired to stunt the devel- opment of the human resource. Private schools, which are very expensive, are stepping into the gap. Public investment in education is also on the increase – the Rivers State government, for instance, has declared an emergency in the sector and voted over N70 billion to it between


Alternatives to oil

While many countries like Nigeria are stuck to oil and would likely experience terrible consequences if demand and prices were to fall in catastrophic propor- tions, there is quite a number of countries that have taken a long-term view and diversified their economies away from oil. Before the world finds alternatives to oil, they too are developing alternatives to oil wealth. Experience shows that a period of sustained high oil prices is usu- ally followed by a lull – sometimes brief, sometimes prolonged. The volatility of crude oil prices is always a warning to oil-dependent countries not to box them- selves into the petrodollar corner. Angola, for instance, is looking far into the future. Having fought a bitter war for ages, the country’s infrastructure was in ruins. However, the oil boom has brought about a transformation in the country. The government has launched a massive project to transform the capital city, Luanda, into a foremost tourist des- tination in Africa. Public parks and walk- ways are being created to modernise the city. New hotels are springing up in preparation for the expected boom: five- star Intercontinental Hotel and Casino, Hotel Sana, Hotel Luanda, and Skina VIP

Inn. In 2007, Angola’s hotel and tourism business reportedly generated $341 mil- lion income – more than twice the figure the previous year and an indication that the “future city” plans are on course. No surprises then that Luanda ambitiously sees itself as “the new Dubai”. Dubai has long transformed itself from

A future without oil?

What does the future hold for Nigeria if crude oil goes out of fashion?




coming up in Angola

a mono-product economy and has become the model of what to do with oil riches. The emirate is one of the seven that make up the federation called United Arab Emirates (UAE). From an emirate that used to depend wholly on oil income, the other sectors of the economy have been developed to such as extent that oil now accounts for about 6 per cent of the city’s income. Its oil wealth has not declined, but other sectors have overtaken it. Recent figures show that real estate and construction (22.6 per cent), trade (16 per cent), entrepôt (15 per cent) and financial services (11 per cent) now outstrip oil. Its enviable status as a global business hub has attracted the high and the mighty from all over the world – including Nigerian politicians and public officers who, after failing to develop their own country with the oil wealth, have now found a pastime in buying up property in Dubai. They regularly escape to the city to get some relief from the lack of electricity and basic infrastructure in Nigeria. About the same time Nigeria started its own aluminium project, Dubai

Aluminium (Dubal) was established. Dubal is one of the world’s leading pro- ducers today while its Nigerian counter- parts are still groping in the dark. Dubal is reputed as a “major supplier of foundry alloy to the Far East's automo- tive industry, a significant supplier of extrusion billet for construction markets and a preferred supplier of high purity primary aluminium for use in the elec- tronics and aerospace industries”, according to the company. “From a rela- tively small smelter operation utilizing three potlines which produced 136,000 tonnes of aluminium per annum in 1979, DUBAL has expanded its opera- tions to encompass eight potlines with the capacity to produce more than 950,000 tonnes of quality hot metal alu- minium each year for clients in more than 44 different countries.” Hot metal volumes were expected to approximate one million tonnes by the end of 2008. It employs about 4000 workers. Dubai’s neighbour Qatar is already devising its own way out of the oil trap. It has one of the world’s largest gas

reserves, but it is looking into the future. Tourism and trade, the country has decid- ed, will be the future. Qatar Airways is leading the way. Doha, the capital city, is primed to become the hub in the Gulf Region. The new Doha International Airport is being built as part of the vision of placing tiny Qatar as a giant on the world map of travel, trade and tourism. Sixty per cent of the airport is built on a land reclaimed from the sea. The airport will open in 2010 with an initial capacity of 24 million passengers a year, rising to 50 million during the final development phase from 2015. The airport will have a total of 80 contact gates, including 25,000 square metres devoted to retail space, comfortable lounges and multi-storey short-term and long-term parking facili- ties. The complex will house a 100-room hotel within the terminal. Other facilities include a free trade zone and a business park, and a suspended monorail to trans- port passengers through the terminal. The airport is obviously aimed at displac- ing Dubai International Airport as the hub in the region.

Nigeria’s slippery oil

Resource curse theorists will see Nigeria as the ultimate case study in the damage oil wealth can do to a country, but they would be shocked to discover the extent of ruin on the country. Whereas other oil-dependent countries are gener- ally regarded as lacking in liberal democ- racy, Nigeria’s case is compounded by the state of infrastructure. Other coun- tries, democratic or not, boast of excellent road network, electricity and a booming petrochemical industry – quite unlike Nigeria whose refineries do not work, necessitating massive importation of petroleum products for years. Nigeria desperately needs functioning trans- portation systems, good roads and stable electricity to stimulate the economy for greater performance. The country has clearly not fully utilised its oil wealth to lay a solid foundation for economic diversification. A future without oil does not mean oil will go out of existence. There will always be oil. In all the talk about “alternative energy”, the reality remains that crude oil is still the king. Oil makes up about 40 per cent of the world’s energy use and 96 per cent of its transportation energy – air, land and sea. Paris-based International Energy Agency projects that “distillates (jet fuel, kerosene, diesel, and other gasoil) will remain the main growth dri- vers of world oil demand”. John Hess of Hess Corporation, at a presentation at Harvard University recently, said oil would still be a major factor in interna- tional trade and relations. He said reces- sion would affect demand, but only for a while since “households spend only 6 per cent of their income on energy – so it’s not a major factor”. Moreover, falling crude prices also make alternatives more expen- sive. The world cannot do without crude oil in the foreseeable future. What is not sure is the price. It has sold for as high as $147 a barrel and could still dip to $20, or $10 or even less. The volatility places mono- product Nigeria at the constant risk of running a very uncertain economy where budgets are tied to crude oil prices. All hope is not lost for the country. A rebound in prices could yet offer the country another opportunity of effective management and forward-thinking, like Dubai and Doha – not forgetting Angola, right at Nigeria’s backyard.