Nigeria’s Oil Imbroglio and the Case Against Imports

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Africa’s largest oil producer suffered one of its worst fuel shortages earlier this year when a supply interruption caused chaos and disruption across its cities. The situation was the outcome of oil marketers embarking on a months-long suspension of imports in protest against unpaid government subsidies. Although import shipments resumed in May after Abuja started paying off millions of dollars in subsidy arrears, fuel supplies took more than a month to return to normal.

This is the curious fate befallen on the world’s eight largest crude producer with know reserves in excess of 36 billion barrels. Despite the enviable description, Nigeria is forced to import almost 85% of domestic fuel needs largely due to mismanagement of its four state-owned refineries. Together with increasing vandalism and violence in the Niger Delta, this has led to huge production shortfalls that cost the country over $16 billion between 2005 and 2007 alone1. The losses amount to an estimated 20% of Nigeria’s combined production capacity of 2.5 million barrels per day. Moreover, the government has to pay oil companies the difference between import costs and the regulated retail price to make oil more affordable locally. “This is clearly a dysfunctional state of affairs,” the Nigerian Minister of State for Petroleum O Ajumogobia conceded during a conference in the capital in February this year2.

Nigeria faces a paradoxical energy crisis of critical proportions – a circumstance that’s best exemplified by recent developments with the state-owned Port Harcourt and Warri refineries. The Nigerian National Petroleum Corporation (NNPC) announced late in July that the two units had shut down after running out of crude oil due to damages in feeder pipelines. Although Niger Delta militants entered a two-month ceasefire in August, more than half of the country’s crude production capacity remained unachieved in the first half of this year. In fact average capacity utilisation at the four refineries was less than 19% in the first half of 20093, according to official figures. Even without these shortfalls, the country’s domestic refining capacity is far short of demand and patently incapable of meeting the requirements of its 148 million people.

Nigeria’s historic overdependence on oil starting from the 1970s resulted in the gradual destruction of agriculture and small manufacturing. By 2002, export of non renewables accounted for 98% of export earnings and 83% of total revenue4. The decline of non-oil sectors that accompanied Nigeria’s mounting petrodollar profits resulted in massive poverty and mass migration to cities. The stalling of economic diversification led to the disintegration of infrastructure and social services. Despite the massive oil infrastructure and significant exports, the Nigerian per capita income at the beginning of the new millennium had fallen below the level registered at independence in 1960.

A vigorous reforms programme launched after the reinstatement of civilian rule in 1999 has only been partly successful in reversing the staggering macroeconomic imbalances that continue to plague the economy. Recent initiatives, like President UM Yar’Adua’s Seven Point Agenda for accelerated economic growth, have focussed on a number of fronts, including education reform, private-public cooperation in infrastructure development, SMEs and enterprise promotion. Abuja’s well-laid plans to achieve rapid and inclusive growth in a time bound manner are reflected in the country’s commitment to the UN Millennium Development Goals and its own Vision 2020 target of economic consolidation. The country’s extensive resource base and human capital make it ideal for an enterprise revolution that drives explosive growth and creates a closely-interlinked entrepreneurial economy.

Already, the better effects of recent policy redirections can be seen in healthy growth of the non-oil sector, which touched 9% in 20065. However, the impact of reforms has been questionable, most of all, in the oil industry.

Since 2005, the administration of President Yar’Adua has sought to curb oil imports by offering exploration and production incentives to companies involved in oil refining and power generation. However, even though more than 20 private refinery licenses have been issued since, not a single project has taken off so far. Further, plans to privatise state-held oil refining operations have been on hold for several years, largely due to heavy subsidies in fuel prices that makes local refining unviable. Conflict, corruption and lack of official transparency have together caused several major foreign investments to be delayed or altogether aborted.

Although there is hardly any credible data on the subject, Nigeria’s oil industry in its present state represent huge losses in terms of potential employment generation and enterprise development. Most existing exploration, production and refining operations run exclusively on raw material and technical imports, with no backward linkages to the local economy. Further, a relatively low standard of education means that technical jobs have almost always to be filled by foreign workers.

Repairing the oil industry, in the context of Nigeria’s wider developmental goals, calls for several initiatives:

* Deregulation of oil prices to reduce fiscal burden on the government and to promote private sector investment in refining operations.

* Enhancing equity finance access to emerging oil refining companies; sops and financial incentives to attract foreign direct investment.

* Empowering regulatory authorities to deal more efficiently with issues surround oil operations, including violence and vandalism, labour problems and power deficits.

* Improving capacity utilisation in existing refineries by raising production standards to cut dependence on finished petroleum imports.

* Diversifying the fuel retail business by deregulating the downstream sector and encouraging business expansion of existing players.

* Enforcing environmental compliance and addressing genuine concerns of local communities; increasing social participation and minimising conflicts.

Nigeria’s four oil refineries have a combined built-in capacity of more than 440,000 barrels per day, but have never operated at full potential. The fact however is indicative of a much larger failure in terms of untapped potential in Africa’s second largest economy. Nigeria’s recent attempts to drive SME growth in the non-oil sector are no doubt commendable, but they do not take away the imperative of further development and optimisation of its flagship industry. Only after achieving self reliance in oil can Nigeria hope to develop a thriving and diversified economy.

Peter O Osalor