UNITED24 - Make a charitable donation in support of Ukraine!


Nigeria - Oil and Gas

Nigeria has taken in over $400 billion in oil revenues since the early 1970s, with an estimated $45 billion in oil export receipts for 2005 alone. Today oil and natural gas revenues account for 95 percent of state revenue, over 40 percent of the Gross Domestic Product (GDP), and 96 percent of the value of exports. Scarcity of potential capital for development is not Nigeria’s problem.

The informal exercise of power by Nigeria’s political oligarchy exerts more control over daily life than do formal institutions. The primary cleavage in the Nigerian polity lies between members of the oligarchy and the citizenry. Since the oligarchy is insulated from accountability, spectacular forms of corruption have become entrenched and tolerated by officials. Decades of military rule centralized tremendous political power in government hands, which extended government control over land and the all-powerful oil industry.

Oil booms and busts, and the economic effects of structural adjustment programs (SAPs), decimated most non-oil industries while bringing unimaginable wealth to the oligarchs controlling the petro-rents. Consequently, the oligarchy became extraordinarily rich, while roughly three-quarters of the Nigerian population fell into abject poverty amid atrophying state services and stagnation in nonpetroleum economic sectors. Together these trends reinforced the domination of a multi-ethnic oligarchy whose power is derived from their political monopoly over the state apparatus and its vast oil rents.

In short, there is a disconnect between members of the oligarchy, who control the political arenas and struggle to maintain their relative hegemony, and the bulk of the population, who find themselves disenfranchised by the informal patterns of patrimonial power controlling public decision making in Nigeria. The formal and informal powers converge in the office of the president who largely monopolizes oil revenues to reward and cement his patrimonial networks. The origins of executive power may lie with the military’s centralization of power and their control over the oil industry, but civilian officials quickly learned the value of central control.

Skyrocketing oil prices in the 1970s fueled rampant corruption and provided the Nigerian rulers with a fabulous source of revenue. Earlier the production and export of tropical commodities in regional market boards created dispersed regional centers of development and some degree of decentralized social power structures. Petro-rents had the opposite effect, however, effectively concentrating financial power at the federal center. In addition, as a result of the overvaluation of the exchange rate that resulted from the oil boom, many other Nigerian exports became uncompetitive.

The oil boom of the 1970s led Nigeria to neglect its strong agricultural and light manufacturing bases in favor of an unhealthy dependence on crude oil. Oil and gas exports account for more than 95% of export earnings and over 80% of federal government revenue. New oil wealth and the concurrent decline of other economic sectors fueled massive migration to the cities and led to increasingly widespread poverty, especially in rural areas. A collapse of basic infrastructure and social services since the early 1980s accompanied this trend. By 2002 Nigeria's per capita income had plunged to about one-quarter of its mid-1970s high, below the level at independence. Along with the endemic malaise of Nigeria's non-oil sectors, the economy continues to witness massive growth of "informal sector" economic activities, estimated by some to be as high as 75% of the total economy.

Nigeria's proven oil reserves are estimated to be 36 billion barrels; natural gas reserves are well over 100 trillion cubic feet. Nigeria is a member of the Organization of Petroleum Exporting Countries (OPEC), and its current crude oil production averages around 1.6 million barrels per day. Poor corporate relations with indigenous communities, vandalism of oil infrastructure, severe ecological damage, and personal security problems throughout the Niger Delta oil-producing region continue to plague Nigeria's oil sector. Multinational oil companies have launched their own community development programs in an attempt to improve their relations with host communities. The Niger Delta Development Commission (NDDC) was created to help catalyze economic and social development in the region, but it is widely perceived to be ineffective and opaque. Significant exports of liquefied natural gas started in late 1999 and are slated to expand as Nigeria seeks to eliminate gas flaring.

Nigeria inspects all imports on arrival, rather than at ports of origin; as a result, about 95% of containers are physically examined. This procedure, along with Nigeria's uneven application of import and labeling regulations and poor infrastructure, complicates the movement of goods through Nigeria's notoriously congested ports and increases the cost of doing business. The government has promoted foreign investment and encouraged reforms in these and other areas, but the investment climate remains daunting to all but the most determined.

Nigeria provides just one example of the paradox of plenty. Assessed against desirable developmental outcomes, the performance of this oil-rich country has been significantly below its potential and even below that of many of its non-oil Sub-SaharanAfrican neighbors. GDP per capita is $400 per year, 60 percent of the population liveson less than $2 per day, 78 out of every 1,000 infants dies at birth, 35 percent of the population under five years of age is malnourished, barely 50 percent of the adult female population is literate, and so on. The oil-related civil war in Biafra, Nigeria’swell-documented suppression (until recently) of democratic institutions, escalating violence in the Niger Delta, and the environmental degradation that has characterized oil operations in the delta complete the picture painted by the summary statistics on development. The record is dismal, yet over the 35 years since 1970, oil rents accruing to Nigeria amounted to an estimated $300 billion. Nigeria, however, is not unique. Its experience is replicated throughout African oil-producing countries and in otherregions of the world where there is similar dependence on oil and gas.

A co-member of the International Advisory Group of the Extractive Industries Transparency Initiative (EITI) initiated by the G8, Nigeria's federal government is playing an important role in having volunteered to pilot the new disclosure and validation methodologies. It has completed a comprehensive audit of oil sector payments and government revenues from 1999-2004. The federal government has passed implementing legislation on public procurement and fiscal transparency, but now it must ensure that Nigeria's 36 states pass and implement similar bills. There is a perception that government contracting remains rife with corruption and kickbacks, and that many state and local officials continue to steal public monies outright.

The flaring of associated gas is illegal, the reality is a different one. There is a lack of gas infrastructure, until recently a relative lack of domestic demand for natural gas, and no transparent gas market. It has also been suggested that the subsidization of other fuels makes gas less attractive than it should be. Penalties are low and enforcement weak, the benefits of utilization accrue elsewhere. As a result of the foregoing, the companies responsible for ending the flaring have at present little incentive to do so. Gas flaring was responsible for around 48 million tonnes of emissions in 2010. Yet it is possible and costeffective to Nigeria to reduce and ultimately end the practice. There are many potential productive uses for this gas such as feeding industrial clusters with a centralized gas supply.

A shortfall in generation capacity has led to the proliferation of small generators, which are inefficient and polluting. Most rural communities remain off the grid, about 60% of the population lack access to electricity. At the current rate of grid expansion they will largely remain under-served. The potential to both provide energy access and to reduce emissions is enormous. The mitigation options for energy address both energy demand and energy supply.

At present, poor Nigerians pay a significant “poverty penalty” in order to meet their energy needs. They pay proportionately more for energy, spend more time acquiring fuels, and suffer the health impacts from poor fuel quality. This puts a significant brake on development and the empowerment of women in particular. Importantly, reduced dependence on fossil resources can also increase security. A further benefit of rural electrification on- and off-grid using renewable solutions is that many small entrepreneurs can find work in the sector.

Industrial productivity, in general, has been most significantly impacted by unreliable electricity supply. Nigerian companies also face stiff low-cost competition from consumer goods produced elsewhere. The regulatory environment can be tough to navigate. Domestic demand, however, is growing steadily and has driven significant new investment in key manufacturing sectors.

Join the GlobalSecurity.org mailing list

Page last modified: 16-02-2019 19:17:03 ZULU