Thought leadership from our experts

Sustainable Development in Nigeria: Leveraging the Petroleum Industry

Introduction

It is a given that putting all of one's eggs in a basket is risky. Over reliance on crude oil as the dominant source of revenue1 has rendered the Nigerian economy perennially vulnerable to the volatility of the oil market. In recent times, the shale revolution in the US and the re-entry of Libya and now Iran to the market has tipped the supply of crude oil and as a result put the price of the commodity under pressure.2 This recent down turn in the price of crude underscores the need to diversify the Nigerian economy from a mono-product to a more inclusive, industrial economy as a matter of urgent priority. Relying on the words of Aliko Dangote3, "the drop in oil prices will give us an opportunity to diversify the economy. This could be a blessing; there will be pains, but good things do not come without pain". Essentially, diversification promotes growth and development and generates employment to the teeming youthful population.4

For the avoidance of doubt, it is my view that while the current decline in crude prices emphasises the need to diversify the Nigerian economy, tapping all the potential for growth and development is in fact the only prudent thing to do. Given the present pressure on the prices of crude and the crisis created in hitherto mono-product economies like Nigeria, the tendency is to argue in favour of shifting attention away from growing the petroleum industry. That in my view would be the second error, next to the over reliance on oil as the sole source of revenue. My proposal in a nutshell, is to aggressively grow the petroleum industry as a catalyst, enabler and seed fund of a robust diversified economy.

The rest of this article focuses on how Nigeria can redirect the petroleum industry from being a 'cash cow' to becoming a catalyst for economic growth and national development. Some of the critical areas of intervention include: -

  • Articulate an overarching petroleum policy and legal framework as a component of the national development plan;
  • Enforce an aggressive acreage management regime;
  • Reform funding of petroleum operations.

Overarching Petroleum Policy and Legal Framework

In order to attract investment to the petroleum sector, the laws, regulations and policy governing the industry should be unambiguous, comprehensive, transparent, flexible, and practical. A fit for purpose legal framework that is responsive to Nigeria's peculiar environment will address the following:

1. Local Consumption

The historical model for petroleum operations in Nigeria is extracting and exporting to earn foreign exchange. I propose that we form policies and enact laws that would foster investment in refining to process end products such as PMS, AGO, DPK, Gas, etc., which have a ready market internally. Investment requirement in this regard will be huge and stability of policies and regulation, security of investment, tax holidays and a deregulated downstream regime will be enabling factors to encourage investment.

The result of this development will be an immense stream of wealth creation by way of increasing job opportunities, reducing reliance on imported petroleum products, improvement in power generation and the success of ancillary industries which use bye-products of petroleum for manufacturing e.g. cosmetics, soap, plastic, agro-manure, toothpaste, shoes etc.

2. Local Participation

A corollary of local consumption is increasing the participation of Nigerian businesses across the value chain of the petroleum industry. In the extraction for export model, the dominant players are the international oil companies ("IOCs") who have the capacity to engage in the capital intensive vertically integrated operating model.5 Access to increased opportunities by indigenous companies will benefit immensely from the Nigerian government's readiness to reform the governance structure of the industry in a manner that promotes segmentation of the industry into completely knocked down components that allows smaller players. This means an expanded legal and institutional framework for governing the upstream, midstream and the downstream sectors of the oil and gas sectors.

A vital facilitator of local participation is the Nigerian Oil and Gas Industry Content Development (NOGCID) Act which prioritises Nigerians and Nigerian entities for the procurement of oil assets as well as the supply of goods and services to all companies participating in the Nigerian oil and gas industry. While the implementation of this Act has reportedly improved local participation, a lot more can be achieved in this regard by close implementation of the NOGCID Act, compliance monitoring and administering sanctions for non-compliance. I also recommend the formation of strategic alliances amongst indigenous organisations as this will ensure they participate effectively and efficiently in the industry. Essentially, both the government and the indigenous companies should give priorities to training and capacity development, as this will reduce reliance on foreign experts.

3. Petroleum Proceeds as Seed Capital

The Federal Government has over the years applied revenues flowing from petroleum operations (i.e. royalty and taxes) to finance recurrent expenditure and operating expenses (opex). Given the nature of petroleum resources (i.e. depletable and non-depletable), this approach is imprudent, lacking in vision and bothering on irresponsible behaviour by a generation of those handed the stewardship of the commonwealth. This is exacerbated by the fact that oil revenues constitute the dominant source of revenue to the federation. Nigeria must therefore wean itself from dependence on oil revenue to meet its opex. It should gradually and systematically substitute oil revenue with tax revenues, and return on investments as a source of funding its opex. The revenues retained can become the source of capital for critical intervention in infrastructure, counterpart funding in developmental projects and sovereign wealth funds for the benefit of future generations. In this regard, let me acknowledge that some efforts have been put in place by successive governments in this direction6. These efforts however need to be coordinated, consistent and in the context of better national economic planning.

Acreage Management

Nigeria notoriously has one of the sloppiest acreage management regimes. Acreage sizes are too large and the provisions of the law for relinquishment and revocation are not complied with. The current legal regime and the proposed Petroleum Industry Bill (PIB) 2012 both contain provisions which require the compulsory relinquishment of half of an OML area after ten years of the grant, or voluntary farm-ins/compulsory farm-ins under the existing marginal field regime or surrender of the leased area or revocation of the OML for good cause have the result of making non-producing fields available for interested entities to work on. Presently, only about nine of the eighteen marginal oil fields awarded to indigenous companies have been developed and are producing in over 12 years of their award. If the intention is for greater local participation and overall optimisation of the petroleum industry, it must be in the interest of the country to enforce the philosophy of drill or drop by relinquishing the non-producing fields and making them available to other interested parties.

Reform funding of petroleum operations

Nigeria's petroleum industry is largely controlled by the government-owned Nigerian National Petroleum Company (the NNPC) via joint ventures (JVs) and production sharing contracts (PSCs) with IOCs. The present arrangement in which the government has about 60 per cent ownership interest in JVs with IOCs is however commercially unviable due to NNPC's inability to meet its financial obligations under the JVs. The 2009 PIB provides for the conversion of current JV arrangements between NNPC and the IOCs into incorporated Joint Venture companies (IJVs). Although this provision seeks to ensure that the NNPC would not rely on federal government funding through National Assembly appropriation, I recommend the complete divestment of Government's interest in the IJV to private players as this would guarantee that the IJVs become self-funding.

Conclusion

The need for a wholesale reform of the oil and gas sector in Nigeria as a response to the growing trends within the industry is now more of an urgent intervening necessity than a mere strategic requirement. These trends have triggered the need for a conscious and conscientious review, over-haul and re-thinking of the national petroleum policies in a manner that ultimately encourages diversification of the economy. Failure to re-strategize and implement these reforms and reposition Nigeria's petroleum industry will represent an epic missed opportunity affecting the prospects of ever attaining sustainable development.


  1. 70% of the revenue generated by the government and 95% of foreign exchange earnings come from oil
  2. The International Monetary Fund predicts that the price of crude will drop to about $20 bbl
  3. Forbes acclaimed richest man in Africa
  4. Opportunities for diversifying the Nigerian economy abound in sectors such as agriculture, mining, tourism, real estate, infrastructure, technology, retail, and entertainment and the creative industry, etc.
  5. Vertically integrated operating model means the need to build the entire infrastructure from the upstream to the terminal required to carry on petroleum operations.
  6. Establishment of the Petroleum Technology Development Fund, the Niger Delta Development Corporation, and the Excess Crude Account