The Nemesis Called Oil and Gas (1)

Nasir Ahmad El-Rufai
That Sunday was like every other one, but the impact of a single event that happened would change the destiny of Nigeria forever. It was the day Shell D’Arcy found oil in Oloibiri, in present day Bayelsa State. The year was 1956; but the story began 20 years earlier in 1936 when Shell D’Arcy was granted sole rights to explore for hydrocarbons all over Nigeria. Prospecting began in 1937 but the company’s activities were interrupted by World War II.

After the war, it teamed up in 1947 with British Petroleum to form Shell-BP unit in Nigeria. In 1958 production began and the quantity of crude oil export was about 5,100 barrels per day (bpd), which doubled a year later and increased to 20,000 bpd in the 1960 when Nigerian was granted independence. Output increased rapidly to 50,000 bpd (1961) and over 1 million bpd in 1970. The first Obasanjo administration created the NNPC in 1977 and that year saw the then highest ever output of 2.09 million bpd under the ministerial leadership of Muhammadu Buhari.

By the time of the Shagari administration in 1980, production had come down slightly but was still in excess of 2 million bpd. It has remained there since. By 1999, the World Bank estimated that Nigeria had earned about $300 billion from oil rents in the previous 25 years! Between 1999 and 2011, the country netted nearly another $300 billion in oil exports, taxes and income from condensates, gas to liquids and liquefied natural gas. Some estimates are even higher, nearing $1 trillion in current dollars.

That steady increase in oil production put the country as the 14th largest producer of oil in the world but the 8th largest exporter. Many Nigerians will be shocked to learn that Russia produces more oil than Saudi Arabia, and the USA, China, Canada and Norway produce more oil than Nigeria. But they do not export theirs in crude form, but choosing to add value through refining, processing and beneficiation into gasoline and other petrochemicals for internal consumption and export. With an estimated crude oil reserves of 40 billion barrels and some 184 trillion cubic feet (tcf) of gas, we are more of a gas than an oil-blessed nation - the 5th largest gas reserves in the world. The capacity to leverage these natural resources for the betterment of our nation and its people is in the hands of our leaders.

The discovery of crude oil was supposedly a blessing of nature expected to accelerate the development and growth of the Nigerian economy. Our oil revenues provided avenues to invest in the future through massive infrastructure build-out, educating our people, ensuring their health and well-being, and equality of opportunity for all. That was the dream and promise of Oloibiri through the lens of our founding fathers. Whether that expectation has been actualized 55 years after is a question requiring deep pondering.

What went wrong with the dream of Oloibiri? What was the vision of the industry's founding fathers and how did we deviate from it? What can we do to diversify away from our oil-dependency? What reforms do we need to implement to put our oil and gas on a path of growth, indigenisation and maximum benefit to our nation?

As part of our exploration of the real sector in search of employment opportunities for our rapidly increasing and youthful population, for the next couple of weeks, we will analyze the oil and gas sector of the Nigerian economy. The objective is not only to restate its importance in our national lives, but open up the black box of the sector a little bit for our readers to understand this tool for our national development, which has also turned out, so far - to be our nemesis.

This is because most of our problems as a country can be traced to our mismanagement of these two natural resources. And what we do going forward can convert this blessing into a greater curse, or the reverse. Like most things in life, it is about the choices our leaders make today that determine the future of millions.

The oil and gas sector accounted for about 16 percent of our GDP in 2010 - the third largest after agriculture and wholesale and retail trade, but employs less than 0.15 percent of the population, due to its technology-intensive nature and the procurement practices of the international oil companies (IOCs). The industry has capacity to employ more people, and with the enactment of the Nigerian Content Development Act in 2010, more will be expected in this regard.

The founding fathers of the modern Nigerian oil industry are probably Head of State Yakubu Gowon, Shettima Ali Monguno, Philip Asiodu, Olusegun Obasanjo, Sunday Awoniyi and Muhammadu Buhari. Their vision of the 1970s led to creation of the NNOC which became the NNPC in 1977. Their desire was to create a Nigerian-owned and managed oil industry via the instrumentality of the NNPC. They saw joint ventures as temporary measures to enable Nigerians acquire the education, expertise and exposure necessary to take control of the commanding heights of the economy, including the petroleum industry. Everything was well-thought out. For instance, the Petroleum Technology Development Fund (PTDF) was established in 1973 to train manpower for the industry.
The Malaysians took similar steps by creating the Petroleam Nasional Berhad (Petronas), which holds exclusive ownership rights to all oil and gas exploration and production projects in Malaysia. Unlike the NNPC, Petronas has since its incorporation grown to be an integrated international oil and gas company with business interests in 31 countries. It was ranked as the 80th largest corporation in the world in 2009 and the 13th most profitable. It has even bid for and acquired oil blocks in Nigeria. NNPC is still a passive partner in an array of joint ventures, entirely dependent on treasury funding!
The Nigerian economy is heavily reliant on oil and gas exports - oil and gas account for about 96% of foreign exchange earnings and 86% of the total revenue of the Federal Government. Compared to other oil-producing nations, Nigeria's excessive dependence on oil is a clear and present danger that we have gone awfully wrong. Take Indonesia which was at the same level of development (and oil-dependence) as Nigeria in the 1960s, oil now accounts for less than 10 percent of its GDP, 25 percent of government revenue and only 15 percent of exports. This over-dependence on oil exports for both foreign exchange and revenues is partly responsible for our poor programme implementation, continuous boom-bust cycles and abandonment of development projects.

The other problem with oil goes beyond government revenue-dependency. It is the impact of 'easy money' on the incentive structure in the society. Oil and gas are natural resources that are, as we say in Nigeria, "just there". Unlike agriculture and industry that require real hard work to earn the fruits of one's labour, oil and gas are gifts of God, and we have the IOCs to organize, finance, extract, transport and sell them, without any labour on our part!. A few statistics here will suffice. Out of 896 million barrels of oil we produced in 2010, 531 million barrels were produced by NNPC-IOC joint ventures in which the NNPC contributes financially but not technically or managerially, 317 million were produced under production sharing contracts in which the NNPC contributes nothing, and only 45 million barrels were produced under service contracts and by independents. Only these miniscule 45 million barrels were produced with some significant Nigerian participation!
As a country therefore, we do little or nothing every month except meet in Abuja to share out what Shell, Exxon-Mobil, ChevronTexaco, ENI, Elf and other oil companies tell us is our share through the NNPC! We can only believe what they and NNPC tell us because we are not involved enough to question what they say or do. The relative ease of 'earning' this money has created a 'national rentier mentality' within the Nigerian elite and even the common man. Our nation got "oil-rich" without working, so each one of us can get rich overnight without working! The impact of this on our thinking as a people, our response to incentives and the mentality of the young generation can only be imagined.
Every activity has become subordinated to the capturing of easy rents from oil and gas. The best and brightest no longer joined the public service and academia willingly, but the oil industry. Oil became the only game in town, and the acquisition of political power by hook or by crook, was the fastest way to be a player. The overconcentration of government efforts and attention on the oil and gas sector has led to the neglect of the non-oil sector making the entire economy fragile as any slight disruption in the oil sector puts the country's economy and polity in crisis, both gasping for breath.
The oil and gas sector has contributed to our challenges in yet another profound way. The rapid accumulation of oil revenues and build-up of healthy foreign reserves led to an overvalued exchange rate. This made imports much cheaper and exports more expensive and therefore less competitive. The results were the collapse of our export agriculture, reduced food production and more imports of cheaper Asian rice for instance, and capital flight - the rush to take monies out of the country. In 1980, the Shagari administration earned about $24 billion from oil exports, enjoying the benefits of the Iranian crisis when oil prices hit nearly $40 a barrel. Then 80 kobo would buy you one US dollar, and everything became cheaper to import than make in Nigeria. A couple of years later, Nigeria's debt crisis surfaced which took us 23 years to exit from.
Once again, our oil and gas industry is at a crossroads. NNPC is perceived as corrupt, opaque and dysfunctional. Its financial solvency and stability are questionable. Its true participation in the industry insignificant, and its unchecked power not matched with responsibility. Operationally, its best refinery (Warri!) operated at 43 percent capacity in 2010, and the proposed withdrawal of the 'fuel subsidy' faces resistance from people that no longer believe an administration that promises to spend at least 70 percent of the budget running government instead of more investments. The reform of the petroleum sector has stalled with the dilution, and delay in passing the Petroleum Industry Bill since 2008! Where do we go from here?