The Trouble with Nigeria Crude Oil

Diezani Allison Madueke

Is the discovery of crude oil in Nigeria over five decades ago a blessing or curse? This was an issue of discussion by eminent lawyers who gathered in Lagos last week. Davidson Iriekpen, who was at the event, writes

It is well known fact that until the Nigeria joined the rank of oil-producing nations in 1958, she depended heavily on agriculture. It sector used to be the mainstay of the economy. But shortly after the discovery of oil the country fell out of grace. In the 60s, agriculture contributed more than 65 per cent of the country’s Gross Domestic Product (GDP). Then, Nigeria was a net exporter of food and earned most of its foreign exchange from agricultural produce. This is no longer the case. Since the discovery of crude oil however, agriculture has suffered serious neglect.

Today, more than 80 per cent of our foreign exchange comes from oil alone. Agriculture has been relegated to the background, at great costs, and negatively impacting the capacity to create jobs, reduce poverty, increase national productivity, diversify the economy, achieve food security, and put the country on the path of sustainable development.

During the First Republic, much of the resources derived from agriculture were shared between the Federal Government and the regions from where such were derived on 50 per cent per cent bases. Then the major sources of revenue were groundnuts, cocoa cotton, palm produce and timber. At that time, the groundnuts and cocoa farmers sold their produce to their regional governments and the regional governments in turn exported the produce. Thus, the regional governments received 50 per cent derivation from the sale of the cash crops. The cocoa farmers in the Western region were able to send their children to schools from the money made from the sale of their produce.

But during the Nigerian civil war, the military government headed by General Yakubu Gowon (rtd) abolished the 50 per cent derivation formula and put all resources under the control of the Federal Government in order to prosecute the war. The civil war had ended long ago, but it was not reversed to the old order. This practice continued until the regime of Alhaji Shehu Shagari who set up a committee headed by Professor Oyetunji Aboyede to work out a new revenue sharing formula.

The committee recommended that the mineral producing areas should be entitled to one per cent of the total revenue accruing to the Federation Account. This recommendation did not please the Niger Delta people. Even with that recommendation, government of Alhaji Shehu Shagari refused to pay the one percent recommended by the committee.

However, the administration of General Ibrahim Babangida (rtd) increased the derivation to three percent. He also established the Oil Mineral Producing Areas Development Commission (OMPADEC) to administer the funds. But OMPADEC could not meet the needs and aspirations of the people because it was starved of funds. The people of the Niger Delta became tired of the neglect and injustice visited on them. That was how the demand for resource control started.

For the over 55 years since the discovery of crude oil in Nigeria, the nation suddenly awoke to a huge source of income generation. This was followed by the gradual slinking away of the many other sources of income that had supported the country through its pre-oil period, one of which is agriculture and aquaculture.

The oil boom brought about a great revenue turnaround for Nigeria and further brought it to international limelight as a major oil producing country in Africa but it also brought about a complete and senseless desecration of the environment especially in the oil sector, loss of indigenous occupation among local communities and massive corruption.

Countless politicians have been made fat from the huge revenue from this material that has become the primary foreign exchange earner for Nigeria. The mansions built by Nigeria politicians, past and present, are testimony to the immense revenue generating power of crude oil.

Crude oil is seen as a blessing by some Nigerians, while some others see it as a curse. Nigerians on either side of the divide have passionate reasons for feeling the way they do. To this category of people, they have their reasons which they hold on to tenaciously and which they are entitled to. The first category of people who think crude oil has been a blessing to the country is obviously people who have benefited from the discovery of this natural resource in the Nigerian soil.

Last week, PUNUKA, a law firm of attorney & solicitors, held its annual lecture titled: “Making a Petroleum Based Economy an Engine for Growth: The Realities of the Resource Curse.” The event was another opportunity to critically look at what the country has benefited from crude oil and suggest the way forward.  And as usual, it was lamentation galore.

Speaking at the occasion, the Managing Partner, PUNUKA, Chief Anthony Idigbe (SAN), said the theme was carefully selected for the yearly lecture in the light of the recent trend and development in the Nigerian oil and gas sector. According to him, the sector had in the last couple of years been attempting some transformations, which the passage of the Nigeria Content Development Act last year, and effort at drafting various laws to reform the fiscal and regulatory frame work for the industry represent. He added that Nigeria was currently at cross roads regarding its petroleum resources, which made Nigeria’s oil and gas endowment an epitome of a ‘resource curse’.

According to the senior advocate, “the history of oil and gas development in Africa is quite pathetic. Over the years, petroleum production has generated great sense of difficulty. Higher revenues from royalties and oil exports have flowed into government coffers, but have been alleged to line the pockets of public officials and their cronies. “Multi-national oil corporations have also been major beneficiaries. The only losers seem to be the citizens of these countries in particular, members of oil producing communities who have borne the brunt of the discovery and exploitation of oil while missing out on the benefits.

“Nigeria is currently at cross-roads regarding its petroleum resources. It is arguable that Nigeria’s oil and gas endowment epitomise the ‘resource curse’. Production of oil and revenue generation is not increasing for a number of reasons and assets are ageing. There is also agitation for local content. The nation seems to solely depend on petroleum resources as her major economic stake.

“Presently, refined petroleum products are imported into the country due to the dilapidated state of the Nigeria refineries. As we speak, the petroleum industry Bill which is meant to reform and change the fiscal regime as well as restructure the regulatory environment is still pending. The momentum for change has never been this apparent,” he emphasised.

Also speaking at the occasion, Professor Pat Utomi, who moderated the session, said there was need for a paradigm shift from the way Nigerian resource was managed in order to allow Nigerians to benefit maximally from their God given resources.

According to him, the resources have now shifted from being a blessing to a curse because of the way the sector was presently managed, which tend to favour those in position of authority and retired generals.

For the guest lecturer, Mr. Steven Otillar, there was need for consistent enforcement of regulations by the government as well as make all parties, both national and international operators feel that everyone was playing on the same field under the same rules. He however regretted that Nigeria with substantial natural resources has not been able to develop such resources in order to increase the overall standard of living of the people.

Otillar, who is of the United States Regional Director, Association of International Petroleum Negotiator (AIPN), said the greatest challenge facing Nigeria’s

petroleum industry is finding an environmentally conscious way to translate oil wealth into individual wealth for the citizens of Nigeria. He called on the government to establish the rules of the game that domestic and international companies alike have to understand and comply with.

On how to manage Nigerian petroleum resources to ensure that they become beneficial to the common people, Otillar said it was an issue being considered by all societies that are net-exporters of hydrocarbons. According to him, the solution would be for Nigeria to learn from the several success stories around the world. “The fundamentals that are required will also take some time to develop.  It is necessary to have a true, strong respect for the rule of law.  If commercial parties cannot have confidence that contracts they enter into will be honored and enforced, then major projects are very difficult if not impossible to develop.

“Nigeria likely needs to focus on maintaining energy exports, but perhaps looking at exporting not crude products, but refined ones, higher value products and chemicals. There must be a level playing field where all companies have the same opportunity to compete in transparent manner. Every country has corruption; every country has political agendas that get in the way of economic growth and prosperity. However, if the situation is such that there is a lack of confidence that business can get done, then companies unwilling or unable to bend the rules will eventually leave, and transformational change can be accomplished” he said.

Speaking at the occasion, the Secretary to the Government of the Federation, Chief Anyim Pius Anyim, admitted that though the oil and gas sector has dictated the pace and structure of growth in the Nigerian economy in the past decades, its impact on employment generation, value addition and diversification of other sectors of the economy has remained comparatively suboptimal. Anyim said it was sad that after many years of discovering oil in the country, Nigerians were yet to maximise the benefit from petroleum resources.

The SGF who spoke through his Senior Adviser, Mr Ferdinand Agu, attributed this to a myriad of constraints that includes high level of foreign content; focus on export of unprocessed crude and low refining capacity. According to him, the oil and gas sector’s relative contribution to the country’s Gross Domestic Product (GDP) in real term, has remained less than desirable with some estimates place at 17 per cent in the last three years. While lamenting that the nation’s petroleum resources were yet to be exploited to the benefits of the ordinary people, they called for a paradigm shift in policy and regulations to ensure that petroleum resources is a blessing and not a curse.

Anyim however expressed hope that the petroleum industry strategies, and programmes under President Goodluck Jonathan’s Transformation Agenda, will stimulate investments in both the upstream and downstream by encouraging local and foreign investors. He said the Federal Government would strive to diversify oil exports to include refined petroleum products and other derivatives from the sector as a means of maximising the benefits from petroleum resources.

He added that deregulation, privatisation and other institutional reforms are being done on this regard, while efforts geared towards the installation of new refineries and increasing the capacities of the existing ones are done to stimulate the petrochemicals industries. SGF said the Nigeria National Petroleum Corporation (NNPC) was now working. He said: “I am proud to announce that this government is also making determined effort at reinvigorating the local content initiatives in the oil and gas sector with its on going reform of fiscal regime and regulatory framework through the Petroleum Industry Bill (PIB).”