By Madeline R. Young
More than one year after the enactment of Nigeria’s Petroleum Industry Act (PIA) 2021, the transformation of the oil and gas industry that the legislation was expected to herald has yet to materialise. As a point of fact, more international oil companies (IOCs) are unloading some of their onshore and shallow water assets to concentrate instead on production in the deep offshore of Nigeria’s upstream petroleum sector. This move – now overshadowing the momentous achievement of the PIA, which became law in August 2021 – has significant implications. The IOC divestments in Nigeria may appear to indicate the companies are just pivoting to offshore production because of the massive opportunities that it holds.
A Department of Petroleum Resources (DPR) – now Nigerian Upstream Petroleum Regulatory Commission (NUPRC) – report says Nigeria had about 13 billion barrels of crude oil reserves in deepwater with only two billion barrels being explored as of 2019.
According to the agency, deepwater oil blocks are those located in areas with water depths exceeding 200 metres and reaching up to 200 nautical miles seaward from the coasts of Nigeria.
Nonetheless, this article will attempt to show that the divestments are not a plain and simple case of pursuing lucrative offshore opportunities.
The Goose and the Golden Egg
The PIA provides a framework for improving natural resource management to ensure efficiency and sustainability of oil and gas production (the golden egg) and the producing assets (the goose). Without taking adequate care of the producing assets – particularly the Niger Delta region and its people – the country cannot produce oil and gas. Other assets involved in the production process include the oil and gas refineries and pipelines whose building and maintenance are critical to laying the golden egg. Moreover, optimising the golden egg – by refining the crude oil locally and investing petroleum revenues judiciously – the country can increase its capacity to continue to take care of the goose. This theoretical idea of how the country’s oil and gas sector should operate is sadly not so in practice. The PIA legislation itself took far too long. This was a law Nigeria supposedly needed to build the resilience and the future of its oil and gas on. But politics slowed the legislative process for nearly two decades, thereby limiting investment into the industry. Following its passage, it was hailed as a major achievement of the President Muhammadu Buhari administration and its implementation was expected to create new investment opportunities and catalyse the economic development of the country.
But the passage of the law has been greeted with many concerns. Majority of Nigeria’s oil fields are located in areas in the Niger Delta region where the livelihoods of mostly small-scale farmers and fishers have been affected by environmental pollution effects of oil spills. This environmental problem is caused by about 240,000 barrels of crude oil that is spilled annually from petroleum pipelines and oil wells, ruining the air quality and water supplies, and also devastating crops and soil.
Besides the environmental fiasco, there is the human cost. While the country extracts its oil wealth from the Niger Delta, an estimated 70 per cent of the population lives in extreme poverty. To address these concerns, one of the key components of the PIA requires oil companies to set up the Host Community Development Trust Fund (HCDTF) with the aim of ensuring harmonious relations between petroleum companies and host communities and improving the socio-economic welfare of the communities.
The law also makes it an obligation of oil companies to protect petroleum assets in communities where they are built. Indeed, oil companies are expected to have incorporated the HCDTF by August 15, 2022, with a proposed Board of Trustees (BoT) and other requirements to boot.
Hedging on Environmental and Social Responsibility
Rather than improving the wellbeing of host community, among other positive developments in the sector, some IOCs are hightailing it to offshore production. What the divestment drive by these IOCs shows is that legislating transparency, good governance, host community engagement, environmental remediation and accountability is no guarantee the rules are always going to be followed nor will standards be invariably met.
This is not surprising given that the environmental and social responsibility scorecards of oil companies have historically lagged the economic considerations of the operators. It took the determined efforts of the Nigerian environmental lawyer, Chima Williams, and his colleagues to get the Court of Appeal at the Hague last year to hold Royal Dutch Shell and its Nigerian subsidiary, Shell Petroleum Development Company of Nigeria (SPDC), liable for oil leakages from its pipelines. Up until last year, Shell evaded accountability since the 2004 and 2005 spills, which polluted farmlands and drinking water in the villages of Goi and Oruma in the Niger Delta region. While the company blamed armed militants for the leakages, Williams and his team obtained documents in 2014 showing Shell was aware as far back in 2008 when an oil company executive revealed that over 73 percent of pipelines in Nigeria were in bad shape and overdue for replacement. Following the January 29, 2021 ruling, Shell reportedly agreed to pay the farmers and fishers a N45.7 billion compensation.
The case has subsequently earned Williams the 2022 Winner of Goldman Environmental Prize for Africa, an award which recognises grassroots environmental champions from around the world.
According to a report by the prize-awarding organisation, the ruling became the first time a Dutch transnational company was held accountable for the violations of its subsidiary outside the Netherlands.
Another Nigerian lawyer, Lesley Gene Agams, whom I spoke with to get her perspectives on the ongoing onshore divestments by IOCs in the country, opined that the divestment drive by the companies could be ploys to abandon obsolete pipelines and other assets to avoid the cost of replacement or removal.
On the IOCs longstanding disregard for environmental safety and poor relations with host communities, Agams said historically, women are economically excluded by the oil and gas sector, adding that “women and children suffer the most in the environmental disaster.”
Agams is not alone in holding the notion that oil companies are negligent in their environmental and social responsibilities.
Indeed, they call on other citizens to hold not only oil companies to account, but also the government, whom they accuse of working hand-in-glove with oil companies to perpetuate social and environmental damages in Nigeria.
Agams told me, the Nigerian government needs to demonstrate its “duty of care to its citizens.” Instead, what is apparent is government’s “complicity in the unconscionable exploitation of Niger Delta resources,” he said.
Negligence and Sabotage
The allegation of the now-decades-long negligence of oil companies to upgrade oil infrastructure may have validity if we consider the agitations by militant groups in the oil producing region. The attacks on oil facilities by the militants actually disincentivised meaningful investment to upgrade the pipelines and contributed to the pre-PIA divestments by some IOCs.
The government’s amnesty programme did quell the restiveness and the subsequent PIA enactment was expected to be a boon for investment.
Nevertheless, the scandalous scale of oil theft and pipeline vandalism have become a major concern in the oil and gas sector, leading to the inability of the government to take advantage of higher crude prices to boost its revenues. As much as 200,000 barrels of oil per day (bpd) was stolen in 2021, according to the Nigerian National Petroleum Company (NNPC) Limited. The sabotage has reached a point where the NUPRC has said it may declare a state of emergency in the sector.
In May this year, the Chief Executive Officer of the NUPRC, Gbenga Komolafe, said the country lost about N434 billion to crude oil theft in the first Quarter of 2022 alone.
Komolafe said only about 1.35 million, or about 71 percent of the 1.9 million barrels the country has capacity to produce daily at the moment get to the crude oil export terminals.
Consequently, he said the country has consistently failed to meet her Organisation of Petroleum Exporting Countries (OPEC) crude oil output quota.
The group general manager, National Petroleum Investment Management Services (NAPIMS), Bala Wunti, also disclosed last week that Nigeria was losing about $700 million every month to crude oil theft and vandalism of pipelines in the Niger Delta region.
NAPIMS is the NNPC subsidiary in charge of the Federal Government investments in the] of the industry.
However, anecdotal evidence suggests that part, or even most of the oil losses being blamed on armed militants or thieves are mainly caused by underreporting of production volumes and negligence of the decrepit pipelines.
Unfortunately, this tends to broadly tarnish the reputation of Nigeria’s civilian population, even as loss of revenue by the government is deepening and environmental damage also continuing.
Theft would mean sale, and that would mean less environmental damage and actual funds circulating in the economy, even if illicit. There is little evidence of this.
The oil theft has had significant impact on Nigeria’s output. Minister of Finance, Budget and National Planning, Zainab Ahmed, recently lamented the situation, stating the country has failed to meet its OPEC quota of 1.8 million barrels per day (mbpd). After averaging 1.32 mbpd during the first four months of 2022, Nigeria’s output continued to fall, reaching 1.1 mbpd in July, compared to Angola’s 1.2 mbpd. With the output decline, Nigeria ceded its position as Africa’s largest oil producer to the southwestern African nation since the second quarter of this year.
Latest data from the National Bureau of Statistics (NBS) show the country’s oil sector contracted by 11.77 percent in second quarter of 2022, even as oil production reached an eight-year low. Thanks to a relatively strong performance in the non-oil sector, the economy grew at a 3.54 percent rate the previous quarter, faster than first quarter of 2022.
Despite the low contribution of the oil sector to the gross domestic product (GDP) – 6.33 percent in the first quarter of 2022, the sector continues to have disproportionate impact on the economy due to the dependence on crude oil for the country’s foreign exchange earnings (about 95 percent). The oil and gas sector accounts for over 50 percent of total revenue. Hence, disruptions to producing the “golden egg” of the economy usually results in devastating economic impacts.
For instance, the fiscal headroom to sustain the subsidies on premium motor spirit (PMS) has diminished, especially amid growing debt servicing costs. A curious development that confronted fiscal management in Nigeria in 2022 was the news that petrol subsidy claims surpassed oil and gas revenue by N210 billion in the first half of this year.
Part of the reasons Nigerian economy got to this point is the government’s inability to increase oil revenue due to pipeline sabotage. Why Nigeria is even paying subsidies on PMS is n the first instance is because of the government’s s own negligence and failure to resuscitate the domestic refineries to optimal performance. For this gross ineptitude, investment in capital projects in 2022 and next year will be compromised.
Averting Fiscal Debacle
Latest figures provided by the Minister of Finance indicate that an astonishing N18 billion is spent per day on fuel subsidy. Having already spent N3.1 trillion in the first eight months of the year, according to NNPC, the country is likely to exceed the budgeted N4 trillion for subsidy payments. Even at N4 trillion, the government will be spending 74.07 percent of its capital expenditure for 2022 on subsidy payments. By next year, the government is projecting the petrol subsidy would rise to N6.72 trillion by which time government would be unable to fund capital projects.
While we have highlighted some of the domestic factors that have imposed a severe fiscal burden on the government in the form of subsidy payments, there are also exogenous factors that are responsible for the rising subsidy costs.
As Jide Akintunde, Managing Editor of FinancialNigeria, said to me, the performance of Nigeria’s petroleum industry is impacted by cyclical factors, which affect the prices of oil and gas. Since these are commodities trades on global markets, Nigeria has no control on the prices. OPEC of which Nigeria is a member sometimes modulates prices by constraining global supplies. But domestic factors have prevented the country from meeting its quota.
The rise in oil and gas prices in 2022, however, is a result of Russia’s invasion of Ukraine, a war that started since February 20, disrupting world trade and precipitating record-level inflation in many countries. Whenever external shocks occur, the naira weakens and inflation rate spikes as evidenced by the recent volatility in foreign exchange rates and the surge in the cost of living in the country.
Therefore, ending the unsustainable petrol subsidy regime to reduce the drain on already limited fiscal resources is a no-brainer. It also puts the country in a stronger position to absorb future oil market shocks. But the only way to stop petrol subsidies without creating a socio-economic crisis is to end the importation of refined petroleum products into the country. This will happen when the refineries have been fixed and the new ones come on stream.
Thankfully, the 650,000 bpd-capacity Dangote Refinery is expected to commence operations by the middle of next year. On August 30, Group CEO of NNPC Limited, Mele Kyari, assured Nigerians there would be no need to import petroleum products come 2023. NNPC owns 20 percent equity in the Dangote Refinery, which is designed to produce up to 50 million litres of petrol and 15 million litres of diesel a day. But even in a scenario where the refinery operates at full capacity and all its output is consumed locally, there would still be a shortfall in supply as average daily PMS consumption in the country reached 74 million litres per day in April this year, according to data from the Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN) – a 2.7 per cent increase in consumption compared to the baseline figure in December last year.
Apart from the four state-owned refineries in Port Harcourt, Warri and Kaduna, there are over 20 petroleum refinery project licences, with a total capacity of 1.09 million bpd. Efforts must be intensified to get other refineries to also become fully operational by next year. Otherwise, one year from now, Nigeria will still be losing economic value, including jobs, to other countries because it is unable to refine petroleum products locally.
Maximising Opportunities for Performance
The first one year of the groundbreaking PIA has certainly been shaky. There is a lot of blame to go around for pipeline underinvestment and vandalism, environmental pollution, moribund refineries, and skyrocketing subsidy costs. But certainly, poor implementation of the PIA by the government in the last one year takes the cake. The confusion over ExxonMobil’s divestment from Mobil Producing Nigeria Unlimited exemplifies the point that there is lack of coordination in implementing the legislation. It was a spectacle that gripped the attention of many Nigerians and the international business community.
Just hours after a presidential statement that Buhari had approved the sale of ExxonMobil’s onshore assets to Seplat Energy, Chief Executive of NUPRC, Gbenga Komolafe, came out to controvert the president. He essentially said the president did not have the power to authorise the deal. With the deal awaiting due process, according to Buhari’s spokesperson, Garba Shehu, stakeholders have rightly advised the government to ensure a clear and harmonious communication and implementation of its policies.
Policy Alert, a non-governmental organisation promoting economic and ecological justice in the Niger Delta, asked the NUPRC last month to urgently publish regulations and guidelines for divestment of oil and gas assets under the PIA. The organisation also warned that assets should not be sold off without due consideration of the potential liabilities tied to them, a situation that has hobbled previous divestments in the sector and the privatisation of Nigeria’s electricity assets.
Policymakers must ensure the PIA does not amount to a case of running to stand still. While ensuring the law has teeth; the PIA must also benefit the people of the Niger Delta and Nigerians as a whole, not only the government and oil companies. A Nigerian professor I spoke to, but who prefers to be anonymous in this article, proposed that perhaps the interests of host communities should be built into the ownership structures of oil companies.
“I think this is critical for the security of the oil infrastructures as well as investment in the sustainability of the communities when the oil is exhausted,” he noted.
Certainly, the divestments, if done properly, can provide investment opportunities that will enhance the development of new projects in the oil and gas sector.
Jide Akintunde said the effort to restructure the national oil company should provide lots of opportunities for Nigeria and its global partners, perhaps in the same way the restructuring of Saudi Aramco has transformed the Saudi company. Last month, the oil giant, which is listed on the Saudi Stock Exchange, announced a record $48 billion profit in Q2 2022, and the company is looking to use the windfall to expand its production capacity and reduce debt. NNPC can also lead the way for indigenous Nigerian oil companies by investing in clean energy technologies. As the world transitions to low-carbon economy, the oil majors – Shell, Chevron, Total, ExxonMobil, Eni and BP – are investing billions of dollars in clean energy. Nigeria should not be left behind in the green transition. There is already substantial interest in the country’s liquified natural gas (LNG).
Finally, the IOCs’ divestments are especially opportunity for indigenous oil producers to increase their stakes in the country’s oil assets, a space historically dominated by foreign companies. Recently, Komolafe charged the Nigerian operators to collaborate, strategise and compete with the multinationals. It is imperative that the Nigerian companies do not repeat the mistakes of the IOCs. The future of Nigerian oil and gas is dependent on the resilience of the operators who need to align their investments with concerns about social justice and global warming.
Madeline R. Young is an Associate Professor of Economics at Anglia Ruskin University of London. Dauda Garuba and Celestine Akpobari contributed provided additional insights to this article.