OIL REPORT

N I G E R I A A N D OT H E R O I L - P R O D U C I N G CO U N T R I E S : A CO M PA R AT I V E

Inside...
S T U DY

Windfall Pitfall
Oil windfalls flatter to deceive,creat-
ing a false sense of unlimited wealth.
Nigeria has a lot to learn from other
countries on how they manage their
windfalls.
PAGE 7

Deregulation Dilemma
Nigerians believe they should natu-
rally enjoy cheap fuel because their
country is well endowed with hydro-
carbon but the government insists
that full deregulation is non-nego-
tiable.Crisis looms then.
PAGE 11

Resource Cross
Nigeria is still battling with the appro-
priate sharing of its oil revenue as
agitations for ‘resource control’fester
in oil-rich regions.What can the
country learn from others?
PAGE 12

NNPC:The
Dwarfed Giant
Many state-owned oil companies are
doing very well all over the world.
Nigeria’s NNPC offers a peculiar case
study.
PAGE 17
Buyers wanted
Local Discontent
Dependence on foreign oil compa-

And now the

nies often under-develops indige-
nous capacity and denies the local
economy enormous benefits,but,
thankfully,Nigeria is now fighting the
cause of local content.
PAGE 20

Very Backward Integration

Crude Crunch
Why are IOCs deeply involved in
downstream activities, specifically
power generation and refining,in
other countries but stick mainly to
upstream in Nigeria?
PAGE 21

A Future Without Oil?

US President Barack Obama seeks energy independence for his country,which buys almost What does the future hold for Nigeria
if crude oil goes out of fashion?
half of Nigeria’s crude oil exports.Militants disrupt production and slow down fresh invest- PAGE 24
ments in the Niger Delta. Crude oil prices take an incredible plunge in the international
market. Is the end nigh for Nigeria’s oil-fuelled economy?
ENERGY EXPERTS must be fum- expectedly, panic – Nigeria was los-
ing by now.
Last year, they predicted crude
$1 billion ing both in price and quantity.
Countries like Russia have enough
Nigeria’s foreign reserves in 1983 as capacity to make up for falling
oil could be going for $200 per
barrel by December. They were crude oil prices crashed. The prices with higher quantity. Nigeria
spectacularly wrong. From a reserves were $10 billion in 1980 was limited on the two fronts. With
height of $147 in July 2008, oil is Source: THISDAY Database the onset of militant activities in the
now gasping for dear life at a SIMON KOLAWOLE REPORTING In no time, however, prices oil-rich Niger Delta, production is
third of that price. began to wither; the $62.50 mark no longer guaranteed to hit the
Indeed, the protracted dilemma When the budget was being was no longer realistic. The bud- 2005 level of 2.7 million barrels per
in fixing a benchmark for drafted in the last quarter of 2008, get drafters adjusted it to $45, day (mbpd).
Nigeria’s 2009 federal budget said
it all – things are falling apart with
crude oil prices hovered in the
vicinity of $100 per barrel. The
thinking again that it was a wise,
conservative decision.
Energy Information Admin-
istration (EIA), the statistical arm of
Exclusive:
the country’s fabled oil wealth drafters felt they were being con- But a week after the the US Department of Energy, esti-
Okonjo-Iweala on
and its fiscal health is no longer at servative with a benchmark of Appropriation Bill was presented mates that Nigeria currently has a how Nigeria can
ease. This is a major consequence $62.50. After all, the 2008 budget to the National Assembly by capacity to produce 3mbpd, but for beat the oil crisis
of the global economic crisis was benchmarked against $59 yet President Umaru Musa Yar’Adua, the shut-ins. Nigeria’s plans of hit- Page 22
which has hurt crude oil prices. crude oil eventually hit $147. oil was selling for $40. There was, CONTINUED ON PAGE 2
2 THISDAY OIL REPORT
ting 4mbpd by 2010 are also in peril as mil-
itants disrupt operations in the industry.
The 2009 budget projected a production
of 2.292mbpd at a time the country was
doing a little less as a result of shut-ins of
nearly 400,000 bpd owing mainly to mili-
tant activities. That was crass optimism. As
the budget was being considered by the
federal lawmakers, the Organisation of
Petroleum Exporting Countries (OPEC), at
its 151st extra-ordinary meeting in Oran,
Algeria, agreed to cut 2.2mbpd from its pro-
duction of 29.045mbpd from January 1,
2009 to stem falling prices. Nigeria’s share
of the cut: 319,000mbpd. The 2009 budget
was already in turbulence before take-off.
As if the twin trouble of militant activities
and falling crude prices were not enough,
the United States – Nigeria’s biggest oil cus-
tomer – is embarking on a comprehensive
drive to reduce energy imports and protect
the country from the uncertainties in the
international market. Energy is a security
issue for the world’s largest economy. Its
military activities in the Middle East, which
have brought it into drawn-out conflict
with the Muslim world, owe partly to the
country’s desire to secure its sources of oil
supply. With Obama seeking to re-create
the image of the US and lessen its involve-
ment in such conflicts, the energy indepen-
dence policy of his administration does not
bode well for Nigeria.
US buys about 46 per cent of Nigeria’s
daily output. European countries account
for nearly 20 per cent, while South America
buys about 7 per cent. These figures should
alarm Nigeria’s economic managers. A pro-
gressive drop in demand by the US in the
next 10 years, coupled with the quest for
“clean fuel” by Western countries, would
hurt Nigeria which depends on oil rev-
enues for survival in the absence of diversi-
fied economic base. Crude oil (and gas)
brings in about 95 per cent of Nigeria’s for-
eign exchange earnings. Over 80 per cent of
budgetary revenues also come from oil.
Except Nigeria develops alternative sources
of income, and quickly too, the unpleasant
reality is that its overdependence on oil will
Castro Castigates
Obama on Energy Plans
PRESIDENT OBAMA’S energy plan is
not likely to make him many friends
outside the United States,certainly not
Fidel Castro,the former leader of Cuba.
In an editorial on the Juventud
Rebelde.cu website,early February,
entitled “The Contradictions Between
Obama Policy and Ethics”,Castro wrote:
“When Mr.Obama promises to invest
considerable amounts of money to
achieve oil independence,what will
those countries do whose main income
is from the export of that energy;many
of them without another important
source of revenue?”He added:“All
nations in the world,big or small,base
their development dreams on the
exchange of goods and services,of
which without a doubt only the
biggest and wealthiest have the privi-
lege of survival.”
NIGERIA AND OTHER OIL-PRODUCING COUNTRIES: A COMPARATIVE STUDY> CRUDE CRUNCH
Audacity of Alternatives
US PRESIDENT Barack Obama has a
string of proposals to cut down oil
imports and make his country “ener-
gy independent”
•Cleantech Venture Capital: A $150
billion, ten-year plan to develop
“green” energy – biofuels, hybrid cars,
wind, solar and clean coal, etc.
• Cap-and-Trade on Carbon: To
reduce greenhouse gas emissions,
Obama wants polluters (including
drivers of cars using fossil fuel) to
sooner or later cripple the economy. But the
country can take solace in the fact that no
matter what Obama says, it will still take
several years to find cheaper and abundant
alternatives to crude oil.
The recent oil boom had seen the
Nigerian government take on extra respon-
sibilities, perhaps on the presumption that
the petrodollar would keep flowing. Many
of the 36 states of the federation had begun
to make heavy investments in mega pro-
jects such as construction of airports and
refineries, often seen as the drainpipes for
public funds under the guise of spending
the petrodollar on infrastructure. Most
states had embarked on employment
sprees, often for political reasons. The
emerging realities, however, portend that
except oil revenue increases – through a
decent recovery in the price of crude –
many of the states would be in deficit in
2009.
The governor of the Central Bank of
Nigeria (CBN), Professor Chukwuma
Soludo, recently revealed that 30 states
have combined deficits of N700 billion
(nearly $5 billion) in this year’s budgets.
The likely consequences: suspension of
projects, delay in payment of salaries and
retrenchment of workers. To avoid all these
unpalatable consequences, some states will
resort to borrowing, either internally or
externally, to finance the deficits. Are we
going back to 1982 then?
Spend to no end
In 1982, Nigeria ran into a major glitch,
the consequences of which it may still be
suffering. The 1970s were particularly
mouth-watering for the nation’s managers
as crude oil brought a flood of dollars into
the economy. Nigeria had discovered oil in
1956. It began to export its entire produc-
tion of 5,100 bpd in 1958 and was among
the world’s oil elite by 1972 with a produc-
tion of about 2mbpd, making the country
the world’s 10th largest producer then.
The bumper breakthrough started in
1973 with the Arab-Israeli war, following
the Yom Kippur (October 5) attack on Israel
by Egypt and Syria. The Western world
opposed the onslaught and, in retaliation,
Arab countries placed an embargo on sup-
plies to Israel’s sympathisers. That meant a
cut in production by about 5mbpd. Prices
rose by 400 per cent between October 1973
and March 1974.
In fact, from an average price of $3 in
1973, oil was selling for $12 by December
1974. Nigeria began swimming in a flood
of petrodollars. From modest oil earnings
of about $200 million in 1970, Nigeria
earned $32 billion between 1973 and 1978,
averaging over $6 billion oil earnings per
year. But crude oil prices began to take a
tumble as the consuming world devised
strategies to curtail their appetite.
Some of these strategies were: use of pool
cars in offices rather than everyone having
an official car; development of fuel-efficient
cars; provision of fast lanes for cars carrying
two or more passengers to encourage
pay for the pollutions. Funds raised will
be invested in developing cleantech.
Target: 80 per cent reduction in emis-
sions by 2050 from the 1990 levels.
• Clean Coal: America is rich in coal.
But coal itself is fossil and non-renew-
able, and it will take a lot to make it
clean of the carbon dioxide content.
• Auto Standards: The auto industry is
to be encouraged to produce more
fuel-efficient cars that will reduce emis-
sions.
Soludo
fewer number of vehicles on the road; new,
lower speed limits; development of fuel-
efficient heating systems; increased empha-
sis on use of mass transit systems such as
buses and electricity-powered trains; and
an increasing drive for local oil exploration
(the United States commenced production
in the Gulf of Mexico).
The result was a moderate decline in
crude oil prices by 1978, by which time
Nigeria had become entirely dependent on
oil. Agriculture and tax revenue had
become insignificant and neglected. The
then Gen. Olusegun Obasanjo government
began to preach the virtues of prudence
(“tighten your belt”) and launched
“Operation Feed the Nation” to return the
country to agriculture, address food short-
age and cut down on food import.
Meanwhile, there was a lot of expenditure
on the bill as mega projects took over the
landscape with little or no provision for
alternative funding in the event of declin-
ing government revenue. Everyone
thought the rain of petrodollars would
pour forever.
They were correct to some extent: ten-
sions in Iran and Iraq in 1979-80 helped to
cut oil production and push up prices
again. Between 1979 and 1981, prices rose
first to $14 and peaked at $35. The Shehu
Shagari government (1979-1983), an experi-
ment in democracy after the 1966 military
take-over, was at first overwhelmed with
too much money. There were no significant
savings for the “rainy day”. Spend, spend,
spend was the philosophy of governors
and the Federal Government.
But the world was not asleep. Stability in
the Middle East as well as increased supply
and lower demand in the oil market hit
prices below the belt. The downward jour-
ney was sustained, unlike in 1978. Nigeria
earned $22.4 billion from oil in 1980 and, by
contrast, $9.6 billion in 1982. The rug had
been pulled from under Shagari’s feet. By
1982, the economy was fully on its knees.
The foreign reserves, built mainly by the
Obasanjo administration, were depleted to
maintain the official exchange rate of N1:$1.
Nigeria had $10 billion in its reserves
kitty in 1980; by 1983, it was down to $1 bil-
lion. The naira, grossly overvalued by the
oil boom, was a living corpse, kept on its
feet only by decree. Imports were now cur-
tailed to ward off the pressure on forex, and
food prices subsequently rose by as much
as 25 per cent within a year. Industries suf-
fered shortages of raw materials and spare
parts. Many factories cut back production
and laid off workers.
The government resorted to import
licensing for the supply of basic commodi-
ties such as rice and milk, nicknamed
“essenco” (essential commodities) as they
were no longer readily available in the
open market. Nigeria’s creditworthiness
had been severely hit by the depleted
reserves. State governors, meanwhile, went
on a foreign borrowing spree ostensibly to
finance important projects, but it turned out
that most of the loans were not effectively
utilised. Nigeria became heavily indebted,
with interest rates hitting the roof following
the global financial crisis of the era.
Shagari’s austerity measures cut down
on social spending and general expendi-
ture, and drastically downsized public
expectations. The results? Hyper inflation,
declining productivity, unpaid wage bills,
growing unemployment, public disen-
chantment… the stage was perfectly set for
a military coup. The Gen. Muhammadu
Buhari government that came in was faced
with a grim reality – low revenue, an econ-
omy devastated by corruption and mis-
management, heavy foreign debts that
needed to be serviced and rescheduled,
unpaid salaries, comatose industrial sector
and high crime rate stemming from unem-
ployment.
Subsequent governments battled with
these problems, from Ibrahim Babangida
and Sani Abacha to Abdulsalami Abubakar
and Olusegun Obasanjo (on his second
coming). The fortunes of Nigeria seem eter-
nally tied to the swing of the petrodollar.
An upward swing brings smiles, a down-
ward one sorrow.
The resurgent post-2000 oil boom saw
Obasanjo build up reserves again, from
which the odious debts accumulated main-
ly during the Second Republic were paid
off and Nigeria exited from the dreaded
Paris Club. There were controversies over
the huge one-off payment of $12 billion to
secure a write-off of $18 billion (Nigeria
started borrowing heavily in the oil-boom
years) but, nevertheless, it offered Nigeria a
somewhat clean slate and stopped huge
annual interest payments.
But the events of the 70s and 80s seem to
be repeating themselves today. High crude
oil prices are coming down, countries are
devising means of cutting consumption
and Nigeria’s economy is taking a hit
again.
There are still quite a number of differ-
ences though. Nigeria’s foreign reserves are
more now – about $46 billion as against $1
billion in 1983. The country is virtually
debt-free, significantly saving Nigeria from
heavy interest and penalty payments it had
to go through in the past. And, perhaps
NIGERIA AND OTHER OIL-PRODUCING COUNTRIES: A COMPARATIVE STUDY> CRUDE CRUNCH THISDAY OIL REPORT 3
most importantly, Nigeria has a past to
learn from. That alone should serve as a
deterrent factor.

Obama’s energy plan

The present and the future do not look
too promising, in any case. To reduce
dependence on foreign oil, President
Obama has proposed various strategies. If
adopted into a policy, Nigeria could be a
major victim if it succeeds. He wants to
pump $150 billion into developing “green”
energy in the next ten years. This is meant to
overhaul the energy system and break the
country’s “addiction to oil” (his words).
That would mean development of hybrid
cars, wind and solar power, clean coal and
more fuel-efficient appliances. By 2012, he
hopes that the use of renewable energy in
the US would have doubled.
In addition to fuel efficiency and green
energy, Obama is also in favour of releasing
millions of barrels of crude oil daily from
the Strategic Petroleum Reserve (SPR) to
keep the prices within a band. The SPR,
established in the 1970s during the cata-
strophic Arab oil embargo, currently holds
about 700 million barrels. In the last eight
years, the US has been saving 70,000 barrels
per day in the reserve. There are plans to
expand the capacity to 1.5 billion barrels.
Obama is also in favour of “limited” off-
shore drilling to increase local oil output in
the country. This is no good news for
Nigeria and other oil-producing countries
hoping for another era of oil boom. The US
seems to have learnt from events of the past
and is bracing to forestall or minimise a
recurrence in the future.
The global move to cut down on the use
of fossil fuels in favour of bio-fuels is also
bad news for Nigeria. Climate change has New rulers of the Niger Delta
become an all-important topic in global dis-
course. Carbon emissions are being discour- At the Annual Meeting of the World
aged. The whole world is now discussing Economic Forum in Davos, Switzerland, in
alternative, renewable sources of energy. January, the Premier of the People’s
With more and more countries working at Republic of China, Wen Jiabao, revealed
achieving its carbon emissions target, the that China had stored up enough oil that
projections for the future of crude oil are not would last for the next 22 months. With oil
flattering at all. Nigeria can take solace in imports also dropping in the US, the
two things: one, it would still take ages to demand for crude oil is unlikely to rise in
relegate crude oil to the background; and, the nearest future. If demand does not rise,
two, Nigeria still has time to diversify its price is not likely to rise.
economy and avoid being held to ransom Indeed, global oil demand is expected to
by oil. crash further this year amid untamed
worldwide recession. EIA predicts that
Austerity measures again there would be a drop of 450,000bpd this
Nigeria’s response to the latest crude cri- year. US oil demand, according to its fore-
sis has been surprisingly sober. Unlike in cast, will drop to the lowest level in 11 years.
the past when massive borrowing went into The World Bank’s Global Economic
bridging budget gaps, there has been a Prospects report said the five-year com-
somewhat realistic approach. President modity boom has “come to an end”.
Yar’Adua has proposed pay cuts for politi- Nevertheless, some analysts are of the opin-
cal appointees and public offices holders. ion that there would be a price recovery
This is expected to cover all tiers of govern- between now and the next three years, but
ment – federal, state and local. The emolu- prices are not expected to rise above $75
ments for this category of public office hold- during the period.
ers cost about N1.3 trillion (about $884 bil- For Nigeria, it should not matter whether
lion) yearly. In August last year, Revenue or not price would recover in the future. The
Mobilisation, Allocation and Fiscal urgent task is to cut out wastages, scale
Commission (RMAFC) had raised some down mega projects, improve infrastruc-
emoluments by 100 per cent, justifying the ture, entrench transparency in economic
increases on certain indices, including management and pursue diversification of
“external reserves, GDP, growth rate, rate of the economy with commitment.
inflation and the need for a living wage”. Back to the future Easier said than done, but better said than
Many states are also responding to the not.
crunch by scaling down their budgets and pile-up itself – domestic or external – is not
slicing some percentage off some fringe something Nigerians want to contemplate Hope in the horizon? ᝓᛰ
෴ᝓ ᛰ
ၙᏴᥴ ፼ၙ‫ޱ‬࿏Ᏼᥴ
ᝓᢩᝓ჻ୱ ૱ ൯ Ᏼ ᇹၙ
ᢩᏴ෴
benefits. again, although domestic borrowing is a Nigerians are quietly hopeful that there Ᏼ
᜶ᥴၙᢩ᜶෴ᥴᏴ
ᝓ᜶෴ᛰ᜶ၙ ᝳ ෴ᝳၙ
ᢩ ࿏ ၙၙᛰᝓᝳ᜔ၙ᜶ᥴᝳ ၙÿ
Another pile-up of foreign debts, as it global phenomenon. would soon be a recovery in crude oil ໝᏴ
෴ᛰᏴᥴ፼ၙ፼ ᝓ
ᛰ࿏ ෴‫ۿ‬ ૱ໝ ෴ ‫ᝓݏ‬ ᜔᜔ ᜶ Ᏼ
ໝ෴ᥴᏴ
ᝓ᜶
happened in the Second Republic, may also These consolations notwithstanding, the prices. It is not based on any data or ჻
ᢩᝓ᜔ᥴ ፼ၙ௺᜶ ᏴၙᢩᏴᥴᝓ ჻෴ ᇹᝓ ᏴᇹၙᢩᏴ
෴෴᜶࿏෴ ᜶
not be entertained because of two signifi- handwriting on the wall is getting larger informed predictions; it is just that it must ᝓၙ ᢩ
᜶෴᜶ໝၙ෴᜶࿏ ၙၙ ᛰᝓᝳ᜔ၙ᜶ᥴ჻ ᢩ
ᝓ᜔ᥴ ፼ၙ
cant developments: one, with Nigeria’s and clearer: Nigeria’s dependence on oil happen to save the country’s economy. The ௺᜶Ᏼၙ ᢩᏴᥴᝓ ჻૱ ၙ ௺ Ᏼ᜔෴ ᙶ
ᝓᢩ෴ ໝ
෴࿏ၙ᜔Ᏼໝ
ordeal in the hands of the Paris Club, the just has to stop. A country that nervously signs are not very encouraging though, as Ᏼ
᜶ᥴၙᢩၙᥴᏴ᜶ᥴ፼ၙ჻
Ᏼၙᛰ
࿏ᝓ჻ ၙၙ ᛰ
ᝓᝳ᜔ၙ᜶ᥴ૱ᥴ࿏ᏴၙᏴᥴ ፼ၙ
Federal Government would be more reluc- monitors movements in oil prices in order forecasts cast doubts on any optimism in the ᢩ
ၙᛰ෴ᥴᏴ
ᝓ᜶፼ Ᏼᝳ๛ၙᥴၙၙ᜶ᥴ፼ၙᝓᢩ ໝၙᝓ჻ᥴ෴ᥴၙᢩၙၙ᜶ၙ
tant to grant country guarantees to states to know whether to smile or sigh is living short run. The global economic meltdown – ෴᜶࿏ᥴ ፼ၙ៹෴ ᛰᏴ
ᥴᝓ ჻ᇹᝓၙ ᢩ
᜶෴᜶ໝၙ ၙᏴ෴ ᛰᝓ෴ ᜶
seeking foreign commercial loans (as distin- dangerously. Oil contributed about 19 per which has seen a sharp rise in business fail- ၙ᜶ᥴ
፼Ᏼ ෴ᥴᝓ ჻ᝓ ໝ
Ᏼᝓÿ
ᝳᝓᛰᏴ
ᥴᏴ
ໝ෴ᛰ᜔෴ ᜶෴ᇹ
ၙ᜔ၙ ᜶
ᥴᝓ ჻
guished from concessionary loans granted cent to the nation’s revenue in 1970, 80 per ures, unemployment and fall in demand ၙᥴ
፼᜶ᝓÿᢩၙᛰ
ᏴᇹᏴ
ᝓ ໝ ᝓ᜶჻
ᛰᏴ
ໝᥴ ၙ ෴ᢩ ၙໝ
ၙ᜶ᥴᛰ᜶ ෴᜔ၙ࿏
by development agencies such as the World cent four years later, and about 82 per cent globally, with the world’s biggest compa- ෴᜔ᝓ᜶ ᇹ჻ ᢩ
Ᏼໝ෴᜶ ၙᇹ ၙ᜶ၙ
ᢩ෴ᥴ
Ᏼᝓ᜶ᝓ჻ᛰ
ၙ෴࿏ၙᢩ๛ ୱ ፼ၙ
Bank); two, Nigeria’s financial sector is now or more since 1989. When every budget has nies declaring record losses – means ‫ۿ‬෴᜶᚜ၙ᜔ᢩ෴ ᇹ෴Ᏼ᜶ၙᝳ๛ ᛰ
Ᏼ፼ၙ࿏๛ ᥴ ፼ၙᏴ ᜶෴᜶ໝᏴ
෴ᛰ
more developed, opening ways for states to to be benchmarked against the forecast demand for oil would continue to fall, at ୱᏴ
᜔ၙᝓ ჻ᝓ ᜶࿏ᝓ᜶ ᝓ ᛰ
෴ᝓ ᛰၙᏴໝᢩ ᢩ
ၙ᜶ᥴ
ᛰ ᝓ ᢩ
᚜ Ᏼ
᜶ᇹ
patronise the capital market rather than bor- price of an unpredictable commodity, the least until measures being adopted by vari- ᝓ᜶፼Ᏼ჻ Ᏼ
ᢩᥴ ๛ᝓ
ᝓ᚜॰Ᏼ ᛰᝓ ᝓ
᜔֊ ௺ၙ෴ ᜶࿏ ๛ ၙᝓ ჻
row abroad. But the notion of a fresh debt country is effectively boxed into a corner. ous governments begin to bear fruits. ৺ၙᥴ
ᢩᝓ࿏ᝓᛰᛰ
෴ᢩᏴ ᜶Ᏼ ᇹၙ
ᢩᏴ෴
4 THISDAY OIL REPORT NIGERIA AND OTHER OIL-PRODUCING COUNTRIES: A COMPARATIVE STUDY
NIGERIA AND OTHER OIL-PRODUCING COUNTRIES: A COMPARATIVE STUDY THISDAY OIL REPORT 5
ROAD NOTES/SIMON KOLAWOLE

A journey into petro-dynamics LEADERS & COMPANY LIMITED

TO QUOTE the inimitable ex-US MD of World Bank, magnanimously Editor-in-Chief/Chairman:

Nduka Obaigbena
President George W. Bush, I “misunder- squeezed out time from her hectic sched-
estimated” the challenges ahead of me ule to answer my questions despite her •
when I embarked on this survey June reservations about me. Group Executive Directors:
last year. It sounded so exciting to my The good people at OPEC helped Eniola Bello, Deji Mustapha
ears to say I wanted to survey five oil- tremendously with securing appoint- •
producing countries on a “comparative ments while also allowing me to use the Divisional Directors:
scale” with Nigeria to draw lessons for library. The Head of PR, Dr. Omar Simon Kolawole, Emmanuel Efeni,
the country’s policy makers in the areas Farouk Ibrahim, and Angela Agoawike, Israel Iwegbu, Benjie Ihenyen
of “policy environment, windfall man- made my stay in Vienna, Austria, head- •
agement, upstream-downstream link- quarters of OPEC, worth the while. Associate Directors:
ages, local content, operations of nation- THISDAY Washington DC Bureau Chief, Peter Iwegbu, Biodun Aminu,
al oil companies” and all that. With the Constance Ikokwu, helped me secure ‘Gbayode Somuyiwa
benefit of hindsight, it was a suicide use of IMF/World Bank libraries, where I •
attempt. Thankfully, I survived it. was overwhelmed with materials in two General Managers:
This report was originally scheduled key areas of my study. I value the very Martins Egboh,Fidelis Elema,
to be published in September 2008. That, useful inputs of Waziri Adio, who was Ayo Oresegun,Labake Yembra,
again, was a product of “misunderesti- the first person I discussed the idea with Dele Ogbodo,Patrick Eimiuhi
mation”. By that time, the work had only in 2006 and who received it with enthusi- •
been half-done, only to be undone by the asm. He kept sending materials to me. Deputy General Manager:
events in the international crude oil mar- Adio, who is currently doing a graduate Angela Okhakume
ket. Crude prices were heading for the programme at Harvard University, US, •
skies when I launched out. By the time I even sent me his lecture notes pertaining Group Heads:
finished, they were diving for the abyss. to the oil industry. Femi Tolufashe, Sola Obisesan, Morooph
So while the original intention was to Richard Swann, Managing Editor of Alli, Peter Bakare, Ugo Nnakwe
emphasise how to manage the windfall UK-based Platts, broadened my horizon •
by learning from other countries, there is by suggesting that I look beyond my cho- Art Director: Obi Azuru
an extended intention now to appraise sen case studies. Deputy Editor of THIS- •
the dangers ahead. The good thing, it DAY, Tunde Rahman, always ably held General Counsel: Jane Inyang-Disi,
can be said, is that Nigeria can learn fort each time I had to travel. Tunji Bello, Chinwe Izegbu (Nation’s Capital)
from both scenarios. forever an inspiration, never failed to •
The idea of Vision 20-2020 is that remind me how important this study Director of Photography:
Nigeria will be among the biggest 20 was. Bisi Ojediran went through the Sunmi Smart-Cole,
economies in the world by 2020. No one draft reports even when it was inconve- Contributing Editor:
Funke Aboyade
knows how this will be achieved in a Yar’Adua: Change agent? nient. Gboyega Akinsanmi and Bunmi
country that is literally still living in the Oni, both my colleagues at THISDAY,
Dark Age as a result of seemingly intractable electricity problems. contributed their own quotas. Austin Avuru, Mike Oduniyi and
The world’s seventh largest oil exporter is a net importer of petro- Hector Igbikiowubo offered invaluable “technical” advice. Peter
leum products as its refineries have, for decades, been epileptic at Bakare handled the graphics at short notice. Abdulmumin Bello,
CREDITS
best and have become a very lucrative drainpipe for public funds my Abuja “uncle”, helped facilitate my Saudi visa. He often called THIS RESEARCH benefited from the fol-
under the guise of maintenance. me “oil sheikh”. How I wish! lowing works:Facts,The Norwegian
Yet we should not be left in doubt about how the country can The sponsors of this survey were marvellous – without fund-
attain its ambitious Vision 2020: it must properly harness, manage ing it would have been difficult. The research was proudly sup- Petroleum Sector 2008 (Norwegian
and invest its petrodollars to the advantage of other sectors of the ported by (in alphabetical order) African Petroleum Plc, Diamond Petroleum Directorate,2008);Nigeria
economy in order to get out of the hole of resource curse. Many Bank Plc, Nigerian National Petroleum Corporation (NNPC), and OPEC: 36 Years of Partnership
petroleum-rich countries are tackling the new reality of economic Oando Plc, Rivers State Government, United Bank for Africa (Nigeria Ministry of Petroleum
diversification, but Nigeria is behind. The most tragic aspect of (UBA) Plc and Zenith Bank Plc. I am aware of my debt of grati- Resources,2006);Wikipedia; Nigeria
the Nigerian situation is that while many oil-rich countries may tude to those who facilitated the funding – Mofe Boyo (Deputy Sweet Crude (Yakubu Lawal and
not be able to boast of a liberal democratic polity, they can at least CEO, Oando), Tony Elumelu (CEO, UBA), Dr. Edmund Hector Igbikiowubo,2007);Oil Revenue
point to excellent infrastructure as a benefit of petroleum riches. Daukoru (former Minister of Petroleum Resources), Shaka
Nigeria is far, far behind in this area. Momodu (my colleague), Malachy Agbo (Diamond Bank), Assignments: Country Experiences
This survey is, in any case, intended to be a wake-up call. David Iyofor (Rivers) and Timeyin Ejoor (Zenith Bank). and Issues (Ehtisham Ahmad and Eric
Nigeria compares too poorly to its mates in oil riches. It is not just I, eternally, value the support and motivation of THISDAY Mottu,IMF Working Paper,2002);Issues
about the poverty in the country. It is also about the structural Chairman/Editor-in-Chief, Nduka Obaigbena, who apart from in Domestic Pricing in Oil-Producing
deficiencies in the oil economy. It is about the triumph of politics offering invaluable insights, kept on challenging me to deliver on Countries (Sanjeev Gupta,Benedict
over common sense. It is about gross underdevelopment of a sec- the project and always granted me the freedom to embark on Clemens,Kevin Fletcher and Gabriela
tor that can galvanise Nigeria’s rise to economic power. Former trips at short notice. He is one in a million. At THISDAY, you can Inchauste,IMF Working Paper,2002);
President Olusegun Obasanjo, it must be acknowledged, made be what you want to be. Talents are allowed to flourish. I have
commendable efforts to change the industry. He might have been worked in eight media outfits in my career – THISDAY stands Universo (Sonagol,Angola);The
caught up in his own contradictions on transparency and out. Economist and Financial Times of
accountability, but he ranks way above others in trying to put a Meanwhile, I would like to remind the reader that this is essen- London;websites of Energy Information
proper structure in place to make the industry function better. But tially a journalistic survey – not an academic research – so the pre- Administration (EIA) and OPEC;
his efforts were not enough, and not many radical changes result- sentation is more journalistic, simplified and ready to use. I made Covering Oil: A Reporter’s Guide to
ed from them. President Umaru Musa Yar’Adua, if he can break every effort to verify my facts in order not to mislead the reader. Energy and Development (Open
the vicious circle, has a lifetime opportunity to put things right All errors, or inaccuracies, are regretted. The exchange rate kept
Society Institute,2005).Norway’s Oil
once and for all. changing during this research, from N119:$1 to N150:$1. It was
Meanwhile, the most difficult aspect of this work was not the difficult keeping track and altering figures all the time, so what Fund Shows the Way for Wealth
survey itself. It was fixing interview appointments with govern- you would find in this report is a rate that is N145:$1. Funds (IMF Survey magazine,2008).
ment officials in the selected countries. E-mails upon e-mails went Finally, I had a “scary” but lovely tune on my iPod which I
unreplied. Text messages were ignored. I had travelled for OPEC somehow often played on my flights. It’s a song by the poet, PHOTOS
meeting in March 2007 and met with officials from the countries Beautiful Nubia, entitled “Ife Oloyin”. It says: “Flying off in the Page 1: Dreamstime (main picture),
I wanted to sample. We exchanged cards. And that was it. Every air/Slicing through the clouds/Any moment from now could be World Economic Forum (Okonjo-
attempt to even communicate, much less fix appointments, failed. my last…” My wife, Abimbola, hated the lyrics! But I calmed her
At a stage, I almost gave up. There was no way I could do this down with the other lines which she now likes: “Such a lonely
Iweala); Page 2: AFP (Castro and
kind of work thoroughly without getting first-hand information. world/Can’t find no one to trust/You’re the only who under- Obama);THISDAY;Page 3: Corbis.com
I got a big relief when I sent an e-mail to the Ambassador of stands/Wipe away your tears/Take me in your arms/This is (main picture),slate.com (illustration);
Norway in Nigeria, His Excellency Ambassador Tore Nedrebø, where I belong/I’m here to stay/I’m coming back home/To give Page 5: THISDAY ;Page 7: Flickr.com;
who replied me in a matter of hours and detailed Havlor Musaeu you all my love/To give you what you want/You will never be Page 9: THISDAY;
to help me. In a few days, I got appointments fixed and my visa lonely/I will always be there for you.” Page 11: Dreamstime, AFP;
secured. In Oslo, Norway, an official of the Petroleum Ministry, For flying safely thousands of kilometres around the world Pages 12-13: Dreamstime;
Olsen Erik Just, spent hours with me, letting me into the world almost every month, I just have to thank God for journey mercies
of petroleum in his country and giving me all the documents I and the special grace for the conception, execution and delivery
Page 15: AFP;Page 17: AFP;
needed. Eddy Rich of the Extractive Industries Transparency of this project. Page 19: Dreamstime;Page 20: AFP;
International, also in Oslo, was very helpful with materials. Dr. Page 21: AFP;Pages 22-23:World
Ngozi Okonjo-Iweala, Nigeria’s former Minister of Finance and • simonkolawole@thisdayonline.com Economic Forum;Page 24: Universo.
6 THISDAY OIL REPORT NIGERIA AND OTHER OIL-PRODUCING COUNTRIES: A COMPARATIVE STUDY
NIGERIA AND OTHER OIL-PRODUCING COUNTRIES: A COMPARATIVE STUDY> WINDFALL MANAGEMENT
Windfall
Pitfall
Oil windfalls flatter to deceive, creating a false sense of
unlimited wealth. Nigeria has a lot to learn from other
countries on how they manage their windfalls
IN THE 1960s, The Netherlands discov-
ered superabundant natural gas in the
North Sea. The rents were enormous. In
no time, the Dutch manufacturing sector
began to suffer as foreign exchange from
gas rents flooded the economy, shoring up
the value of the Dutch currency, then
called guilder. The economy was
inevitably intoxicated with a strong
guilder. Imports became cheaper. The
local industries became less and less com-
petitive as their products could no longer
compete with imports. The industries
started dying one after the other. The
Economist of London (November 26, 1977)
used two words to describe the develop-
ment – “Dutch Disease”.
This was also the era when Nigeria
made unprecedented revenues from oil.
The Arab-Israeli face-off of 1973 had led to
high oil prices following the embargo on
Western countries by the Arabs. Nigeria
benefited from the boom and was soon
awash with foreign exchange. In one year,
Nigeria recorded a 350 per cent increase in
revenue – thanks to oil. The country
earned $32 billion between 1973 and 1978,
and $16 billion in 1979 alone. In 1980, the
country grossed $24 billion. The naira was
consequently one of the world’s strongest
currencies, exchanging at 80 kobo to $1. It
was, for instance, cheaper to import bot-
tled water than produce it locally because
of the favourable exchange rate. But the
local industries suffered as a result. In two
famous words, Nigeria became afflicted
with the “Dutch Disease”.
Since the trauma of the post-oil boom
era of the 1970s, Nigeria has gone through
different adjustment phases as it struggles
with deindustrialisation and underdevel-
opment. The initial consequences, follow-
ing the crash in crude oil prices, were pret-
ty ugly – job cuts in private and public
sectors, withdrawal of various forms of
subsidies, heavy external borrowing, col-
lapse of industries, etc etc. However, there
was a lingering feeling that Nigerians had
to suffer because the oil boom was not
well managed by the government. Too
many projects were being pursued at the
same time, some of them with little or no
Meanwhile,in Other Lands...
SEVERAL OIL-PRODUCING countries have
special savings from windfalls. They are
classified under the “Sovereign Wealth
Funds”. They are invested in stocks, bonds,
property, among other securities, world-
wide. These funds not only yield interests,
they are also expected to provide for the
future and protect local economies from
excessive public spending. Nigeria’s
Excess Crude Account is not a perfect
example because it is not invested like
other SWFs.
Algeria: The Revenue Regulation Fund
was set up in 2000 and is estimated to
THISDAY OIL REPORT 7
$420 million
Nigeria’s foreign debt stock in 1973 when oil
boom started
$14.7 billion
The debt stock in 1982 when the oil windfalls
started drying up
Source:THISDAY Database
economic benefit but based purely on
political considerations. The projects were
also concentrated in urban areas, further
worsening urbanisation. There were no
adequate savings for the rainy day. This
led to the near total collapse of the econo-
my as soon as crude oil prices took a tum-
ble.
Déjà vu?
Cue another boom. After a prolonged
lull in crude oil prices, there was a
rebound starting from 1999. From as low
as $10 in 1998, the prices began to pick up,
hitting a record $147 ten years later. This
Seeing no evil: Is oil economy all good?
time around, Olusegun Obasanjo, who
was also military head of state (1976-1979) sive drawdown on the reserves. The ment in the country, the money should be
in the boom-bust era, began to encourage Shehu Shagari government (1979-1983) shared out to the three tiers of government
savings for a “rainy day” through robust which succeeded Obasanjo had to dip (federal, state and local) to spend on
external reserves in his second coming hands into the reserves to finance its bud- poverty-alleviation projects.
(1999-2007). In 2003, his government cre- get. The consequences were dire. From a
ated the Excess Crude Account in which modest foreign debt of $3.3 billion in To spend or not to spend
the difference between the budget price 1978, Nigeria’s profile had hit $14.7 billion There are several issues thrown up by
(called “benchmark”, usually lower) and in 1982 following a renewed turmoil in this argument. Economists will argue, for
the actual price is saved. the oil market and the global financial cri- instance, that spending the windfall has
However, this generated a heated sis which pushed up interest rates. This fiscal implications. Whereas the Federal
debate in the polity. Why should Nigeria time around, if Nigeria went the way of Government is charged with maintaining
be keeping huge sums in reserves when heavy spending and little savings again, macro-economic stability – through
there was a glaring lack of infrastructure there was the danger that the crunch of healthy exchange, inflation and interest
at home? Of what use is the Excess Crude the 1980s might repeat itself. rates – a lack of control over spending by
Account when Nigerians are hungry? The Obasanjo government (1999-2007), the other tiers of government will harm
What is “excess” when there is “scarcity”? which met modest reserves of $3.7 billion whatever measures are in place. The
These were the most asked questions in in 1999, left office in 2007 with $45 billion biggest threat would be inflation, caused
the new era of oil boom. They inevitably sitting pretty in those coffers. However, by excessive public spending. Inflation,
provoked a feeling of déjà vu. Haven’t we the question is still being asked: why save not well managed, can discourage invest-
been through this before – spending oil so much when there is so much to spend ment. Secondly, it is feared that the wind-
windfall ambitiously and suffering the money on at home? Nigerian state gover- fall may be mismanaged through white
consequences disastrously? nors, in particular, have been querying elephant projects and outright stealing. In
Whereas Obasanjo built some reserves the legality of the Excess Crude Account, the opinion of development analysts, cor-
when he was military head of state in the arguing that the Constitution does not ruption and misappropriation of the oil
1970s, the subsequent crash in oil prices recognise it. They also argue that because windfall are responsible for Nigeria’s
led to an economic downturn and a mas- of the enormous challenges of develop- CONTINUED ON PAGE 9
hold over $50 billion. The excess earn- seed capital of $5.2 billion. However, the per cent of all revenues be saved, irrespec-
ings from crude oil sales go into the foreign assets of the government are tive of market price and production levels.
account, designed mainly to finance estimated at over $300 billion. They are
debts. The account is kept in dinar, the not treated as reserves but investments. Qatar: With $50 billion in its kitty, the
Algerian currency. eight-year-old Qatar Investment Authority
Kuwait: The Kuwaiti Investment is investing all over the world.
Norway: The Government Pension Fund Authority has saved $264 billion so far. It
of Norway was established in 1990 to was established in 1953, the first by any Russia: Russian National Wealth Fund has
provide for “generations unborn”. The country. KIA, which is headed by a
saved $32 billion in the first year of its
fund currently holds over $400 billion. It
Managing Director, has $5 billion invest-
is invested offshore to protect the econ- establishment.
ment in two US banks, Citigroup and
omy from excessive public spending. Merrill Lynch. The Kuwaiti parliament
performs an oversight function on the UAE: In 1976, United Arab Emirates estab-
Saudi Arabia: In 2008, the Saudi Arabia fund. The funds are invested locally and lished the Abu Dhabi Investment Authority.
Sovereign Wealth Fund was set up with a internationally. It is mandatory that 10 Its current assets are nearly $900 billion.
8 THISDAY OIL REPORT NIGERIA AND OTHER OIL-PRODUCING COUNTRIES: A COMPARATIVE STUDY
NIGERIA AND OTHER OIL-PRODUCING COUNTRIES: A COMPARATIVE STUDY> WINDFALL MANAGEMENT
Is Norway’s Way the Best Way?
WHEN IT comes to prudent manage-
ment of the petroleum resources,
Norway is the global poster boy. All
the diseases associated with
“resource curse”, such as neglect of
manufacturing sector, bloated public
service, poor social infrastructure,
environmental degradation and
pseudo-democracy/outright dicta-
torship, are alien to this Scandinavian
country. Its Government Pension
Fund (GPF, savings from oil windfall)
is hailed as a model for sovereign
wealth funds. It was set up in 1990
slow-paced development.
The other side of the coin, however, is
that given the poor state of infrastructure
in Nigeria, the pace of the country’s devel-
opment will be too slow except govern-
ment spends on infrastructural develop-
ment. Without reliable power and trans-
portation infrastructure, for instance, eco-
nomic activities will continue to be ham-
pered. Investors will continue to incur
unnecessary costs (building roads,
haulage, fuel etc etc) which could have
been channelled towards real invest-
ments. Small- and medium-scale busi-
nesses, which employ millions of
Nigerians, will also continue to bear
unnecessary costs, while real incomes will
continue to dwindle as cost of living
remains high. It is also argued that huge
foreign reserves and excess crude savings
will lose value overtime: what $1 can buy
today may be less than what it can buy
tomorrow.
However, the argument may not be a
case of black or white. Economists such as
Paul Toungui, Gabon’s former Minister of
State and Minister of Economy, Finance,
the Budget and Privatisation, favour a
pragmatic approach. He advanced a
somewhat broad perspective in an article
in F&D, a quarterly magazine of the IMF,
published in December 2006. He argued
that a portion of the windfall should be
used to finance “social spending” – such
as education and healthcare – while a por-
tion should be saved to cushion the
impact of future external shocks.
Toungui endorses spending part of the
windfall to get out of debt (Obasanjo paid
$12 billion to secure Nigeria’s exit from
the Paris Club in 2005) so as to strengthen
public accounts and make the economy
attractive to foreign investment. “Paying
down debt early brings greater benefits
than building up savings that earn a low
rate of return,” he wrote. But to attain the
Millennium Development Goals (MDGs),
there must be investment in “basic social
and production infrastructure”, he said,
warning: “The pace of spending has to be
commensurate with the economies’
capacity to absorb large additional spend-
ing…”
Saving grace
Several oil-producing countries, such as
Qatar, UAE and Norway, have made
enormous savings from the oil boom.
Kuwait’s savings are in excess of $260 bil-
lion. Norway has over $390 billion, which
is almost the size of its GDP. The Abu
Dhabi Emirate in the UAE has a mind-
blowing $900 billion in boom savings.
Nigeria, in contrast, has $15 billion which
is being shared monthly to make up for
the low oil revenue. Whereas other oil-
producing countries operate their savings
as sovereign wealth funds (SWFs) which
are invested in shares, bonds, property
and other securities across the world,
Nigeria shares its own savings on a regu-
and has so far saved over $390 billion
– which is almost the equivalent of
the country’s GDP. Nigeria can draw
useful lessons from the Norwegian
experience.
One, the Fund aims to save as
much money as possible from the
oil windfall and fund public pension
in the future, given the demographic
structure of the country which shows
an aging population in the years to
come (in Nigeria, though, pensions
are no longer defined/paid by gov-
ernment. Pensions are now contribu-
lar basis among the various tiers of gov-
ernment. The windfall savings are kept as
part of foreign reserves. Political consider-
ations have limited the country’s ability to
derive maximum value from it. The sav-
ings are not invested as other oil-produc-
ing countries do.
In 2006, the government of Obasanjo
decided to draw down from the fund to
finance power infrastructure following
the lack of success or speed in the attempt
to get private investment to boost the
country’s power supply. Various power
plants were to be built under the National
Integrated Power Project (NIPP). This, in a
sense, represented a productive use of the
oil windfall. In the years to come, Nigeria
could look back and celebrate utilising the
windfall to address the electricity problem
once and for all – in addition to the exit
from the Paris Club. The actual costs of
these projects are still a subject of conjec-
tures, but figures ranging from $2 billion
to $16 billion are being quoted.
Accusations of corruption and improper
planning are still hanging on the project.
However, a bigger problem is dogging
the use of the windfall. It is being argued
that operating a windfall account is
unconstitutional and should be discontin-
ued – a development that may mean there
would be no special savings any more,
which is indeed very dangerous, especial-
ly when compared with the experiences of
other countries who now have enormous
savings for the years ahead. Some politi-
cians argue that Section 162 of the Nigeria
Constitution provides that all revenues of
the government must be pooled and put
in the Consolidated Revenue Fund and
shared by the various tiers of government.
This argument, which sounds very
legal and democratic, is nonetheless
viewed as a ploy to transfer the windfall
into the hands of politicians from where it
is highly susceptible to mismanagement.
Social critics and activists are apprehen-
sive that the country may end up with lit-
tle or no benefits from the oil boom by the
time the constitutional argument is
employed to share the savings. It would
Post Script: Oil Savings to the Rescue
NIGERIA’S ECONOMY could have been in
greater trouble today but for the savings
from oil windfall in the recent years of
boom.Dwindling oil revenue has seen a
freefall in federal allocation which is
shared monthly among the federal,state
and local governments.N435.40 billion
was shared in December 2008,down to
N285.58 billion in January 2009 – repre-
senting a 34.4 per cent drop.This further
dropped by N50 billion in February.To
make up for the deficit,the three tiers
have agreed to share gradually from the
Excess Crude Account.In February,$1.5
tory – you get what you contributed
while working, in addition to your
employer’s matching contributions).
Two, the Fund’s investment strate-
gy is very transparent. The finance
ministry, officially the owner of the
fund, regularly reports on the goals,
investment strategy, ethical guide-
lines and results. Quarterly and annu-
al reports are published by the cen-
tral bank, the fund’s manager, on the
management and performance of the
fund in a very detailed manner.
Three, the fund is like an endow-
appear, however, that a political solution
may be applied to address the constitu-
tional question – since it could never be
the intention of the framers of the consti-
tution that the country should have no
savings. The various levels of govern-
ment can strike an agreement to save
rather than spend everything. The com-
promise, at the end of the day, may be to
spend some and save some.
Once-size-fits-all?
Beyond the peculiar political environ-
ment of Nigeria, however, the UAE or
Norway example does not really suit the
country. Norway, for instance, was a
developed country before it found oil
wealth. It had a tax system in place. This
was not eroded by the oil wealth. The
basic infrastructure to keep the economy
growing was already in place. Also, its
population is small – a little over 4.6 mil-
lion. Nigeria, by contrast, has a popula-
tion of 140 million with poor social and
economic infrastructure. While Norway
can afford to stash billions of dollars away
for the future generations, the same can-
not be said of Nigeria which is in dire
need of the fundamentals to grow the
economy.
Indeed, it is very difficult to find any
country that is very similar to Nigeria in
terms of oil wealth per capita, state of
infrastructure, a teething democracy and,
most critically, a complex ethno-political
configuration which is a major factor in
the way economic resources are man-
aged. What would work very well for
UAE would be exposed to the politics of
Nigeria. Politics almost always triumphs
over economic commonsense, and there
is always this feeling of the country being
locked up in a vicious circle.
Spend, save and invest
Nigeria’s means of livelihood is crude
oil. The government has spoken quite
encouragingly about diversifying the eco-
nomic base – but oil still accounts for over
80 per cent of government revenue and 95
per cent of foreign exchange. The country
billion was shared from the $20 billion fund,
although over $5 billion has already,been
pledged to fund the National Integrated
Power Project (NIPP).The foreign reserves
have also been dwindling as the central
bank tried to save the naira from falling.But
the naira eventually depreciated as the
apex bank also tried to avoid washing away
the reserves.If crude oil prices do not wit-
ness a significant improvement,the
reserves and excess crude oil revenue sav-
ings stand the risk of being completely
depleted.That would be very catastrophic
for Nigeria,in the short run,at least.
THISDAY OIL REPORT 9
ment fund – the long-term returns
are invested in financing the non-oil
sector. In a way, the capital, derived
100 per cent from oil revenue, is intact
while the interest is spent to develop
the non-oil sector.
Four, the fund is part of the budget
– every net allocation to it and pro-
jected returns are reflected in the
overall budget of the government.
Five, to protect the local economy
from getting “overheated” with
petrodollars, the fund’s assets are
invested abroad.
also has one of the world’s biggest gas
reserves – which are more than its oil.
Therefore, it appears that for a long time
to come, the position of oil and gas in the
revenue profile will be predominant.
What is not sure is the price of oil.
Sudden oil windfall flatters to deceive,
as the country has experienced in the past.
The urge to spend and spend and spend is
ever present with little consideration for
the rainy days. Despite the horrendous
post-boom experiences of the past, the
Nigerian political leaders do not seem to
have learnt their lessons. Much of the oil
wealth is still being mismanaged.
“Resource curse” theorists will easily cite
Nigeria as a perfect example of the dam-
age oil rents can do to the economy and
the polity.
Nigeria’s precarious revenue situation
is worsened by militant activities in the
oil-producing Niger Delta. New invest-
ments in the sector are hampered. Crude
oil prices, meanwhile, have peaked and
are on a downward spiral. Falling pro-
duction and falling prices portend doom
for Nigeria. It makes a whole lot of sense
for the politicians to pause and think of
the dangers that lie ahead if the oil wind-
fall is not reasonably managed to avoid a
crippling fiscal crisis.
Subject to the necessary legal backbone,
a large percentage of oil windfalls ought
to be saved and invested for the sake of
the future. The remaining portion could
be shared by the tiers of government only
periodically – like when there are serious
shortfalls. The portion to be shared should
be targeted at social and economic infra-
structure within assessable timelines. The
government should also continue to pur-
sue the public-private initiatives in infra-
structural development. This has the
potential of containing excessive public
spending with all its side effects, as well as
creating wealth and jobs, in addition to
efficient management, given that govern-
ment institutions are still undergoing
reforms intended to make them more
capable in service delivery.
Obasanjo
10 THISDAY OIL REPORT NIGERIA AND OTHER OIL-PRODUCING COUNTRIES: A COMPARATIVE STUDY
NIGERIA AND OTHER OIL-PRODUCING COUNTRIES: A COMPARATIVE STUDY> SUBSIDIES
Deregulation Dilemma
Nigerians believe they should naturally enjoy cheap fuel because their country is well endowed with hydro-
carbon. But government insists full deregulation is non-negotiable. Unions are ready to bring the country
to a halt. Crisis looms then
A REDUCTION in petrol pump price
should be eagerly applauded, shouldn’t it?
Not in Nigeria. An announcement by the
Petroleum Products Pricing Regulatory
Agency (PPPRA) in January 2009 that the
pump price of petrol had been reduced from
N70 (about half a dollar) per litre to N65 was
initially met with cynicism and then outright
rejection. Why? Politics. Petrol pricing in
Nigeria has a long political history. For
decades, the governments and the citizens
have been engaged in fierce battles over
what the prices of petroleum products
should be. Under the coinage of different
terms, petrol prices have always gone up.
Sometimes it is referred to as “appropriate
pricing” and other times “deregulation” and
“liberalisation”.
The PPPRA, in announcing the reduction
of petrol price, tied the decision to the falling
prices of crude oil in the international market
(Nigeria imports virtually all the petrol it
consumes). It then dropped in the word
“deregulation”. This triggered an alarm
among Nigerians, especially the unionists,
who immediately sensed that the govern-
ment was preparing ground for a rise in fuel
prices as soon as crude oil prices picked up
again. The debate is taking different shapes,
in any case: some even argued that petrol
should be cheaper than N65 if prevailing
crude prices were to be taken into account;
others expressed the belief that the decision
was too late as marketers had already made
a kill since the crash in oil prices.
One of the biggest battles any government
in Nigeria faces is the pricing of petroleum
products. In the last couple of decades, it is
one of the major crises an infant government
runs into. Gen. Ibrahim Babangida, who
took over as military president in 1985,
increased fuel prices in his first budget of
1986 as economic recession continued to hit
public finances. It became an annual ritual as
the economy’s managers sought to reduce
government spending and provide for “effi-
cient” consumption of petroleum products.
Most violent protests Babangida’s govern-
ment faced emanated from increases in fuel
prices.
When he left office in 1993, the issue was
as hot as ever. Gen. Sani Abacha, who ruled
from 1993 to 1998, also increased fuel prices
and faced the wrath of organised labour.
When Abacha died in 1998 and Gen.
Abdulsalami Abubakar assumed office as
head of state, he too preached the virtues of
“deregulation”, increasing the prices of
petroleum products in his first fiscal mea-
sures. The public outcry remained. The
Olusegun Obasanjo government waited for
a year after assuming office before increasing
the prices, citing, also, the need to “deregu-
late” the downstream sector of the economy.
For the eight years that he was in power, the
sensitive issue of product pricing was ever a
source of constant face-off between his gov-
ernment and organised labour.
The current government of President
Umaru Musa Yar’Adua started off badly – it
had to contend with the crisis of another
labour face-off over the issue of fuel pricing.
He didn’t increase the prices by himself –
Obasanjo had done so shortly before hand-
ing over to him. But faced with a crippling
industrial action by the unions, Yar’Adua
eventually reversed or toned down the price
increases. It was the most difficult way to
At what price?
start for a new president, but Yar’Adua is
not alone. Most of the previous presidents
and heads of state always had to confront
the thorny issue on assumption of power.
“Subsidy can kill”
The government of Yar’Adua, who had a
socialist bent as a student and as a lecturer,
had been hinting since last year that the
Lessons from Iraq
IRAQ, STILL smarting from an
internal war, has managed to
put a new refinery on stream
despite its political and eco-
nomic fragility and the cli-
mate of instability.This is the
inside view of the new refin-
ery built by the Czechs in
record time.This crude oil
distillery unit at the Dura
refinery in southern Baghdad
was inaugurated on January
26, 2009. It will produce
70,000 barrels per day. At the
price of petrol would be increased. The ener-
gy minister, Mr. Odein Ajumogobia, had
said by December 2008, the bill for fuel sub-
sidy would hit N700 billion (about $5 bil-
lion). This was unbearable, he said, and was
of no benefit to the ordinary people on the
streets. Indeed, it has been argued over the
years that the ultimate beneficiaries of fuel
subsidies are the contractors who import the
official opening ceremony,
Iraq’s Minister of Oil, Hussein
al-Shahristani, said his coun-
try would increase its oil
refining capacity to become
self-sufficient in oil produc-
tion by the end of this year.
The Nigerian government is
still clueless on when it
would achieve self-sufficien-
cy as all refineries are not
only down, they are inade-
quate to meet increasing
local needs.
THISDAY OIL REPORT 11
products on behalf of the Federal
Government. According to the government,
the money is better channelled to providing
social infrastructure from which the ordi-
nary people will benefit rather than the “fat
cat” contractors.
Several arguments have been canvassed
against subsidy – any form of subsidy at all.
The neo-liberal economists argue particular-
ly in the case of fuel subsidy that it brings
market distortions. Since the pump price is
not a true reflection of the cost and the eco-
nomic value to be derived, the market is
operating at an “artificial” and unrealistic
level. It allows for inefficient use of resources,
they also posit. Another point of discussion
is the smuggling of products which this can
engender. If the cost of fuel is N70 in Nigeria
and N200 in Benin Republic, the fuel seller
would rather take the product to Benin to
take advantage of the price difference. But if
the forces of demand and supply are
allowed to determine the price, there would
be no distortions between the Beninoise and
Nigerian markets. There will be no incentive
for smuggling as a result.
Another argument is pursued by conser-
vationists. If the price of fuel is too low, the
tendency to waste is there. Charging a high
price will force people to conserve energy
and reduce demand, especially since fossil
fuels are non-renewable and reserves are not
limitless. Closely related to this argument is
the concern of environmentalists that fossil
fuels contribute carbon emissions to the
atmosphere, thereby worsening global
warming.
In Nigeria, a few individuals, most of
them fronting for their principals in govern-
ment, have amassed enormous wealth just
importing petroleum products on behalf of
the government. Before the 2007 elections,
excessive contracts were believed to have
been awarded just to build up funds to
finance political campaigns. Many ships
were stuck offshore, unable to offload
because of limited reception facilities.
Anything between N50 billion and N100 bil-
lion is said to have been incurred in demur-
rage over the years as a result. Fuel import
contracts are about the most lucrative source
of rent collection in Nigeria. The refineries
are down or inefficient. Even if they are
working at full capacity, they cannot meet
the consumption requirements of the coun-
try. Importation is therefore unavoidable.
CONTINUED ON PAGE 15
12 THISDAY OIL REPORT
Resource
Cross
Nigeria is still battling with the appropriate sharing of its
oil revenue as agitations for “resource control” fester in
oil-rich regions.What can the country learn from others?
CRUDE OIL fuels dissent and war – ask
the Nigerian government. The contending
issue: Who controls the resources? In the
oil-rich Niger Delta region, peace has been
at a premium for this reason. The wealth
of Nigeria comes from the region. The
people of the region have been at logger-
heads with the Federal Government over
the “control” of the petroleum resources.
They argue that they bear the brunt of the
environmental damage caused by oil
exploration activities. Their livelihoods –
agriculture and fishing, to be specific – are
perpetually under threat from oil spills,
gas flaring, acid raid and other forms of
despoliation. Their terrains need special
attention. The costs of building and main-
taining infrastructure in the very swampy
areas are far more than in the rest of the
country.
Most states of the federation depend
virtually on the monthly sharing of oil
earnings. Most states do not generate
enough revenue internally to pay monthly
salaries, much less maintain roads and
buy office stationery. Take away the oil
revenue from the central pot and at least
27 of the 36 states would fold up. Oil con-
tributes at least 80 per cent into this feder-
ation pool. The Federal Government takes
47.19 per cent from the pot, which is
shared monthly, while the states share
31.10 per cent and councils 15.21 per cent.
National Priorities Services Fund, which is
jointly administered by all tiers of govern-
ment, gets 6.50 per cent.
Nigeria operates a heavily criticised fed-
eral system – a central government, 36
states and 774 local councils. And because
the power over petroleum resources is
granted to the centre, many are wont to
argue that Nigeria operates a unitary, not a
federal, system. This is not an argument to
be pursued or analysed in this report.
Rather, the questions here are: how are
other countries sharing oil revenue? What
Learning from Others...
HOW ARE other oil-producing countries han-
dling this critical issue of who controls what?
Different countries have different histories and
political systems.This makes it difficult to draw
a like-for-like experience for Nigeria. However,
a few countries operating federal and unitary
systems are sampled here and there are rea-
sonable arrangements which Nigeria can
adopt or adapt.
Federal Systems
United Arab Emirate (UAE): This is a federa-
tion of seven emirates – Abu Dhabi, Ajman,
Dubai, Fujairah, Ras Al-Khaimah, Sharjah and
Umm Al-Qaiwan. Unlike Nigeria which was
coupled together by the British colonialists, the
emirates pre-defined the terms of their federal-
ism. Each emirate has political and economic
autonomy and is vested with the ownership
and control of all resources within its boundary.
The central government is run with “donations”
from the emirates. Abu Dhabi is very rich in oil,
while Dubai and Sharjah are rich in commerce
and tourism, with some little oil wealth too.
These three emirates make the biggest “dona-
tions”to the central government.The contribu-
tions are revised every year to reflect the reali-
ties of need. Notably, too, oil-rich Abu Dhabi has
can Nigeria learn from them? Given that
the ethno-political and economic dynam-
ics of each country are different, there is no
such thing as one-prescription-for-all.
Every politics, Thomas “Tip” O’Neill said,
is local.
Resource out of control
Nigeria’s oil-rich region has, for
decades, been campaigning for “resource
control”. The agitation has taken a violent
turn in recent years, leading to bombings,
kidnappings and production shut-ins. The
clamour for resource control has been
interpreted in many ways; there seems to
be no consensus on what it actually
means. One interpretation is that the oil
states want to “monopolise” the resources.
That is, they would take all the revenue
coming from oil, while the 28 non-oil
states would have to make do with what-
ever they have in their own territories – as
it was in the colonial days. A second inter-
pretation is that the oil-rich region wants
its share to increase from the current 13
per cent to 25 per cent or 50 per cent or
even more. They believe this would com-
pensate for the years of neglect and ruin
caused by exploration activities. A third
interpretation: let the states preside over
the entire processes of exploration and sale
of crude oil in their territories and then
pay taxes and royalties to the central gov-
ernment.
The first scenario, which some may
argue is tantamount to secession, has
some historical background. Before the oil
boom, especially in the colonial era,
Nigeria operated a three-region (later
four) political structure that allowed each
region to control its resources. At a time,
every region was allowed to keep the
taxes and royalties from its natural
resources. But this was when the wealth
was from cocoa, cotton, coffee and palm
oil (see box on page 13). Petroleum had
embarked on a massive project to depend
less on oil income and rival Dubai in tourism
and commerce.Talk about healthy competi-
tion.
Canada: Oil provinces control their own
resources. Petroleum taxes are theirs, in addi-
tion to royalties. Because only very few
provinces have oil (Alberta and
Saskatchewan) – which, ironically, is NOT
their major source of income – the Federal
Government has an equalisation fund from
where grants are given to other provinces to
allow for “economic balance”, very similar to
the Nigerian case where non-oil states are
compensated through principles such as
“land mass”, “population”and “terrain”. In
Canada, the oil-producing provinces have
long set up oil funds where the bulk of oil
revenue is saved to protect their local
economies from the volatility of petrodollars.
United States: The US is very similar to
Canada. All states own the resources in their
lands, with the exception of federal territo-
ries.They have a variety of tax bases
assigned to them.These allow them to
charge different taxes and collect royalties.
REVENUE SHARING <NIGERIA AND OTHER OIL-PRODUCING COUN
Flames of hell
not started contributing much to revenue
then. The distribution of wealth was fairly
balanced in the federation and each region
was primed to compete against the other
in economic terms.
However, the fabulous wealth that came
with the oil boom in the 1970s significant-
ly altered the revenue sharing structure in
Nigeria. While cocoa and other products
generated just millions of dollars, oil
flooded the economy with billions of dol-
lars. The military government, which had
overthrown democratic rule in 1966, did
not want to contemplate retaining the old
formula, especially with the petroleum
resources concentrated in a few states in
the same geopolitical axis. This most cer-
tainly led to a series of decrees and laws
that gradually transferred ownership of
petroleum resources into the central pot
for onward redistribution. In the opinion
of the policy makers, this was to allow for
a balance of economic power and even
development across the federation. But in
the opinion of the minorities from the oil-
producing areas, this was another evi-
However, all taxes and royalties do not go to
the states alone – they are subject to federal
income tax.That is an essential part of the
states’ obligation to the federation. It must
be noted, however, that every state in the US
fends for itself.They do not have to be as rich
as other states and no state owes the other
any obligation of keeping it economically
alive. Alaska is the richest in oil and has set
up a fund for the future, in addition to pay-
ing oil sector “dividends”to its citizens regu-
larly.
Mexico: The central government is virtually
in charge of the oil revenues. All the states
receive 20 per cent as transfers, irrespective
of whether or not they are oil-producing.
However, municipalities (called councils in
Nigeria) where oil-production and shipping
activities take place receive an extra 3.17 per
cent from the federal purse as compensation
for the environmental damage.
Venezuela: Like Nigeria, oil is the major
source of income of Venezuela. Oil is concen-
trated in the hands of the central govern-
ment, but states are entitled to between 20
and 30 per cent of oil royalties.The central
dence of hegemony: when the majority
ethnic groups had the mining wealth, they
allowed “resource control” but as the
tables turned in favour of the minorities,
there was suddenly a need to balance eco-
nomic power.
The second senario is an increase in the
derivation payment. Currently, the
Constitution stipulates that not less than
13 per cent should be paid to the states
where the production takes place. This
was a major development, given the fact
that since the oil boom of the 1970s,
derivation had nose-dived from 20 per
cent to as low as 1 per cent. The provision
in the 1999 Constitution for 13 per cent
owed largely to the agitations and inten-
sive lobbying by the oil-producing region.
By the time the Constitution was being
finalised in 1998, the Niger Delta had
changed dramatically: Ken Saro-Wiwa,
later executed in controversial circum-
stances, had internationalised the cam-
paign for justice and equity in the region,
while the youths had made a famous
“Kaiama Declaration” demanding
government is not convinced the states are
spending their share of the oil revenue judi-
ciously, while the state and councils are clam-
ouring for more given the responsibilities they
are saddled with.
Unitary Systems
Indonesia: Resources are owned by the central
government and, until 2001, were fully under its
control with no provision for derivation.
However, like in Nigeria, the oil-producing
regions campaigned vigorously for greater
share of oil revenues.The government decided
to devolve powers and cede more revenues to
the component units of the state. Education and
health, among others, are now wholly financed
by provinces and districts. As part of the reforms,
onshore oil and gas revenue are shared with the
centre. Oil-producing provinces and districts
receive 15 per cent and 30 per cent from oil and
gas revenues respectively as derivation.
Norway: The central government is fully in
charge of the petroleum resources. Oil and gas
revenues are managed in a different way – there
are significant savings for future generations
while transfers are made to public utilities such
as schools and hospitals.
NTRIES: A COMPARATIVE STUDY> REVENUE SHARING
resource control and threatening to take
the law into their hands to actualise their
demands.
Attempts to increase the derivation per-
centage over the years have met brick
walls and worsened the relationship
between the region and the hardliners
from outside the region. Since revenue
allocation in Nigeria is a zero-sum game –
one state’s gain is another’s loss – the
Niger Delta is not short of antagonists in
its campaign for more money. The most
frequently asked questions are: what have
Niger Delta leaders achieved with the 13
per cent they are collecting? Why should
they be asking for more? However, this
has not helped the debate, because the
people from the region also maintain that
it is nobody’s business what they do with
their money. We demand fairness, they
often argue.
Changing the provisions of the Nigerian
constitution is a very difficult, almost
impossible task because of the highly divi-
sive political undertones. But if the deriva-
tion is to be increased, it does not require a
constitutional change. The constitution
did not put any upper limit on what the
derivation should be. Section 162 (2) states
that “…the principle of derivation shall be
constantly reflected in any approved for-
mula as being not less than thirteen per
cent of the revenue accruing to the
Federation Account directly from any nat-
ural resources”. The Ledum Mitee
Committee set up by the present govern-
ment has recommended an increase in
derivation, reportedly to between 25 and
50 per cent over a period of time.
The third senario, which can in any case
supplement the second interpretation, is
that states should have power over the
resources in their lands. The entire process
of production and sale should be under
the jurisdiction of the states – which
would now pay taxes and royalties to the
federation account. In other words, the
states still do not need to get more than the
current 13 per cent derivation (although
they can get more), but they should be the
ones to decide what oil blocks to auction,
what companies would handle explo-
ration and under what conditions. The
good aspect of this proposition is that
states would take their own destinies into
their hands. A major cause of the animosi-
ty in the Niger Delta is that decisions are
taken above their heads by the Federal
Government which does not think it is
under any obligation to negotiate the
interests of the people into the agreements
they enter with the oil companies. Since
the people are the ones going to suffer the
environmental consequences of oil explo-
ration, they ought to be part and parcel of
the negotiations and decision-making.
For or against?
There are various propositions on how
resources should be controlled and how
the rents should be shared. Ehtisham
Ahmad and Eric Mottu, in their essay enti-
tled “Oil Revenue Assignments: Country
Experiences and Issues” (2002), argued
strongly against revenue-sharing. Rather,
they want the revenue to be centralised (in
the case of Nigeria, the Federal
Government would be in charge) because
of macro-economic stability. The alterna-
tive, they argued, is for stable oil-tax bases
to be assigned to the oil-producing areas,
“supplementing these with predictable
transfers (allocations) from the center”.
They argued that oil revenue-sharing has
never solved the problem of keeping sep-
aratist groups happy because oil-produc-
ing areas would always feel they would be
better off by keeping all their oil revenues
anyway.
From the economic perspective, Ahmad
and Mottu wrote: “Arguments for central-
isation of oil revenues are based on a num-
ber of considerations. A central govern-
ment can better absorb the uncertainty
and volatility of oil prices because it usu-
ally has a broader tax base, less correlated
with oil prices, than subnational (state)
jurisdictions. And if subnational govern-
ments do have other assigned taxes, oil-
rich regions may have less incentive to use
such bases if they are also assigned oil rev-
enues – this can lead to internal beggar-
thy-neighbour outcomes within federa-
tions and a misallocation of factors of pro-
duction. Moreover, a central government
can contribute to horizontal equity by
redistributing oil revenue between
resource-rich and resource-poor regions.”
In Nigeria, the current horizontal shar-
ing formula already creates a big gulf
among the states. Various principles are
employed – equality of states, need (popu-
lation, land mass, terrain) and internal rev-
enue generation efforts. Based on these
principles, every state would get similar
allocations from the pool. The differences
would not be massive. However, the
derivation principle (13 per cent) alters the
figures significantly. Take, for instance, the
federal allocations in December 2008,
which represents a general pattern. These
were the gross allocations to four oil states:
Akwa Ibom, N13.7bn; Bayelsa, N9.6bn;
Delta, N9.4bn; and Rivers, N20.6bn.
And these were the gross allocations to
four non-oil states: Ebonyi, N2.4bn; Ekiti,
N2.4bn; Bauchi, N3.3bn; and Zamfara,
N2.8bn. The gap is enormous. Rivers gets
nearly ten times what Ekiti gets – even
with derivation being 13 per cent. If
derivation were to go up to 25 per cent or
50 per cent, the oil-rich would get richer
while the rest would get poorer. On this
score, many are against “resource con-
trol”.
But these explanations are dismissed on
various grounds, both emotionally and
logically. The arguments range from
“we’re not the ones who said you should-
n’t have oil in your ground” to “why not
be creative with how you can make
money rather than depend on our oil?”
Nigeria as a whole suffers from overde-
pendence on oil, but most non-oil states
have virtually gone to sleep since the shar-
ing of oil revenues is guaranteed every
month. Many states are rich in agriculture
– which can generate more jobs than oil –
but there is no incentive to develop it since
they are not under pressure to feed them-
selves independent of oil revenues. In the
pre-oil boom era, regions were somewhat
self-sufficient, generating income from
agriculture and taxation. These veritable
sources are no longer treated as priority. In
addition, many states are rich in solid min-
erals which are left undeveloped, not for
any strategic reason but for the easy flow
of petrodollars. It is argued that if every
state is allowed to control its resources,
non-oil states will be forced to develop
alternative sources of revenue.
The resource control camp has a com-
pelling argument, obviously.
Captured scapegoats
Trouble Formula
A brief history of Nigeria’s allocation arithmetic
1946
Pre-independence Nigeria depended
on taxes and mining rents.The
Phillipson Commission, set up by the Sir
Richards colonial government, recom-
mended that the three regions (North,
East and West) should keep direct taxes,
mining rents and licensing fees, while
federally collected import, export and
excise duties and company taxes
should be shared among the regions.
The colonial government received a
fraction for administrative purposes.
1951
The Hicks-Phillipson Commission
sought broader tax bases for the
regions and proposed a sharing formu-
la based on three principles – one,
import/excise duties to be shared
based on derivation; two, population;
three, special grants to police and edu-
cation to be transferred to the regions.
Every region seemed to like the
arrangement because each benefited
differently:West liked derivation, North
liked the transfers based on population
and East liked the special grants.
1953
Chick Commission altered the arrange-
ment, recommending that mining
rents, royalties and personal income tax
should be shared among the regions
while derivation should be applied and
expanded to export duties.
1960
Nigeria’s year of Independence.The
Raisman-Trees Commission allowed
regions to retain personal income tax. A
central pot (“Distributable Pool
Account”) was created for major rev-
enue items to be distributed among
the regions and the federal govern-
ment.
1964
Binns Commission abandoned deriva-
tion. Distribution now to be based on
internally generated revenue efforts
and quality of service provided by each
region.
1970
The beginning of trouble? Nigeria was
starting to earn good money from oil. A
military government had taken over
power in 1966. Decree No. 13 was pro-
mulgated to vest petroleum resources
in the hands of the central government.
Derivation principle was abandoned.
Allocations to be based on need (as
defined by the population of each state
– now 12, created from the four-region
structure), along with lump-sum trans-
THISDAY OIL REPORT 13
fers.
1971
Federal Military Government took con-
trol of all offshore rents and royalties
via Decree No. 71.
1975
Decree No. 6 transfers all revenue to the
central, providing 20% for derivation.
1977
Aboyade Committee recommended
Federation Account where all revenues
would be pooled for onward sharing
among the three tiers of government –
the first time local councils would be
considered. Each tier of government
was also to have its own tax base.
Recommendations rejected by the
Constituent Assembly in 1978.
1980
Okigbo Commission wanted the
Federation Account and three-tier shar-
ing as recommended by Aboyade.The
panel wanted revenue shared on the
principles of population, social services
and equality of states.Was against the
derivation principle, but this was reject-
ed.
1981
Revenue Allocation Act allocates 3% to
derivation
1982
Act nullified; a new derivation of 1.5%
introduced
1984
New derivation: 1.33%
1989
Derivation reduced to 1%
1990
New principles introduced to revenue
sharing: landmass/terrain (wetlands,
plain and highlands).This was obvious-
ly designed to achieve “balanced redis-
tribution”
1992
Derivation increased to 3%; Oil Mineral
Producing Area Development
Commission (OMPADEC) created to
manage the funds.
1999
Constitution 162 (2) makes derivation
of “not less than 13 per cent”a key prin-
ciple of the sharing formula for oil rev-
enue.
14 THISDAY OIL REPORT NIGERIA AND OTHER OIL-PRODUCING COUNTRIES: A COMPARATIVE STUDY
NIGERIA AND OTHER OIL-PRODUCING COUNTRIES: A COMPARATIVE STUDY> SUBSIDIES
CONTINUED FROM PAGE 11
However, the excessive rent collection
would not be so if there was no subsidy. If
the pump prices are free of official ceiling,
importers can bring in products and charge
economic prices. Government would not
need to import, and there would be no infla-
tion of import contracts encouraged by the
payment of subsidies. It follows, logically,
that private enterprise will grow as investors
are allowed to operate freely in the market.
But with the subsidy regime, a few individ-
uals are handpicked and given government
patronage. In the end, they make billions of
naira at the expense of ordinary Nigerians.
This line of argument has been canvassed
over the years by those who are against the
subsidy regime.
“Subsidy can heal”
But there is also a robust cache of argu-
ments deployed to counter the anti-subsidy
campaign over the years. One argument has
it that as citizens of a country endowed with
oil wealth, Nigerians do not have to pay the
market price for fuel. It’s God-given and the
citizens are not being done any favour
through subsidy. Consumers in most oil-
producing countries pay lower prices (see
box), so Nigerians are not benefiting any-
thing unknown to mankind. The official
argument that the huge sums of money
expended on subsidy could have gone into
financing social infrastructure such as health
and education is often frowned on by this
group, which says education and health
budgets have never been well managed and
pouring more money into those sectors is no
guarantee that anything would change as
long as corruption is pervasive. It is easier,
faster and more realistic to feel the impact of
fuel subsidy than budgetary allocations to
social sectors which are often mismanaged,
this group believes.
Another pro-subsidy argument is
anchored on the poverty level in Nigeria.
Transportation is a major component of cost
of living. Any slight increase in fuel price
provokes an equal or higher increase in the
costs of goods and services. By keeping fuel
prices low, the government will contain the
inflationary pressure on the poor people
who make up between 50-70 per cent of the
Nigerian population. This would seem to
knock off the argument that the ordinary
people do not benefit from fuel subsidy.
Whereas it creates a few “fat cats” in the
process, subsidy still trickles down to at least
100 million Nigerians. There is definitely a
difference between buying fuel at N70 per
litre and N100 per litre. For the ordinary peo-
ple, the difference will be reflected in daily
costs of public transportation and feeding, in
the least. This appears to be one of the
strongest arguments of the pro-subsidy
camp.
Removing fuel subsidies to curb smug-
gling, in the opinion of this camp, is an
attempt to inflict pains on millions of
Nigerians because of the activities of a few
criminals who ordinarily should be check-
mated by the state were its institutions not
weak. A strict control of the borders and full
applications of the laws against the criminals
and their collaborators are seen as better
ways of checking smuggling rather than fre-
quent fuel price increases. While this view-
point seems to ignore the “natural policing”
that uniform cross-border prices can bring
about, it nonetheless tasks the state on the
effectiveness of its own institutions since it is
not only fuel that is smuggled. The Nigeria-
Benin borders are by far one of the most
active smuggling routes in Africa.
The government has long abandoned its
age-old argument that removing subsidies
would eliminate product scarcity. There has
been massive importation of products under
the subsidy regime for over eight years now
and fuel queues have disappeared. They
only emerge owing to non-subsidy-related
issues, such as strikes, long public holidays
and accidents at the import reception facili-
THISDAY OIL REPORT 15
ties. But then, the massive importation and
availability are at a heavy cost. Even at that,
the pump price is not uniform nationwide.
In remote parts, petrol is sold in cans at prices
way above the pump price. Filling stations in
Petrol prices per litre in OPEC countries as at February 2009
many states also sell above the official price.
There are therefore obvious leakages and
exploitation internally. Country ($:¢) N:K GDP Per capita
Should there be subsidy at all? Algeria $0.34 N49.30 $240.2bn $7,100
The issue of fuel subsidy in Nigeria is not Angola $0.53 N76.85 $114.6bn $9,100
one that can be addressed conclusively, it Ecuador $0.51 N73.95 $107bn $7,700
would seem. Perhaps the starting point of Iran $0.10 N14.50 $859.7bn $13,100
the debate should be: should there be any Iraq $0.10 N14.50 $113.9bn $4,000
form of subsidy at all in any country of the Kuwait $0.24 N34.80 $157.9bn $60,800
world? If the answer is yes, what should be
Libya $0.14 N20.30 $92.01bn $14,900
subsidised? If the answer is no, how do you
Nigeria $0.44 N65.00 $328.1bn $2,200
address glaring imbalance, disincentive and
wealth redistribution in the economy? Qatar $0.22 N31.90 $83.29bn $101,000
Should government fold its arms and hand S’Arabia $0.16 N23.20 $600.4bn $21,300
over every aspect of the society to market UAE $0.45 N65.25 $186.8bn $40,400
forces in the hope that the market will sort Venezuela $0.02 N2.90 $368.6bn $14,000
out itself and redress every imbalance in the
system? This seems to be the direction of Sources:THISDAY Database,CIA Handbook,GTZ
fresh debates following the financial crisis
that has been torturing the global economy, round the purchase and distribution of the the prices of imported and locally refined
leading to government intervention in capi- fertilisers. By some accounts, the fertiliser product will be the cost of shipping –
talist countries such as UK and US. scandal is next to fuel in the siphoning of which some say is negligible. For as long as
The first part of the question on the desir- public funds into private pockets. the local refineries buy crude oil at the
ability of subsidies is better answered with international prices, the prices of end prod-
the fact that in every country of the world,
Local refining first… ucts would be similar. Two, subsidy is
even the most capitalist, there is one subsidy The debate on fuel subsidies in Nigeria is defined in two ways, the first being the dif-
or the other. In the US, agriculture and steel
poorly structured at present. Government ference between the cost of production and
sectors enjoy generous subsidies running often bases its argument on the high cost of sale price, and the second being “opportu-
into billions of dollars yearly. In the EU, farm
importation of products. This begs the nity cost”, that is: at what price can I sell my
subsidies are ever present. In the UK, farm
question. Is subsidy related to just importa- product in another market?
and transport subsidies are critical to the
tion? If Nigeria achieves self-sufficiency in
economic stability of the country and the
government does not shy away from that local refining and importation stops today, In the abundance of water
fact. Essentially, then, subsidy is no perfidy, would there still be a budget for subsidies? All the economic arguments about sub-
but an economic strategy. These questions are often taken for granted sidy, however, will face stiff opposition
The Nigerian aspect of the argument, by government officials, whereas they may from the evidence from the “OPEC region”
however, is a bit different. It is being argued be at the heart of the debate. The focus has – all members subsidise petroleum prod-
always been on the amount spent on ucts in their local market. Their logic has
that government should channel fuel subsi-
importation of products without any atten- nothing to do with any arguments about
dies to the agricultural sector instead
because the sector is the biggest employer of tion to several other issues that are critical market forces, appropriate pricing, efficient
to answering the question. consumption, smuggling, deregulation, lib-
labour and the biggest contributor to the
country’s GDP. Indeed, agricultural subsi- In opposing the pump price cut in eralisation and such like. To them it is sim-
January, labour argued that basing local ple: we have crude oil in super abundance
dies already exist in the form of cut-price fer-
pricing on imported products is not a feasi- and our people must enjoy the benefits.
tilisers and tractors sold by government to
ble way of calculating subsidy. The first Whatever the arguments may be, how-
farmers. It is highly political, though, as ben-
step is to achieve local sufficiency in refin- ever, the Yar’Adua government appears
eficiaries are most often members or sup-
ing in order to be able to determine the determined to lay the subsidy ghost to rest
porters of the ruling party in a state. It is
actual economic price of the products. This as it seeks to reform the oil industry. But the
therefore a tool of political patronage, like
argument, however, is subject to criticism battles ahead, with unions in particular,
fuel contracts. More so, scams often sur-
on two fronts. One, the major difference in promise to be fierce.
The old excuse for deregulation
16 THISDAY OIL REPORT NIGERIA AND OTHER OIL-PRODUCING COUNTRIES: A COMPARATIVE STUDY
NIGERIA AND OTHER OIL-PRODUCING COUNTRIES: A COMPARATIVE STUDY> NOCs
Higly inflammable corporation
NNPC:The Dwarfed Giant
Many state-owned oil companies are doing very well all over the world.Nigeria’s NNPC offers a peculiar case study
THE NIGERIAN National Petroleum
Corporation (NNPC), Norway’s Statoil
and Malaysia’s Petronas were all set up as
state-owned oil companies in the 1970s.
But that is where the similarity ends.
Today, the now renamed StatoilHydro is
the biggest offshore oil and gas company
in the world. Last year, it was ranked by
Fortune magazine as the world's 11th
largest oil and gas company by market
capitalisation, and the 59th largest compa-
ny in the world. Petronas is ranked by
Fortune as the 95th largest company in the
world. It is the 8th most profitable compa-
ny in the world and the most profitable in
Asia. Petronas now has business interests
in 31 countries.
And NNPC? Veteran joint venture part-
ner, that’s it. Without its partnership with
Shell and other oil majors upstream,
NNPC is just an empty shell, a giant tod-
dler. Downstream, NNPC has a clutch of
“mega” fuel stations and four refineries
which are perpetually in a rotten state.
NNPC is seen as Nigeria’s most sleaze-rid-
den organisation through which politi-
cians and their cronies have been milking
the national treasury for decades. It had
metamorphosed from Nigeria National
Oil Company (NNOC), which was set up
by the military government in 1971 “to
participate in all aspects of petroleum,
including exploration, production, refin-
ing, marketing, transportation and distrib-
ution”.
In practice, all NNOC was doing was
forcefully acquiring interests in the interna-
tional oil companies operating in Nigeria.
That was arguably the wrong foundation
that was laid, because it never saw itself as
a potential global player. It first acquired
33.33 per cent in Agip. Then 35 per cent in
Safrap, the Nigerian arm of Elf. It later
“seized” 35 per cent in Shell-BP, Mobil and
Gulf. It went on and on, increasing its stake
to 55 per cent in each company. The estab-
lishment of NNPC in 1977 was part of a
supposed reorganisation of the sector.
A Crude Oil Sales Tribunal had been set
up to investigate the activities of NNOC.
The tribunal found out that in three years,
the company had failed to collect 182.95
million barrels of their equity share of oil
being produced by Shell, Mobil and Gulf.
The loss was estimated at $2 billion. (This
sum was mistakenly understood by the
public to mean “missing” or “stolen”).
However, the loss was as a result of
NNOC’s inability to find buyers for its
share of the oil production at a price it
desired, after having paid its full share of
the production costs to the JV partners.
NNOC had also failed to produce audited
reports for the same period under review.
Its successor, NNPC, has not fared bet-
ter. It has always been under the control of
government officials who realised quite
early how massive a honey pot it is. The
structure of the NNPC itself was and is
cumbersome. It was not only Federal
Government’s vehicle of participation in
the oil industry, it was also the regulator of
the sector. In one breath, it was a player. In
another, it was a referee, through the
Department of Petroleum Resources.
Attempts have been made to reform the
corporation over the years. It was first
decentralised into nine units in 1981. In
1988, the corporation was “commer-
cialised” into 12 strategic business units –
all under three broad areas of responsibili-
ty, namely Corporate Services, Operations
and Petroleum Investment Management
Services. But the symptoms and the dis-
eases remained the same.
Separating oil from politics
THISDAY OIL REPORT 17
After decades of indisputable inefficien-
cy, the NNPC is finally facing the needed
surgery. Nigeria seems to be learning from
the rest of the world already with the tone
of the reforms proposed for the oil indus-
try. The aim, it has been said, is to separate
oil from politics. It may sound unthinkable
in Nigeria, but this is the stated objective.
Many energy analysts have often can-
vassed that nothing short of full liberalisa-
tion of the oil sector will suffice; they are
about to get their wish with the institution-
al change on the cards.
Ex-President Olusegun Obasanjo had
set up the Oil and Gas Sector Reforms
Implementation Committee (OGIC) in
2000 to produce a National Oil and Gas
Policy. It came up with radical recommen-
dations, chief among which was the need
to separate the commercial institutions
from the regulatory and policy-making
ones. Obasanjo did not act on the report,
but President Umaru Musa Yar’Adua is
going ahead with the reforms. He reconsti-
tuted OGIC under the leadership of indus-
try veteran, Dr. Rilwanu Lukman.
Its report, submitted last August, has
been packaged as a bill and sent to the
CONTINUED ON PAGE 19
18 THISDAY OIL REPORT NIGERIA AND OTHER OIL-PRODUCING COUNTRIES: A COMPARATIVE STUDY
NIGERIA AND OTHER OIL-PRODUCING COUNTRIES: A COMPARATIVE STUDY> NOCs
National Assembly for the enabling laws.
The report suggests solutions to the prob-
lems affecting the industry in the country,
highlighting operational strategy and
action items necessary to drive the nation-
al oil company to a global status. It also
proffers solutions to fiscal policy problems
and community issues affecting all seg-
ments of the industry.
The major highlight of the reforms is to
make the national oil company indepen-
dent of government finance and run as a
proper business entity which can leverage
on its assets to source funds for its projects.
This would effectively put an end to the
era of Federal Government paying cash
calls on JV projects. The bill listed the objec-
tives of the fiscal regime to include “the
creation of an economic climate that
encourages stability, the observance of the
rule of law, and the elimination of corrup-
tion” and “the gradual elimination of sub-
sidies in all areas of the petroleum indus-
try”.
Other objectives include:
•The establishment of a regime for taxa-
tion on petroleum products for the pur-
pose of financing infrastructure in and
around the entire federation;
•The establishment of appropriate rules
to discourage the consolidation of down-
stream projects with upstream fiscal
regimes;
•Ensuring that the licensee, lessee or
contractor utilises cost effective measures
in the course of petroleum operations in
order to ensure efficient cost savings and
maximum economic benefits to the state.
A new structure
The structural problems are to be
addressed through the creation of new
institutions as contained in the bill.
The Nigerian Petroleum Directorate (NPD):
This will function as the secretariat of the
Minister of Petroleum Resources and take
over any functions previously undertaken
by the Ministry.
The Nigerian Petroleum Inspectorate (NPI):
It will be the successor to the assets and lia-
bilities of the Petroleum Inspectorate of the
NNPC and the Department of Petroleum
Resources of the Ministry of Petroleum
Resources.
Petroleum Products Regulatory Authority
(PPRA): This will regulate the downstream
NNPC depot of confusion
sector of the oil and gas industry.
The National Petroleum
Management Agency (NAPAMA): The
Assets
agency will be in charge of monitoring and
approving costs of ventures in which
Nigeria has investments or participating
interests, with the objective of maximising
the total revenue accruing to the govern-
ment from the upstream petroleum indus-
try in Nigeria and ensure that all operating
contractual arrangements in the upstream,
including but not limited to joint operating
agreements, production sharing contracts,
and service contracts, achieve the objective
of realising or achieving optimal financial
returns.
National Petroleum National Oil Company
(NNPC Ltd): It will be the holding compa-
ny and successor to the assets and liabili-
ties of the Nigerian National Petroleum
Company of Nigeria (NNPC).
National Petroleum Research Centre
(NPRC): This will be responsible for
research and development in the petrole-
um industry in Nigeria, specifically
upstream exploration and development
matters.
Speaking to the press late last year, the
Chairman, OGIC Sub-Committee on
Policy Framework, Dr. Mohammed M.
Ibrahim, said once passed into law and
fully implemented, it would have a “seis-
mic impact” on the oil and gas industry.
He said the bill is “transformative” and
would have an impact of heightening pro-
portion in the way the business of hydro-
carbon is carried out and done in Nigeria.
“We discovered that, there are four fac-
tors that are responsible for the disrepair
state of the Nigerian oil and gas industry
and these are what this bill has come to
address.
“Number one, we discovered that, there
is lack of designation of functions and
responsibilities in the Nigerian oil and gas
sector – there was no clear separation of
the policy framework for the Nigerian oil
and gas industry, a complete absence of a
clear cut policy for the Nigeria hydrocar-
bon industry.
“Secondly, we discovered there was
political interference in the function and
functioning of the various institutions in
the Nigerian oil and gas industry.
“Similarly, we discovered lack of capaci-
ty by the operators of the Nigerian oil and
Dwarf among equals
Comparing and contrasting NNPC with its
peers in the world is not exactly heart-
warming.The gap is too wide.A fair call
would be that Nigeria is yet to start.It is all
the more worrisome because countries
such as Brazil and Malaysia,which are not
bigger petroleum producers than Nigeria,
have national oil companies that are con-
quering fields across different countries.
StatoilHydro (Norway)
Statoil was established in 1972 but has
now merged with Norsk Hydro to create
StatoilHydro.It was privatised in 2001,and
was listed on both the Oslo Stock
Exchange and the New York Stock
Exchange as Statoil ASA,with the
Norwegian government retaining a 64 per
cent stake.It merged with Norsk Hydro in
2007 and became the biggest offshore oil
and gas company in the world.It is
involved in production in 13 countries,
including Nigeria,and has 2000 retail out-
lets in eight.The government still retains
62.5 per cent in the company and collects
dividends from it every year.
Petronas (Malaysia)
Petroliam Nasional Berhad (Petronas) was
founded by the government of Malyasia
in 1974.It is still wholly owned by the gov-
ernment and is in charge of the entire oil
and gas resources in the Asian country.
The Petronas Group,which has 103 sub-
sidiaries,19 part-owned outfits and 57
gas industry.
“We also discovered a complete sever-
ance between the oil and gas industry and
the larger economy in which case the
Nigerian oil and gas industry has not
served as a catalyst to developing the
Nigerian economy as a whole which will
now transform into socio-economic bene-
fits to the Nigerian masses,” he said.
Ibrahim, who was the Special Assistant
on Petroleum to the former Head of State,
General Abdulsalami Abubakar, was opti-
mistic that if the bill is passed into law, for
THISDAY OIL REPORT 19
associated companies,is involved in broad
petroleum activities.It has about 100 sub-
sidiaries and 40 joint-venture companies
in which it owns 50 per cent stake.
Aramco (Saudi Arabia)
State-owned Aramco has the largest
proven crude oil reserves of 260 billion
barrels.It leads in production with 8mbpd
and operates the world's largest single
hydrocarbon network,the Master Gas
System.Its annual production of crude oil
alone is in excess of 4 billion barrels.It
manages gas fields with 253 quadrillion
scf reserves.It manages the world’s largest
oil field and the largest offshore field.
Aramco is by far the world's most prof-
itable company,according to several esti-
mates.
Petrobras (Brazil)
The company,founded in 1953 by Brazil,
was the country’s oil monopoly until 1997
when the government liberalised the sec-
tor.It has an output of over 2 million bar-
rels per day,as well as being a major dis-
tributor of oil products.Petrobras is a
world leader in the development of
advanced technology,covering deep-
water and ultra-deep water oil production.
It is in 18 nations in Africa,North America,
South America,Europe and Asia.Petrobras
is the third largest company of the
Americas,after Exxon Mobil and General
Electric.
the first time in the history of the country,
“there will be a clear-cut policy for the oil
and gas industry… It is a bill that is a prod-
uct of almost a decade of hard work that
has carried stakeholders in the industry
along. It is a bill that is a product of holistic
and audit of serious hydrocarbon terrain
all over the world”.
However, there are still questions over
how much accountability and transparen-
cy should be expected from the reformed
structure because of a seeming lack of an
institutionalised mechanism for openness.
20 THISDAY OIL REPORT
Local Discontent
Making money for foreign companies
Dependence on foreign oil companies often under-develops indigenous capacity
and denies the local economy enormous benefits, but, thankfully, Nigeria is now
fighting the cause of local content.
THE PETROLEUM Decree of 1969 (now an
Act of Parliament) is notorious on many
counts, especially for transferring ownership
of oil minerals to the Federal Government – at
the expense of the regions/states. But the Act
tried to do something good: it required that
“within 10 years of operation”, oil companies
must Nigerianise their most senior positions
up to 75 per cent and 100 per cent for other
cadres. By 1971, the Federal Government
started acquiring stakes in the International
Oil Companies (IOCs) on the suspicion that
they were reluctant to transfer skills and tech-
nology to Nigerians.
To show government’s seriousness in
empowering Nigerians for bigger participa-
tion in the petroleum sector, the military gov-
ernment set up the Petroleum Technology
Development Fund (PTDF) in 1973 with a
specific mandate: “To ensure the develop-
ment of highly skilled indigenous manpower,
through the training of Nigerian students,
graduates, professionals, technicians and
craftsmen in the fields of geology, engineer-
ing, science and management of the oil, gas
and solid minerals sectors.” But what have
solid minerals to do with petroleum technol-
ogy development? Perhaps that was one of
the indications that the government was not
too sure of what it wanted – and it was no
surprise that PTDF did not set sail until 27
years after, with nothing significant to show
as achievements to date, apart from granting
hundreds of scholarships.
The local content policy of 1969 and the set
targets of 1979 turned out to be unrealistic.
Successive governments did not show much
commitment to it. The IOCs continued to
dominate the sector, in the process recruiting
Nigerians as “casual workers” not entitled to
certain benefits such as pensions. These mea-
sures saved them costs, sure, but it has also
cost Nigeria full participation and full benefits
in the sector. Even the national oil company,
the Nigerian National Petroleum
Corporation (NNPC), established in 1977, is
still a toddler. The majority of the country’s
critical oil and gas projects are operated by
Shell Petroleum Development Company
(SPDC), which produces nearly half of
NIGERIA AND OTHER OIL-PRODUCING COUNTRIES: A COMPARATIVE STUDY> LOCAL CONTENT
3%
Various estimates of the local content of oil and
gas industry in Nigeria
90%
Local content in Algeria
Source:Nigeria Sweet Crude
Nigeria's crude oil, under joint venture (JV)
partnerships. Other JV partners are
ExxonMobil, Chevron, ConocoPhillips, Total
and Agip. But NNPC remains an onlooker.
Contents and intents
Former President Olusegun Obasanjo, to
his credit, revived the local content policy, set-
ting new targets and recording some level of
success. He directed the IOCs to Nigerianise
their contents by at least 45 per cent by 2006
and 70 per cent by 2010. Unlike in the 1970s,
however, the oil companies themselves had
started accommodating Nigerians in their top
echelon. In fact, SPDC, for the first time,
appointed a Nigerian, Basil Omiyi, as
Managing Director during Obasanjo’s
regime. Another Nigerian, Mutiu Sumonu, is
now MD.
The local content policy is not just about
appointments, however. Nigerians and
Nigerian companies are now to be involved
in a broad range of activities, including oil and
gas servicing, trading and finance. Detailed
engineering designs for all projects are to be
domiciled in Nigeria and project manage-
ment teams and procurement centres for all
projects must also be located in the country.
Fabrication and integration of all fixed plat-
forms (both offshore and onshore) weighing
up to 10,000 tonnes are to be carried out in
Nigeria. For the fixed platforms greater than
10,000 tonnes, pressure vessels and integra-
tion of the topside modules are to be carried
out in Nigeria. Fabrication of all piles, decks,
anchors, buoys, jackets, pipe racks, bridges,
flare booms and storage tanks including all
galvanising works for liquefied natural gas
and process plants are to be done in the coun-
try – same as all flow-lines and risers.
Other directives are: assembling, testing
and commissioning of all Subsea valves,
“Christmas Trees”, wellheads and system
integration tests are to be carried out in
Nigeria; all Floating Production, Storage and
Offloading (FPSO) contract packages are to
be bid on the basis of carrying out topside
integration in Nigeria; a minimum of 50 per
cent of the total tonnage of FPSO topside
modules must be fabricated in Nigeria; and
all low voltage earthing cables of 450/750 V
grade and Control, Power, Lighting Cables of
600/1000 V grade must be purchased from
Nigerian cable manufacturers.
There are about 23 items on the list of direc-
tives, including local insurance content and a
In Other Countries
Iran
The National Iranian South Oil Company
(NISOC), a subsidiary of the state-owned
National Iranian Oil Company, accounts
for 80 per cent of local oil production.
Private ownership of upstream activities
is constitutionally prohibited, but the
government allows buyback contracts:
IOCs can participate in exploration and
development through an Iranian affili-
ate.
Libya
The oil industry is run by the state-
owned National Oil Corporation (NOC).
Along with the subsidiaries, they
account for 50 per cent of the country's
oil output. IOCs, such as Repsol YPF
(Spain), Eni (Italy), OMV (Austria), and
Total (France), are also involved in explo-
ration and production.
Norway
The government of Norway holds the
provision that “all operators and service
providers must make provisions for targeted
training and understudy programmes to
maximise utilisation of Nigerian personnel in
all areas of their operations. All operators
must therefore submit detailed training plans
for each project and their operations”.
The Obasanjo government added action to
its words by adopting competitive bidding
for most of its projects. The country’s JV part-
ners were also encouraged to share knowl-
edge with their indigenous contractors
through enlightenment programmes. The
IOCs were asked to domesticate their reser-
voir management and seismic processing
projects. They are encouraged to break their
major projects into small, manageable pack-
ages so that Nigerian contractors can benefit.
The age-long habit of the foreign compa-
nies taking the whole money out of the coun-
try and leaving the local people high and dry
is expected to be broken gradually as these
measures are applied to the sector. All these
measures mean a lot for the local economy –
actually billions and billions of naira will be
ploughed back through these backward link-
ages. Radically, in 2005, the “local content
vehicle” concept was introduced into the
licensing round for oil and gas blocks. These
vehicles are aimed at fast-tracking and con-
cretising the Nigerianisation policy: Nigerian
companies would participate more in engi-
neering procurement, fabrication and other
services; development of strategic plans for
the transfer of technology; and development
of a legal framework to ensure compliance
and progress monitoring, among others.
Journey of a thousand miles
Are you seeing the doughnut or the hole?
The local content in the Nigerian oil industry
is still low, with various estimates suggesting
between 3-9 per cent. Oil accounts for virtu-
ally all of government revenues and foreign
exchange, yet contributes just about 15 per
cent to the real Gross Domestic Product
(GDP) as most of the productive activities
take place outside Nigeria. The country is just
an end-user, a consumer, as it were. The local
content policy, if it succeeds, will address this
major deficit. Thousands of jobs will be creat-
ed locally, directly and indirectly. The finan-
cial sector will be a major beneficiary as com-
panies seek local financing for billion naira
projects.
What’s the progress report? Some good
news. Engineering design, seismic, fabrica-
tion and financing now have local contents,
and in sizeable proportions, but still far too
insignificant to be regarded as a victory.
Although some local operators still complain
about the reluctance of the IOCs to fully
accommodate them, any progress at all
should be treated as progress. After all, the
previous decades yielded virtually nothing.
Nigerian companies, for the first time,
CONTINUED NEXT PAGE
major stake in the oil sector. It has 62.5
per cent stake in StatoilHydro, which
controls over 60 per cent of Norway’s oil
and gas production.The government
directly owns part of the country’s oil
production through the State Direct
Financial Interest (SDFI).The major IOCs
are big players such as ConocoPhillips,
ExxonMobil and BP are also in Norway
but, by law, in partnership with
StatoilHydro.
Venezuela
Petroleos de Venezuela S.A. (PdVSA), the
country's state-run oil and natural gas
company, took control of Venezuela’s oil
industry in 1975 when the government
nationalised the sector. In the 1990s, 22
foreign oil companies were allowed in as
part of government reforms. Venezuela
is trying to attract foreign national oil
companies, including those from China,
India, Iran, and Russia, to invest in the
sector.

NIGERIA AND OTHER OIL-PRODUCING COUNTRIES: A COMPARATIVE STUDY> LOCAL CONTENT
were given the preferential position with
the licensing round of marginal fields in
2005. The government awarded 24 such
fields to them. The fields are marginal and
are not as lucrative as the ones handled by
foreign companies, but it was no doubt a
step forward in local content development.
Over time, Nigerians are expected to devel-
op their technical and management skills in
these fields before moving on to higher
grounds. The Niger Delta Company was
the first to go into production; others soon
followed suit.
Nigerian companies – such as Oando Plc
– are now more involved in upstream activ-
ities. Oando Energy Services Limited won
competitive oilfield service contracts in
excess of $150 million in Nigeria in 2007. It
commenced its $500 million five-year
investment plan with the acquisition of two
oil drilling rigs for approximately $100 mil-
lion for use in the Niger Delta. It has also
acquired a third oil rig. Oando Exploration
and Production is the operator of two oil
blocks – OPL 278 and OPL 236. Oando is
also a Nigerian content partner with Agip
Oil on OPL 282 and has a 45 per cent inter-
est in a marginal field, OML 56. It recently
bought two offshore oil licences from Shell
for $625.7 million and is in talks with two
other foreign oil majors about buying three
more oil licences.
In the downstream sector, more Nigerian
companies are gaining prominence. Zenon,
AP Oando, Obat and Ascon are leading
indigenous players. It must be added, how-
ever, that Nigeria relies heavily on imported
products as the refineries continue to per-
form epileptically. Many Nigerian compa-
nies have been licensed to go into product
refining – a critical area foreign companies
have shied away from for ages for one rea-
son or the other.
Monitoring Progress
In a 2007 essay entitled “Inter-sectoral
Linkages and Local Content in Extractive
Industries and Beyond – The Case of São
Tomé and Príncipe”, Ulrich Klueh et al sug-
gested policy considerations based on
lessons drawn on the principles to foster
local content in the oil industry. They pro-
posed: “Accountability… the creation of a
dedicated and independent government
authority responsible for monitoring local
content in oil industry and securing that
local vendors are guaranteed the opportu-
nity to apply and compete for contracts.
International examples include the UK’s
Offshore Supplies Office (OSO) and
Norway’s Goods and Service Office (GSO),
with their qualified accounting personnel
knowledgeable of industry practices.
“Adequate metric/definition… the
development of an unambiguous definition
of what constitutes local content.
Monitoring of employment and value
added gains, as well as project expenditure
impacts on the local economy (including tax
payments) are good proxies for assessing
local content at the different phases/stages
of the projects.
“Efficiency considerations… Local con-
tent assessments and targets need to take
into account technological considerations.
Technical/capacity constraints define the
level of economic benefits that can be cap-
tured within a particular region at a particu-
lar point in time. Policymakers must realize
that, at any point in time, there may be some
areas of operation beyond the technical
reach of local vendors.
“Information dissemination… the estab-
lishment of a public outreach and analysis
office to (i) develop a registry of competent
and qualified local vendors, (ii) advise locals
on potentials for joint ventures and other
mechanisms of cooperation with foreign
companies, and (iii) support plans for local
capacity building, training, and R&D.
“Acknowledgement of spin-off bene-
fits… monitoring and public dissemination
of complementarities between the oil indus-
try and the rest of the economy. Examples
include spillover effects from oil into agri-
culture (e.g., fertilizers production) and hos-
pitality industry (e.g., hotels and entertain-
ment).”
Nigeria seems to have drawn a lot from
these lessons. The latest drive for local con-
tent may not fade out.
21
THISDAY OIL REPORT
Very Backward Integration
Why are IOCs deeply involved in downstream activities – specifically power gen-
eration and refining – in other countries but stick mainly to upstream in Nigeria?
FACT: NIGERIA, the world’s seventh largest government is already paying for the differ- tion to producing 700,000 tonnes per year
exporter of crude oil, survives on imported ence between cost and market price to mar- of paraxylene, 140,000 of benzene and
petroleum products. The refineries are not keters, no company loses money at the end 200,000 of polymer-grade propylene.
working and are grossly inadequate. The of the day. However, the biggest hole in the Initially, Saudi Aramco will own 62.5 per
four refineries – Warri, Kaduna and Port argument can be found in other member cent of Jubail, while Total will own 37.5 per
Harcourt I and II – have a combined name- countries of OPEC. Fuel prices are heavily
cent. It is planned that later, Aramco’s
plate capacity of 438,750 barrels per day, but subsidised there, even more than Nigeria shares will be reduced to 37.5 per cent,
this is purely on paper. Nobody really does, yet IOCs build and run refineries in while 25 per cent will be made available to
knows the output from these refineries at those countries. Why should Nigeria’s case the public to buy.
any point in time as they have become sub- be different? Perhaps the real reason many IOCs are
ject of political manipulations. At best, they In the course of this study, this writer wit- running away from the refinery business is
operate at half-capacity. The country contin- nessed the signing of an agreement the gestation period for the business. In the
ues to rely on product import. Incidentally, between the Saudi Arabian Oil Company United States, for instance, no new refinery
all the refineries are government owned. (Aramco) and Total in Jeddah, Saudi has been built since 1977. The strict envi-
Fact: Nigeria’s economy runs on genera- Arabia, last June, for the establishment of ronmental requirements apart, the return
tors as the country generates less than half of the Jubail Refining and Petrochemical
on investment in the best of markets is
its installed capacity of 3500 megawatts – Company. The refining will have capacity around 5 per cent per year – while cost of
even though it currently needs close to for 400,000 barrels per day – about the same building a big-size refinery is estimated at
10,000mw to achieve a semblance of stable capacity of Nigeria’s four refineries put $2 billion. There are 149 refineries in the
supply. Some estimates put the require- together. The refinery will, when inaugu- US, nearly half the number about 20 years
ments at double that figure. But for country rated in 2012, process Arabian heavy crude ago. The upstream market is already capi-
that is talking about industrialisation, no fig- for global consumption. The full-conver- tal-intensive. Maybe this explains the
ure is too much to target. However, govern- sion refinery is expected to maximise the IOCs’ non-committal attitude to the busi-
ment owns almost all the generating plants, production of diesel and jet fuels – in addi- ness in Nigeria.
mainly because of ancient monopoly laws
and partly because foreign companies,
which have the wherewithal, are not very
enthusiastic about getting involved.
For a country so rich in oil and gas, the
refining and power generation statistics are
damning. The blames for the backward can
be distributed to a range of doorsteps. One:
the government has not been enthusiastic to
open up these critical areas of the energy sec-
tor for private investment. Two: politicians
and their cronies feed fat on the inefficiencies
that are associated with public ownership of
power plants and refineries. Three: the
labour unions get irritated anytime privati-
sation is discussed because it has come to
represent downsizing. Four, and most rele-
vant to this report: the International Oil
Companies (IOCs) feel their business inter-
ests are better served if they concentrate their
energies on drilling crude oil – it would
appear they want minimum contact with
Nigeria and Nigerians as much as possible.
Their philosophy, as it were, is: take the oil
and run. Apart from Agip’s involvement in
power generation through its 450mw Kwale
plant, no IOC is active in this key sector.
The immediate past administration of
Olusegun Obasanjo tried to tackle this prob-
lem, although quite late, by emphasising
“backward integration”. For ages, Nigeria’s
premium oil blocks were given out to IOCs
without any strings attached. There was no
deliberate attempt by successive govern-
ments to take full advantage of Nigeria’s
prized assets to encourage – or even enforce
– investments in the country. But Obasanjo
came up with a rule in 2005: if you want to
get Nigeria’s oil blocks, you must also pro-
vide a comprehensive proposal on the
investment you would plough back into the
downstream sector. Top on the list were
power generation and refinery.
Deregulated excuse
The regular excuse for the lack of interest
of IOCs in the downstream sector is that it is
government regulated. Until the sector is
fully deregulated and government no longer
determines the prices of petroleum prod-
ucts, no international company will build a
refinery in Nigeria. This is also cited as the
reason why investors who have acquired
licences for refineries are reluctant to start
work. This argument, as convincing as it
sounds, is actually not fool-proof. If any-
thing, the oil companies can only enjoy pro-
tection under the subsidy regime. Since the Shell retail outlet, anywhere but Nigeria
22 THISDAY OIL REPORT NIGERIA AND OTHER OIL-PRODUCING COUNTRIES: A COMPARATIVE STUDY> INTERVIEW

Okonjo-Iweala on Nigeria
and the crude crunch
Managing Director,World Bank,Dr.Ngozi Okonjo-Iweala,is arguably Nigeria’s most respected Minister of Finance since
Chief Obafemi Awolowo.She served the country between 2003 and 2006 under ex-President Olusegun Obasanjo
CRUDE OIL, Nigeria's major source of
income, is under serious threat with the
global quest for alternative sources of
energy and President Obama’s energy
independence policy. What do you fore-
see in the next 5 to 10 years?
I am of course not an energy expert
but it is fair to say that Nigeria and other
oil-exporting countries are indeed facing
difficult times in the context of the pre-
sent global financial crisis. With global
demand down due to the deep recession
in most oil-importing countries and oil
prices hovering presently at around $40
a barrel and with the country's produc-
tion down to 1.9 mil barrels a day,
Nigeria's fiscal situation is a challenge
now and will be for as long as oil prices
are on a downward trajectory. The
developed countries and in particular,
President Obama [United States] have
made clear their desire for greater ener-
gy independence based on the develop-
ment of alternative energy sources.
Nuclear power is back in consideration
as are cleaner coal technologies. There is
increasing use of wind, solar and bioen-
ergy sources. I believe that these trends
can only accelerate in the coming five to
ten years notwithstanding lower oil
prices. As such Nigeria has to pay great
attention to this in terms of accelerating
the diversification of its economy away
from oil.
Nigeria has been talking about grow-
ing the non-oil sector for decades, but
only little progress has been made. Why
is this so? How may we overcome the
obstacles?
Nigeria has tremendous potential to
grow its non-oil sector in both tradeable
sectors such as agriculture and mining
as well as non-tradables such as real
estate and construction. But apart from
the growth of the agriculture sector, little
progress has been made in putting in
place the infrastructure and consistent
microeconomic and sectoral policies
needed to encourage private sector
investment to induce this growth. This
has largely been due to serious corrup-
tion and governance issues. Little
progress will be made as long as monies
intended to upgrade and install new
infrastructure are not directed to their
intended uses.
There are always debates on what to
do with oil windfalls - spend or save? You
advocate savings for the rainy day, but
how do we develop infrastructure with-
out taking advantage of windfalls?
Yes I advocated saving the oil windfall
for a rainy day and I am very glad I did
despite the challenges at the time with
some policymakers saying we should
spend everything because the rainy day
was already upon us. If it was raining
Okonjo-Iweala CONTINUED NEXT PAGE
NIGERIA AND OTHER OIL-PRODUCING COUNTRIES: A COMPARATIVE STUDY> INTERVIEW
Okonjo-Iweala
then in 2004-2006, then you must admit it
is pouring now and the good thing is that
the country has had a little umbrella in
the form of the excess crude account to
cushion the negative external shock of
the steep fall in oil prices. When I came
into office in July 2003, our reserves were
only $7 billion and falling. There was
nothing like excess crude savings. We put
the fiscal rule in place and budgeted at oil
prices lower than the prevailing price and
saved the difference allowing the sums to
be managed with our reserves. By the
time I left office in August 2006 reserves
were at $38 billion. Presently reserves
stand at $53 billion of which about $20
billion or so is excess crude. The excess
crude account has come in handy to
make up for the deficits state, local and
Federal Government are experiencing
due to lower oil prices. Though states are
seeing falling allocations, they would
have been much worse off if there had
been no excess crude account to draw on.
The key question now is if the global
recession lasts a couple more years and
oil prices remain low, how far will the
excess crude stretch at present levels of
expenditure? All levels of government
will have to use resources more efficient-
ly and prioritise. It may even be neces-
sary to scale back or postpone less impor-
tant expenditures. In doing this, care
should be taken not to scale back expen-
ditures related to the provision of basic
services for ordinary people. In particu-
lar, education-and health-related expen-
ditures should be maintained. With
regard to using excess crude to finance
infrastructure, this can be done and in
fact monies from the excess crude
account were already used to finance
some of the power sector investments.
Infrastructure finance is a good use of
these monies provided the investments
are made to benefit the population.
You're known not to favour fuel sub-
sidy for several reasons. However, in the
“I believe the key issue with
the private refineries like
with any other business is
that they would like to
charge a price that will
enable them cover their
costs and make some
amount of profit on their
venture...”
course of my research, I discovered that lenient deal from the creditors, do you
virtually every OPEC member subsidises now have a sense of "thank God we did it"
local pricing of petroleum products. Why in the face of this global financial crisis
do you think Nigeria's case should be dif- and crude oil crunch? What scenario
ferent? would have emerged by now if we hadn't
You are wrong to say I do not favour paid then?
fuel subsidy. I have no problem with It is magnanimous of you to admit
subsidies be they for fuel or fertilizer or that, as a critic of the debt deal at the
other goods provided the subsidies go to time, you can now see that this may have
those who are less well off in our society. been a very good thing that we did for
What happens so often in our country is the country and we got an unprecen-
that we say we are subsidising something dented deal. Nigeria got a 60 per cent
for the benefit of those of our population write-off of its debt a whopping $18 bil-
who are poorer but if you do proper lion write-off – at a time of high oil
research to see who is benefitting you prices. It took a great deal of work –
will see that the very poor among us do blood, sweat and tears to do it. If you
not benefit. So the issue is how do we had hired consultants to do this work
design a subsidy programme that will they would have charged the country a
properly reach intended beneficiaries? great deal of money. Yet those of us who
We need to be able to design "smart sub- worked on it did it as part of our normal
sidies". assignment looking at the benefit it
One issue with building private refiner- would bring the country. This deal
ies in Nigeria is that licensees are demoti- enabled us to bring the external debt
vated by regulated pricing. But since gov- down from $35 billion to $5 billion at the
ernment already pays the subsidies - time I left government and it is even
which means refineries can indeed recov- slightly lower today. I can tell you that
er their costs through such payments - do even now, highly laced officials among
you think such fears are valid? whom I move in international circles
I believe the key issue with the private cannot quite believe that their countries
refineries like with any other business is accorded Nigeria this debt deal at a time
that they would like to charge a price that when the country was experiencing high
will enable them cover their costs and oil prices. Can you imagine just how dif-
make some amount of profit on their ven- ficult it would have been now with such
ture. If government wants a regulated low prices of oil, and diminished income
price at the pump for refined products for the country if we had to take $3 bil-
which does not cover their costs then lion a year to pay our debt service? And
government will need to sit with the if we said we wouldn’t pay we would
refiners and agree on a cost plus arrange- only have accumulated more debt with
ment that pays them a reasonable margin increased penalties and interest. By now
and then make it up to them for those our debt could have ballooned to $50 bil-
unrecovered costs. Such subsidies as you lion or more leaving a heavy load for our
say – if they receive the payments – children to deal with. I am very thankful
should enable them to continue operat- to God that despite the criticism from
ing. some quarters, we did our best and
You were at the forefront of the debt many Nigerians, including from the
relief Nigeria got from the Paris Club. National Assembly, saw the wisdom of
Although some critics (including me) this act and supported us. It is good we
argued that we should have got a more pressed ahead and got the deal done
THISDAY OIL REPORT 23
because it is one of the most critical
things that is helping our economy
today. It is one of the successes of
reforms that people in and out of the
country cite today! It opened the door to
investors, it lifted a burden from the
neck of Nigerians, it left us space to
finance activities in our budget other
than debt payment. Now at this time of
global crisis it has given us more budget
space to focus on essentials. I hope
Nigerians never forget the freedom that
lifting the debt burden has brought us.
We must never incur such high levels of
debt again.
If you were to see President Yar'Adua
today, what suggestions would you offer
to him on the way forward as crude oil
prices continue to impact negatively on
our fortunes?
My answer could fill several pages of
an essay. So I cannot do it justice
here–maybe in another forum.
Essentially I would to say to Mr.
President: act on those things within
your control so as to stabilise the econo-
my, remove uncertainty and point to
clear and consistent policy directions.
Make clear how you are going to finance
the budget deficit; be clear and transpar-
ent on the status of the financial sector
and how any issues arising would be
dealt with. Give clear indications on the
direction of the exchange rate and show
credibility in how you intend to manage
it. Use the little fiscal space the country
has for counter cyclical measures financ-
ing infrastructure development and
other employment generating activities.
Focus also on school feeding, vaccination
programmes, and other such activities
benefitting our children and our preg-
nant and nursing mothers because we
need to support the most vulnerable in
our society at this time of crisis. Above
all, begin to seriously put in place mea-
sures to diversify our economy away
from oil.
24 THISDAY OIL REPORT
HYPOTHETICAL QUESTION: “If the
world finally finds a feasible alternative
to oil, what would become of Nigeria’s
economy?” Answer: “God forbid, the
world will always need crude oil; noth-
ing can replace it, no matter how hard the
world tries.”
It may not sound like a convincing
answer, but that is the unspoken
response in the minds of the political
managers of Nigeria who cannot just
contemplate a future without oil. As far
as they are concerned, there must be
demand for crude oil, period.
It needs repeating: oil is the soul and
spirit of Nigeria. Take away the oil earn-
ings and the country will go prostrate. As
much as 95 per cent of the country’s
exports are oil and gas. Government rev-
enues are almost entirely from oil. Yet, it
is not that the country lacks other sources
of livelihood, but the easy flow of
petrodollars has effectively tamed the
Giant of Africa and buried its potential.
Take agriculture, for instance. It is com-
mon knowledge that a delegation from
Malaysia, on a visit to Nigeria in the
1960s for an agricultural workshop, took
palm seedlings back home and today the
country is the world’s leading palm oil
producer while Nigeria, which used to
produce a third of world’s total output in
1962, has disappeared from the palm
radar – because it found oil wealth.
The country is also not short of good
tourism potentials. Neighbouring coun-
tries such as Ghana, Gambia and Cote
d’Ivoire, and other African countries
such as Kenya, Morocco and Mauritius,
have developed their tourism to the level
of foreign exchange earners.
Above all, the human resource base is
grossly underdeveloped. The public edu-
cation system in Nigeria has suffered
years of neglect. Inadequate infrastruc-
ture, antiquated teaching methods, insuf-
ficient teaching staff often lacking in
motivation and probably needing to be
taught themselves, and inept administra-
tion have all conspired to stunt the devel-
opment of the human resource. Private
schools, which are very expensive, are
stepping into the gap. Public investment
in education is also on the increase – the
Rivers State government, for instance,
has declared an emergency in the sector
and voted over N70 billion to it between
2008-2009.
Alternatives to oil
While many countries like Nigeria are
stuck to oil and would likely experience
terrible consequences if demand and
prices were to fall in catastrophic propor-
tions, there is quite a number of countries
that have taken a long-term view and
diversified their economies away from
oil. Before the world finds alternatives to
oil, they too are developing alternatives
to oil wealth. Experience shows that a
period of sustained high oil prices is usu-
ally followed by a lull – sometimes brief,
sometimes prolonged. The volatility of
crude oil prices is always a warning to
oil-dependent countries not to box them-
selves into the petrodollar corner.
Angola, for instance, is looking far into
the future. Having fought a bitter war for
ages, the country’s infrastructure was in
ruins. However, the oil boom has
brought about a transformation in the
country. The government has launched a
massive project to transform the capital
city, Luanda, into a foremost tourist des-
tination in Africa. Public parks and walk-
ways are being created to modernise the
city. New hotels are springing up in
preparation for the expected boom: five-
star Intercontinental Hotel and Casino,
Hotel Sana, Hotel Luanda, and Skina VIP
Inn. In 2007, Angola’s hotel and tourism
business reportedly generated $341 mil-
lion income – more than twice the figure
the previous year and an indication that
the “future city” plans are on course. No
surprises then that Luanda ambitiously
sees itself as “the new Dubai”.
Dubai has long transformed itself from
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NIGERIA AND OTHER OIL-PRODUCING COUNTRIES: A COMPARATIVE STUDY> AFTERWORDS
A future without oil?
What does the future hold for Nigeria if crude oil goes out of fashion?
African Dubai... coming up in Angola
a mono-product economy and has
become the model of what to do with oil
riches. The emirate is one of the seven that
make up the federation called United
Arab Emirates (UAE). From an emirate
that used to depend wholly on oil income,
the other sectors of the economy have
been developed to such as extent that oil
now accounts for about 6 per cent of the
city’s income. Its oil wealth has not
declined, but other sectors have overtaken
it. Recent figures show that real estate and
construction (22.6 per cent), trade (16 per
cent), entrepôt (15 per cent) and financial
services (11 per cent) now outstrip oil. Its
enviable status as a global business hub
has attracted the high and the mighty
from all over the world – including
Nigerian politicians and public officers
who, after failing to develop their own
country with the oil wealth, have now
found a pastime in buying up property in
Dubai. They regularly escape to the city to
get some relief from the lack of electricity
and basic infrastructure in Nigeria.
About the same time Nigeria started its
own aluminium project, Dubai
Aluminium (Dubal) was established.
Dubal is one of the world’s leading pro-
ducers today while its Nigerian counter-
parts are still groping in the dark. Dubal
is reputed as a “major supplier of
foundry alloy to the Far East's automo-
tive industry, a significant supplier of
extrusion billet for construction markets
and a preferred supplier of high purity
primary aluminium for use in the elec-
tronics and aerospace industries”,
according to the company. “From a rela-
tively small smelter operation utilizing
three potlines which produced 136,000
tonnes of aluminium per annum in
1979, DUBAL has expanded its opera-
tions to encompass eight potlines with
the capacity to produce more than
950,000 tonnes of quality hot metal alu-
minium each year for clients in more
than 44 different countries.” Hot metal
volumes were expected to approximate
one million tonnes by the end of 2008. It
employs about 4000 workers.
Dubai’s neighbour Qatar is already
devising its own way out of the oil trap.
It has one of the world’s largest gas
reserves, but it is looking into the future.
Tourism and trade, the country has decid-
ed, will be the future. Qatar Airways is
leading the way. Doha, the capital city, is
primed to become the hub in the Gulf
Region. The new Doha International
Airport is being built as part of the vision
of placing tiny Qatar as a giant on the
world map of travel, trade and tourism.
Sixty per cent of the airport is built on a
land reclaimed from the sea. The airport
will open in 2010 with an initial capacity
of 24 million passengers a year, rising to
50 million during the final development
phase from 2015. The airport will have a
total of 80 contact gates, including 25,000
square metres devoted to retail space,
comfortable lounges and multi-storey
short-term and long-term parking facili-
ties. The complex will house a 100-room
hotel within the terminal. Other facilities
include a free trade zone and a business
park, and a suspended monorail to trans-
port passengers through the terminal.
The airport is obviously aimed at displac-
ing Dubai International Airport as the
hub in the region.
Nigeria’s slippery oil
Resource curse theorists will see
Nigeria as the ultimate case study in the
damage oil wealth can do to a country,
but they would be shocked to discover
the extent of ruin on the country. Whereas
other oil-dependent countries are gener-
ally regarded as lacking in liberal democ-
racy, Nigeria’s case is compounded by
the state of infrastructure. Other coun-
tries, democratic or not, boast of excellent
road network, electricity and a booming
petrochemical industry – quite unlike
Nigeria whose refineries do not work,
necessitating massive importation of
petroleum products for years. Nigeria
desperately needs functioning trans-
portation systems, good roads and stable
electricity to stimulate the economy for
greater performance. The country has
clearly not fully utilised its oil wealth to
lay a solid foundation for economic
diversification.
A future without oil does not mean oil
will go out of existence. There will always
be oil. In all the talk about “alternative
energy”, the reality remains that crude oil
is still the king. Oil makes up about 40 per
cent of the world’s energy use and 96 per
cent of its transportation energy – air,
land and sea. Paris-based International
Energy Agency projects that “distillates
(jet fuel, kerosene, diesel, and other
gasoil) will remain the main growth dri-
vers of world oil demand”. John Hess of
Hess Corporation, at a presentation at
Harvard University recently, said oil
would still be a major factor in interna-
tional trade and relations. He said reces-
sion would affect demand, but only for a
while since “households spend only 6 per
cent of their income on energy – so it’s not
a major factor”. Moreover, falling crude
prices also make alternatives more expen-
sive.
The world cannot do without crude oil
in the foreseeable future. What is not sure
is the price. It has sold for as high as $147
a barrel and could still dip to $20, or $10
or even less. The volatility places mono-
product Nigeria at the constant risk of
running a very uncertain economy where
budgets are tied to crude oil prices. All
hope is not lost for the country. A
rebound in prices could yet offer the
country another opportunity of effective
management and forward-thinking, like
Dubai and Doha – not forgetting Angola,
right at Nigeria’s backyard.