Nigeria’s oil machine creaks 64 years after

After 64 years of independence and over six decades of oil exploration, crude oil accounts for less than 10 percent of Nigeria’s GDP but represents about 90 percent of foreign exchange earnings and more than half of government revenue.

Endowed with some of the world’s biggest proven oil reserves of 37 billion barrels, Nigeria had the potential to break into the global stage to take an active position in decisions on international energy demand and supply issues alongside most of the world’s biggest oil producers.

Nigeria and the Organization of the Petroleum Exporting Countries (OPEC) had collectively agreed on how much oil to produce, with a view to exerting considerable influence on the global market price of oil and, understandably, keep it relatively high in order to maximise profitability.

In 1973, the cartel was able to influence an oil boom which saw prices quadruple from $3 per barrel to $12 per barrel.

Also, between 2006 and 2009, the price of oil went from $74.59 to $109.25. Again, from 2010 to 2013, the price of oil rose from $84.24 to $100.95.

Life after oil

During these boom periods, most oil-producing countries ran successful economies and also learned not to put all their eggs in one basket by intensifying plans for life beyond crude oil, a point Africa’s biggest oil-producing country missed.

For instance, Saudi Arabia, the world’s biggest oil exporter, took full advantage of the sustained rising oil prices to build new cities. The projects were designed to burnish the country’s image, develop a non-oil economy and generate enough employment to maintain social stability.

For the UAE, building an economy less dependent on the ups and downs of the price of oil, but with a skilled workforce in many different industries, is beyond lip service. The country has a development plan for the next 50 years after 2021 called “2020: Towards the next 50.”

The plan aims to strengthen the country’s investment in future generations with a focus on advanced technology, relying less on oil by diversifying exports and imports, enhancing cohesion in societies, improving the productivity of the national economy and building on Emirati values for the benefit of future generations.

In Norway, the government viewed oil revenue not as a source for immediate squandering but as a “transformation of wealth, from a natural resource to financial wealth,” with consideration for the future by upholding an ethical obligation to share oil wealth with future generations.

Nigeria is different

For Nigeria, the narration is different. Policy missteps, wasteful spending and an inability to diversify away from petrol dollars or build a life after oil plan have restricted the country’s economy from attaining its full potential and have rendered it fully susceptible to the renowned “resource curse.”

“No doubt, IOC divestments have created opportunities for local operators and service providers. However, weak governance eventually stifles everything. The government has a huge responsibility to catalyse things, drive efficiency, and sustain it so that the Nigerian oil and gas industry can thrive,” said Dimeji Bassir, CEO, Ofserv told Africa Energy Magazine.

Despite producing oil in commercial quantities for more than five decades, Nigeria’s oil production has not exceeded, in recent tyimes, the 2.3 million barrels a day achieved in 1979. Its oil output was insufficient to spark a Middle Eastern-style economic miracle back then.

“Since the early days of exploration in the Niger Delta region, Nigeria has faced challenges of crude oil theft and pipeline vandalism, leading to disruptions in production,” analysts at Asset & Resource Management Company Limited (ARM) Group said in their 2024 report.

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They added, “These issues have significantly impacted Nigeria’s ability to produce crude oil to its maximum potential, resulting in consecutive contractions in the sector’s growth rate.”

Recent modest gains such as the passage of the Petroleum Industry Act (PIA), rising indigenous operators and the advent of modular refineries have been stunted by an inefficient national oil company, loss-making refineries, and declining foreign direct investment (FDI).

“Nigeria’s refining capacity, although substantial, has been hindered by outdated infrastructure and mismanagement,” Analysts at ARM said.

They added, “Recent efforts to establish modular refineries have increased refining capacity, but it still falls short of meeting domestic demand.”

Rot in NNPC

Analysts said deep scrutiny of Nigeria’s national oil company is the starting point in enabling the country’s oil and gas resources to deliver maximum value for its people.

“Nigeria is a volatile country, and our oil and gas industry does not have a good reputation internationally, making it difficult to raise capital to develop greenfield projects. Refining is the newest of the different upstream, midstream, and downstream sectors in the country, and while dealing with being a pioneer, refineries in Nigeria have had great difficulties in securing feedstock,” said Michael Osime, chairman of AIPCC Energy.

The NNPC, as the country’s oil firm, is at the centre of the chaos. Entrusted with 445,000 barrels of the country’s share of oil output from various contracts with local and international oil partners, the company has over the years turned to swapping crude for refined products because it could not maintain its refineries.

When the company began the opaque oil swaps in 2010, its refineries were working at only around 20 percent of capacity. The next year, banks unwilling to finance more open account imports that were at a deficit of over $3 billion forced the government to start granting waivers to marketers, ushering in the era of fraudulent petrol subsidies.

“By looking at successful oil companies like Shell and Exxon Mobil, Nigeria can glean valuable lessons in operational excellence. These companies prioritise efficiency, innovation, and sustainability, setting standards that NNPC and other local players should aspire to meet,” a senior oil executive told BusinessDay.

He added, “For instance, embracing technology in exploration and production can lead to lower costs and reduced environmental impact, making Nigeria’s oil sector more sustainable in the long term,”

Also requiring cleanup is NNPC operating models. It uses Joint Venture Agreements with local and international oil companies to produce in onshore and shallow-water oil wells. It owns 60 percent of benefits in these agreements but often fails to contribute its share of costs, leading to what is known as cash call arrears in the industry. However, it recently paid $2.44bn cash call obligations to multinational oil companies which are its joint-venture partners.

Most of these fields are troubled by sabotage and local community issues, forcing its multinational partners to opt out. Under the Nigerian law, they are required to decommission these fields – essentially leaving them the way they met them environmentally – but the costs are enormous. So they found a creative solution by selling their stake to local oil companies.

But NNPC has kicked against this arrangement. Shell, ExxonMobil and recently, ENI, have struggled to exit stakes in onshore assets.

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“If we examine the production figures, with about 1.3 million bpd, excluding 600,000 bpd from deepwater, we are left with only 700,000 bpd from onshore operations. This is a significant decline from the previous level of 2 million bpd,” Austin Avuru, executive chairman, A.A Holdings told Africa Energy 2024 report.

He added, “As these IOC transactions settle and independents take charge, I anticipate a surge in new investments by these independent companies. It is conceivable that onshore and shallow water production could reach 4.5 million bpd, possibly in the near term.”

Apart from upstream, analysts at ARM said Nigeria’s downstream sector faces challenges, including mispriced products, security concerns, and dilapidated infrastructure, despite being the 13th largest crude oil producer in the world.

“The sector grapples with various challenges, including inadequate supply chain, security concerns around pipelines, inconsistent supply due to vandalism, outdated pipeline infrastructure, malfunctioning refineries, and logistics challenges,” Analysts at ARM said.

The nation now has Dangote Petroleum Refinery and it is being looked upon to change the Nigerian petrol refining outlook.