Why Does the Richest Country in Africa Continue to Struggle to Manage Its Fossil Fuel Industry?

Nigeria’s Oil and Gas Industry

Nigeria is the richest and most populous nation in Africa. Much of Nigeria’s wealth, economic development, and population growth have been fueled by the oil-rich enclaves of the Niger Delta. According to the U.S. Energy information Administration, Nigeria is the largest oil producer in Africa and also the fourth-largest exporter of natural gas in the world. Oil reserve estimates published in the Oil & Gas Journal (OGJ) convey that Nigeria had an estimated 37 billion barrels of proven oil reserves at the end of 2015, which is the second-largest quantity of proven reserves in Africa after Libya (EIA, 2016). While Nigeria is well-endowed with massive fossil fuel reserves, the country has struggled to address increasing levels of violence, rampant government corruption, and toxic levels of environmental degradation.

Nigeria’s federal government relies on oil revenue to fuel 90 percent of the country’s budget (Adunbi, 2015). The oil-rich region of Niger Delta, situated in the southern part of Nigeria, is where the vast majority of the country’s fossil fuel resources are located. Nine out of Nigeria’s thirty-six states are involved in oil and gas exploration in this region. Moreover, a wide array of ethnic groups, including the Ijaws, Itsekiris, Ikwerres, Urhobos, Ibibio, Efik, Igbos, Isokos and Yorùbás, also inhabit this oil-rich region. A great deal of international critics have reprimanded Nigerian government officials for failing to ensure that a portion of the oil wealth is funneled into the local communities to address environmental deterioration and poor living conditions that have been exacerbated by oil and gas exploration in the region.

A Region in Conflict

In recent years, Nigeria’s Niger Delta region has become riddled with conflict. Local insurgents have started to attack the country’s oil and gas infrastructure in an effort to take control of the region’s fossil fuels. As a result of these attacks, Nigeria’s total revenue from oil exports has been falling consistently since 2012. As multinational oil companies and the Nigerian government have started to lose control of the country’s fossil fuel industry, oil wealth has started to evaporate. Johnson Agbonayinma, a lawmaker in the Nigerian House of Representatives, claims that between 2011 and 2014, nearly $17 billion worth of oil and liquefied natural gas was stolen from the government and the nation’s oil producers (Stein, 2016). The allegations point to over 727,000 metric tons of liquified national gas and 58 million barrels of oil being illegally exported from the country (Wallace, 2016).

OPEC Membership

Nigeria became a member of the Organization of the Petroleum Exporting Countries (OPEC) in 1971. After nearly a half of a century as a member of OPEC, some scholars, economists, and energy analysts have questioned whether OPEC membership has benefited Nigeria. Oil was first discovered in Nigeria in 1956. Oil production began only two years after the initial discovery. By the late 1960s and early 1970s, Nigerian oil production had reached about two million barrels of crude oil a day (Pyagbara, 2003). While OPEC was first formed in 1960, Nigeria didn’t become an official member until the rise of Nigeria’s military junta led by General Yakubu Gowon, when officials finally decided that joining OPEC would safeguard the country’s oil production.

During the first decade of being an official member nation of OPEC, Nigeria experienced profound growth in its fossil fuel industry. Following the years after the 1973 Arab Oil Embargo, the country’s leaders welcomed vast sums of new fossil fuel revenue after oil prices skyrocketed higher. In 1977, the Nigerian National Petroleum Corporation (NNPC) was developed to manage the regulation of the country’s fossil fuel industry, with a secondary responsibility to oversee upstream and downstream oil and gas infrastructure developments. With the oversight of the NNPC and the support of the rest of OPEC’s member nations, oil and gas production in Nigeria ran relatively smoothly prior to the mid-2000s, when oil theft, political instability, and environmental degradation started to adversely impact the industry as a whole.

The Rise of Instability

The rise of instability in the Niger Delta has critically damaged the oil industry and crippled the country’s economy. Oil and gas pipeline vandalism has resulted in a massive number of oil leaks and has forced production shutdowns. In recent decades, the Movement for the Emancipation of the Niger Delta has been one of the main militant groups that has attacked oil and gas infrastructure as a political objective and claim to oil revenue. Increasing security concerns have dramatically increased the cost of oil and gas production in a time when oil prices have already been plummeting. Many oil service firms have pulled out of Nigeria altogether due to the instability and difficulties associated with conducting business in Nigeria.

In addition to organized groups like the Movement for the Emancipation of the Niger Delta that have an objective to sabotage the country’s oil industry, oil theft in Nigeria has also become a complex theft and trade business that has involved numerous high-level organized crime syndicates. These crime syndicates often include high-ranking government officials, international organizations, security personnel, and even local communities.

Oil is stolen from all levels of Nigerian production sites, including refineries, storage tanks, oil barges, pipelines, and even direct drilling operations. Most of the theft occurs in small operations where a pipeline is tapped, and oil is siphoned into small tanks or boats. Thousands of these small operations have resulted in widespread oil leaks and high levels of water pollution. The United Nations Environment Program estimates that it would take 25 to 30 years to address the environmental damage and clean up the oil and gas industry operations (EIA, 2016).

Falling Oil Production

It is challenging to estimate the exact toll that the oil theft has had on the Nigerian oil industry. The U.S. Energy information Administration estimates that around 400,000 barrels of oil are stolen each day. However, this estimate does not account for the massive quantity of oil that is continuously spilled throughout the natural environment. As a result of the militant sabotaging campaigns and the general theft of oil, official oil production counts in Nigeria have fallen to around 1.5 barrels per day (Stein, 2016).

Chevron Claims

Nigerian President Muhammadu Buhari casts some of the petroleum industry problems directly on the international oil companies. A series of government lawsuits claim that companies like Chevron and Eni have failed to declare billions of dollars’ worth of oil and gas exports, which essentially has robbed the Nigerian government of oil and gas revenue. While international oil companies have become embroiled in the fallacies of the Nigerian oil and gas industry, some companies continue to publish shareholder newsletters and advertising campaigns that highlight the success of the African oil and gas industry. One such publication from Chevron highlights how the oil company continues to bolster African economies.

“In over 50 African nations, we’re creating new opportunities and building lasting relationships while working in the energy industry. And, in the next five years, Chevron and our partners are going even further. We’re investing an additional $20 billion in energy-related projects to help support Africa’s economies and develop its people. Today, over 90 percent of our employees in Africa are Africans. For nearly 100 years, we’ve been honored to help turn promise into progress for Africa. And we’ll be there in years to come, more committed than ever” (Adunbi, 2015). While Chevron has failed to officially acknowledge the challenges of oil and gas development in Nigeria, executives from Royal Dutch Shell have been much more candid about the issues that are hindering oil and gas production in Nigeria.

Royal Dutch Shell’s Take

In a 2012 panel discussion hosted by the James M. Jeffords Center’s Institute for Environmental Diplomacy and Security and the Vermont Council on World Affairs, Royal Dutch Shell’s Senior Manager of International Operations revealed some of the real challenges experienced in Nigeria. Prior to joining Royal Dutch Shell, Olav Ljøsne was a diplomat at Norwegian Embassies in Iraq, Saudi Arabia, Iran, and also with the United Nations. While a significant percentage of Royal Dutch Shell’s oil revenues are funneled back to the Nigerian government through taxation, Ljøsne insisted that his company didn’t contribute money toward political campaigns and has held an overall policy to not interfere in domestic politics, no matter how challenging they may be. Despite these assertations, Royal Dutch Shell has been heavily involved in a court battle alleging $1.1 billion in bribes paid to Nigerian government officials to secure lucrative off-shore oil and gas drilling rights (Cohen, 2019).

When asked about the complications and safety issues with oil extraction in Nigeria, Ljøsne said that Royal Dutch Shell’s annual five-billion-dollar loss as a consequence of oil theft is by far the most severe problem because it results in oil spills and violence. He stated that around 250,000 barrels of oil are lost or stolen from Shell’s daily production of four million barrels. Moreover, he declared that it would be impossible to provide security for the entire system of pipelines and extraction rigs in a region about the size of Portugal. When asked about Royal Dutch Shell’s economic contributions to Nigeria, Ljøsne made several key points about how Shell employs over 25,000 people and has awarded over 17,000 scholarships to Nigerian college students.

Socioeconomic Decline

As the challenges of oil and gas production in Nigeria have been amplified in recent years, many of the country’s political and economic indicators have worsened. Africa’s most populated country now also hosts the world’s worst performing stock market and the most people living in what the World Bank has labeled as ‘extreme poverty,’ with upwards of 87 million Nigerians living on less than $1.90 each day (Cohen, 2019).

While Nigerian President Muhammadu Buhari has vowed to turn around his country’s economy by addressing the disastrous oil and gas industry, government corruption has continued to plague the economy. When Buhari first became the country’s leader, unemployment hovered around eight percent. However, by 2019, unemployment ballooned to 23 percent. Moreover, as a result of the damage inflicted upon the oil and gas industry, Nigeria has needed to import $5.8 billion worth of refined petroleum products since 2017, despite holding one of the largest reserves of oil in Africa.

The Need for Foreign Investment

Foreign investment is needed to revitalize the Nigerian oil and gas industry. Analysis conducted by Royal Dutch Shell conveys that only 25 percent of the country’s oil and gas reserves are being utilized (Cohen, 2019). In order to make full use of the country’s fossil fuel reserves, some Nigerian political leaders have called for energy sector privatization to effectively attract direct foreign investment.

Unfortunately, the militant instability has been one of the main forces that has prevented foreign investors from pumping new funds into the Nigerian economy. Existing Nigerian oil refineries have the ability to process 500,000 barrels of oil per day. However, according to data collected in October 2018, the country’s refineries have only been utilizing around 11 percent of their total capacity. While Nigeria currently struggles to keep its oil and gas industry afloat, increased foreign investment could make for an attractive business opportunity in the future.

Sources

Adunbi, O. (2015). “Oil Wealth and Insurgency in Nigeria.” Indiana University Press.

Cohen, A. (2019). “Will President Buhari Rescue Nigeria’s Oil and Gas Sector?” Forbes.

EIA. (2016). “Nigeria.” U.S. Energy Information Administration.

Ogunnoiki, A. (2019). “Nigeria’s Membership of the Organization of the Petroleum Exporting Countries (OPEC): Weighing the Cost and Benefit.” African Journal of Social Sciences and Humanities Research: Volume 1, Issue 2, (pp. 39-46).

Pirani, S. (2018). “Burning Up: A Global History of Fossil Fuel Consumption.” Pluto Press: London.

Pyagbara, S. (2003). “The Ogoni of Nigeria: Oil and Exploitation.” Minority Rights Group International: Micro Study.

Stein, C. (2016). “Nigeria doesn’t know exactly how much oil it produces, but is pretty sure $17 billion is missing.” Quartz Africa.

Wallace, P. (2016). “Nigerian Lawmakers to Probe Claim $17 Billion of Oil Stolen.” Bloomberg.