Today, all signs indicate that Nigeria’s petroleum sector is burdened by market and governance failures with the possibilities of things getting worse than they are if urgent reforms are not taken, writes Chineme Okafor.
In September 2016, just a little over a year after President Muhammadu Buhari assumed office and at a time Nigeria’s oil production was greatly challenged by political, governance and market issues, an agency of the federal government – the Nigeria Extractive Industries Transparency Initiative (NEITI) released a policy paper titled: ‘the urgency of a new petroleum sector law,’ and stressed the need to reform the oil industry.
At that time, Nigeria’s oil output was about 1.805 million barrels a day (mbd), down from the 2.127mbd which was the average production in 2015 when Buhari’s government took off in May.
Reports from NEITI had indicated that the productivity level of the country’s oil industry was declining and that reforms were seriously needed.
Besides the reports from NEITI, the Petroleum Products and Pricing and Regulatory Agency (PPPRA), had also disclosed that between 2006 and 2016, Nigeria had spent over N8.97 trillion to subsidise petrol consumption by its citizens under the Petroleum Support Fund (PSF) scheme.
By implication, this meant that because Nigeria had consistently failed to refine the petrol consumed by its citizens, the country spent that much to import and sell the product at rates ordered by the government.
Nonetheless, the NEITI 2016 audit report showed in its assessment that Nigeria’s crude oil production continued to drop between 2012 and 2016, just the same way revenue accrued to the federation from oil did.
For instance, NEITI stated then that the total crude oil production in 2016 was 659,137 million barrels (mbbls), which was less than 2015 production figure of 776,668mbbls by 117,531mbbl, thus representing a 15.13 per cent drop.
With regards to the production decline, it added: “There has been a steady decline from 2012 to 2016, with the sharpest drop occurring in 2015 and 2016. Similarly, total crude oil lifting in 2016 dropped by 112,280mbbls from 780,429mbbls in 2015 to 668,148mbbls in 2016, representing a 14.39 per cent decrease.”
On the revenue end, the audit report had shown that oil incomes to Nigeria in 2012 was $62.94 billion, which fell to $58.08 billion in 2013, and further down to $54.56 billion; $24.79 billion and $17.05 billion in 2014, 2015 and 2016 respectively, to suggest that the sector which kept Nigeria running was under immense threat, and needed some adjustments.
Like Venezuela, Nigeria looks unconcerned
Although no new reports on the status of Nigeria’s oil industry have been produced by the NEITI, activities in the industry in the last two years suggest the situation hasn’t changed. Even data from the Nigerian National Petroleum Corporation (NNPC) suggest that the sector is only but managing to hold up.
But with the obvious threats, and the option of halting its grim impacts with reforms which have been flaunted for years by different governments, Nigeria like its fellow Organisation of Petroleum Exporting Countries (OPEC) member – Venezuela, stands unworried about what could happen. The country’s president, Buhari, even ignored these threats when in 2018, he held back his signature on a vital reform bill which experts believed could have kicked off the reform trail.
In context, the troubles with the oil industry in Nigeria and Venezuela do not look different, especially when considered on the back of the lack of or inadequate investment through market and governance reforms, both of which have shortened their efficiencies.
While for Venezuela, its oil industry has reportedly been in a nose-dive since its government took retrogressive actions that pulled off investments, which saw its output in recent years fall from 2.4mbd in 2015 to only 1.34mbd at the end of 2018, Nigeria, on the other hand has elected to continue to run its oil industry with a 1969 law experts consider archaic and unfit for purpose in a sector that has evolved over decades.
But by choosing to continue with the 1969 Petroleum Act, and delaying reforms through the Petroleum Industry Bills (PIB), the NEITI in its policy brief had clarified that the country was at the losing end when compared with what she had lost and continues to lose to market and governance failures associated to the old law and other ineffectual supplementary legislations.
The urgency of reform
Just like most industry experts, the NEITI explained that there was need for reforms in Nigeria’s oil sector.
It had explained: “The process of enacting a new law for Nigeria’s petroleum sector has gone on for far too long, and at enormous costs to the country. More urgency, more clarity and better coordination are needed.”
The agency further noted that the failure of Nigeria to pass an over-arching law for her petroleum sector after repeated attempts had continued to accumulate huge costs to it, and estimated that more than $200 billion must have been lost by the country to such failure.
Hinting that governance deficiencies have been prolific in Nigeria’s oil sector, NEITI stated: “In the 16 years the process of reforms commenced, and in eight years since the PIB was first drafted, there was no question that the petroleum industry was in desperate need of regulatory reforms.”
“Some of the reasons like imprecise rules, excessive regulatory discretion, and the fusion of regulatory, policy and operator roles were first-order problems which in turn created second order causes.
“Others like corruption, lack of transparency and accountability were consequences in a chain of ripple effects, leading ultimately to a severely underperforming economy, loss of benefits to the country, and a largely impoverished population,” it noted.
Furthermore, it stated that the PIB which was later separated into four – Petroleum Industry Governance Bill (PIGB); Petroleum Industry Host Community Bill (PIHCB); Petroleum Industry Administration Bill (PIAB) and Petroleum Industry Fiscal Bill (PIFB), by the National Assembly for ease of passage had suffered repeated setbacks due largely to disagreements among stakeholders.
Some of these disagreements which would eventually feature in Buhari’s rejection of the legislated PIGB the National Assembly sent to him in 2018 to assent and pave way for reforms in the sector, centered mostly on regulatory framework which included the power of the minister petroleum; ownership and control of the resources; host community benefits; environmental concerns; as well as fiscal regime.
The PIBs, routes out of the Venezuela scenario
Even though Buhari in 2018 refused to set off the process of reforming the sector’s governance framework by withholding his assent to the PIGB, industry experts believe the bill and the three others yet to be passed by the National Assembly remained Nigeria’s best shot at avoiding continuous deterioration of its oil industry.
For instance, the NEITI’s policy brief stated that attempts at capturing the economic losses of Nigeria to the lack of reforms in a single figure was almost impossible given the scale of effects and size of the multiplier.
NEITI had explained that stretching back to the period before the life of the PIB, the country’s oil sector had continued to deteriorate largely due to the fact that the laws that govern it are either not sufficient for effective regulation of the sector, or too outdated to be relevant in today’s global energy environment.
“For instance the Petroleum Act (1969) was enacted when the country’s economy revolved less around oil and when the global oil market was less competitive than today’s. Yet the country has failed to enact laws to adapt to the changing realities in the sector locally and internationally.
“Relying on rules and methods that were crafted for the market as it was four decades ago is not only a wrong choice, it is a very costly one in reality. Inevitably, the cost of failure of policy and regulation to adapt as the industry evolved has left a yawning gap between endowment and performance,” said the NEITI.
Further, other experts explained that even if Nigeria relies on higher oil prices to gain momentary reprieve, it would hardly guarantee her any long term solution especially with regards to her fluctuating oil production volumes and huge financial subsidy paid by the government to keep the pump prices of petrol within its regulated rates.
As indicated by the NEITI, while oil revenues continue to fall and investments in the sector continues to dwindle, it thus should be a no-brainer to the government and other stakeholders to reform the sector through the PIBs before Nigeria heads the path Venezuela is on now.
