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Nigeria's Proposed Oil Reform Bill Criticized as Off-Target

Thursday, March 25, 2010

By Marianna Gurtovnik

"I want to reassure Nigerians and our foreign partners of our unwavering commitment to pursuing the reform in this sector with an eye on our national interest primarily and also in meeting the market demand for energy security," (Nigeria's Vice President and Acting President, Goodluck Jonathan, on the Nigerian government's Petroleum Industry Bill, February 22, 2010). 

"The simple, passionately stated priorities of government have been completely lost in a cumbersome document that lacks insight into the very basics of our industry" (Royal Dutch Shell's Regional Executive Vice-President of Exploration and Production in Africa, Ann Pickard, on the Petroleum Industry Bill, February 23, 2010).
 

The statements above delivered at the last month's oil and gas conference in Nigeria's capital, Abuja, highlight the controversy surrounding a proposed reform of the energy sector there. 

Nigerian oil is gaining increased commercial and political importance for the United States. First, for shipping purposes, the Gulf of Guinea is much closer to U.S. refineries than those located in the Persian Gulf. Secondly, Nigerian oil has a relatively low sulphur content, thus yielding a higher gasoline return and causing less environmental pollution. And, lastly, Nigerian crude offers a much-needed diversity of supply, tempering the United States' over-reliance on Arab nations for crude.

As of December 2009, Nigeria was a top third exporter of crude oil to the United States, preceded by Canada and Mexico and followed by Saudi Arabia and Venezuela.

In September 2008, after a decade of planning and drafting, the Petroleum Industry Bill (PIB) was finally submitted to Nigeria's National Assembly. Abuja hopes that the legislation will provide impetus for domestic economy, remedy the fiscal flaws evident in the Nigerian oil sector, and demonstrate commitment to meeting the country's output quota negotiated with OPEC.

Over the last year and a half, the bill has been reviewed and discussed by various stakeholders,  locally and internationally. While Nigerian officials have lauded the legislation as progressive, international oil corporations have complained that higher royalties and taxes proposed by the bill will make the exploration of Nigeria's already costly deepwater oil reserves financially unfeasible. “The analysis suggests that – no matter which version of the bill you look at – all or almost all proposed deepwater projects between now and 2020 will become uneconomic… approximately 50 billion dollars wouldn’t be invested as planned,” Royal Dutch Shell's Vice-President Ann Pickard was quoted as saying.

When asked about the implications of PIB for Nigeria's hydrocarbon industry and the economic well-being of its citizens, Chevron's spokesperson told Look Who's Talking that the company “supports the overall strategy of the Nigeria's oil and gas reforms. It is a complex issue that requires government to engage with its partners and other interested stakeholders in further dialogue.”

Speaking to journalists in Abuja, Chevron's Managing Director in Nigeria, Andrew Fawthrop, lamented that the "squeeze that has been put in the deep water terms will reduce investments." At a February 23 dinner with the media arranged on the sidelines of the 2010 oil and gas conference in Abuja, Mr. Fawthrop noted that, "If in the future, the security issues go away and if there is larger industry in the deep water worldwide, with more activity going on, the cost may come back down. The [Nigerian National Assembly's] house and senate need to decide if they do want to keep the oil in the ground for the future or they want to generate more jobs in the near future. There is no right or wrong answer. That is why you elect officials to make those decisions."

Nigeria is, at the moment, the largest exporter of crude in Africa, followed by Angola. However, the ranking may shift in the coming years as Nigeria's oil production has stalled repeatedly since the early 1990s as a result of the destruction of oil installations and abduction of expatriate oil workers by local armed groups advocating a fair redistribution of profits to communities in the nine oil-rich states known as the Niger Delta region.

While the government's oil revenues have grown over the last decade, ordinary Nigerians have become poorer, and unemployment has spiked among the youth in the Niger Delta. According to a World Bank report released last November, "The consensus in society is that youth unemployment is on the rise, with an associated negative impact on public order and an increase in militancy." Because of oil spillages, armed resistance groups, such as the Movement for the Emancipation of the Niger Delta (MEND), have demanded compensation for environmental degradation and negative impacts on traditional sources of income, such as fishing.

The government, in turn, accused the insurgents of illegally siphoning oil from the pipelines and using proceeds from black market sales to acquire state-of-the-art weapons, which they successfully used against the Nigerian army.

According to the Organization of the Petroleum Exporting Countries (OPEC), as a result of the violence, Nigeria's oil output has shrunk by a quarter, down to around 2.2 million barrels per day. Security concerns have pushed oil businesses further into the Gulf of Guinea to explore Nigeria's deepwater oil fields.

In addition to raising funds from international capital markets, PIB plans to turn Nigeria's government-owned oil company into a profit-making enterprise that would derive its funding from hydrocarbon sales. Yet, the self-sustainability of the national oil company will come into question if its foreign partners downsize their exploration and production in Nigeria as a result of the bill's prohibitive fees and tax schedules. In addition to a 30 percent income tax, the bill has introduced a sliding scale (5 to 25 percent) of royalty fees for oil and gas companies based on their production levels.

Furthermore, a substantial increase in oil sales would be necessary to fully end the dependence of the national oil company on the government budget. A sufficient increase is possible to achieve since Nigeria's offshore reserves are prolific and believed to brim with hydrocarbons. Experts, however, claim that a spike in oil exports could easily bump into Nigeria's OPEC quota, and it is unclear how Abuja plans to reconcile this anticipated boost in oil sales with OPEC. Policymakers discussed removing Nigeria from OPEC a few years ago, as part of an initiative to forgive the country's foreign debt in return for oil, but no definitive conclusion has been reached. In the last quarter of 2009, Nigeria's foreign debt amounted to just under $4 billion.

In terms of boosting economic growth, PIB's proposed tax rates favor gas over oil in order to incentivize the production of gas for domestic purposes. Nigerian officials have lambasted oil companies for burning gas to separate it from oil at the time of extraction. This procedure, known as "flaring," has caused a release of toxic substances and placed Nigeria on the list of the world's largest greenhouse gas emitters. Over the years, the bulk of the gas that has actually been retained, has been exported, even though Nigeria's own energy needs have been consistently short-changed. PIB's preferential taxes for gas may help redress the balance now.

Overall, however, the government has largely shifted the responsibility for local socio-economic development onto foreign oil companies.

For instance, the bill requires that international oil companies train and employ local workforce and contract Nigerian businesses for their procurements, including refining crude to produce fuel, most of which this West African nation now imports. While such mandatory community development projects benefiting the developing nations are common in the extractive industry, they will not do enough to meet the pressing needs of Nigerians in the oil-producing provinces. And long-term prospects of ordinary citizens sharing in the government's oil bonanza seem bleak: the bill vaguely states that Nigerians may obtain a stake in the national oil corporation in the future, thus leaving a key source of popular discontent—the government's reluctance to share the oil revenues—unaddressed.

 

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Marianna Gurtovnik's interests lie in foreign policy, international security, and energy security.