Nigeria's Oil And Gas Paradox: Abundance Amidst Scarcity

Nigeria, a nation abundantly blessed with natural resources, continues to face significant fiscal challenges despite its wealth. With approximately 44 major solid minerals, the most prominent being oil and gas, it is perplexing that these resources have failed to adequately address the country's development needs.

Over the past 40 years, the cumulative revenue from oil and gas has exceeded $1 trillion, an amount that should have been sufficient to begin transforming the nation's economy and infrastructure. Yet, Nigeria consistently resorts to borrowing, with the total public debt standing at ₦121.67 trillion ($91.46 billion) as of March 31, 2024, according to the Debt Management Office.

This paradox raises critical questions: Are we not generating enough revenue? Is the problem rooted in implementation, political will, legal frameworks, or a combination of these factors? This article examines the oil and gas industry as a microcosm of the systemic issues plaguing Nigeria's resource management and explores why the nation lacks sufficient resources despite its apparent abundance.

Historical Context and Industry Evolution

The Nigerian oil and gas industry has a rich history dating back to the early 20th century. In 1908, the German-owned Nigerian Bitumen Corporation conducted initial exploratory work in Ondo State, though these efforts were ultimately unsuccessful. The industry truly began to take shape in 1937 when Shell D'Arcy, a precursor to Shell Petroleum Development Company of Nigeria, was granted sole concessionary rights across Nigeria's entire territory.

A pivotal moment came in 1956 with the first commercial oil discovery at Oloibiri in the Niger Delta. Exports commenced two years later in 1958, marking Nigeria's entry as an oil-producing nation. The following years saw other International Oil Companies (IOCs) enter the market, including Mobil in 1955, Agip in 1962, and Elf in 1962.

Several key milestones shaped the industry's development:

• In 1971, Nigeria joined the Organization of Petroleum Exporting Countries (OPEC) and established the Nigerian National Oil Corporation (NNOC), which would later evolve into the Nigerian National Petroleum Corporation (NNPC) and eventually the Nigerian National Petroleum Company (NNPC Ltd).
• The 1980s saw the introduction of production sharing contracts (PSCs) to attract investment in offshore acreage.
• The 1990s and 2000s brought increased focus on promoting Indigenous participation.
• More recently, there has been a push for comprehensive reform, culminating in the Petroleum Industry Act of 2021.

Today, the Nigerian oil and gas industry operates under a complex structure involving various stakeholders, including government entities, regulatory bodies, international and indigenous operating companies, and service sector firms. The industry operates under various contractual arrangements, including Joint Ventures (JVs), Production Sharing Contracts (PSCs), Service Contracts, and Marginal Field Operations.

Local Content Development

The Nigerian Oil and Gas Industry Content Development Act of 2010 marked a significant shift towards increasing Indigenous participation in the industry. Key provisions include:

1. Giving priority to Nigerian independent operators in awarding oil blocks and lifting licenses
2. Exclusive consideration for Nigerian Indigenous service companies in contracts not exceeding $100 million
3. Mandatory submission of Nigerian content plans by operators in the industry

The Nigerian Content Development and Monitoring Board (NCDMB) was established to implement and monitor compliance with this Act. While progress has been made, significant challenges remain in full implementation and achieving the Act's objectives.

Key Challenges

1. Exclusion of Nigerian Participation in Key Value Chains

The Nigerian oil and gas industry faces significant challenges due to the exclusion of Nigerian participation in key value chains. There are 36 value chains related to crude oil exploration, with at least seven crucial ones largely excluding Nigerian participation: Legal, Shipping, Banking, Insurance, Drilling, Oil Field Services, and Engineering and Construction.

In the legal sector, over $1 billion worth of legal work is lost to foreign firms annually due to a perception of superior expertise and international experience. The shipping industry suffers as Nigerian companies are not engaged in shipping crude oil products, primarily due to the absence of a legal framework for developing a national fleet of vessels. This leads to a significant loss of potential revenue and employment opportunities.

The banking sector is affected as funds from crude oil production are often domiciled in foreign banks, sometimes held for months before remittance to the Central Bank of Nigeria. This practice deprives Nigerian banks of substantial business and the economy of potential multiplier effects. The Nigerian insurance industry plays a very insignificant and limited role in the oil and gas industry, with no major Nigerian insurance underwriters covering risks for the over 25,000 foreign vessels in Nigerian cabotage waters or the over 1,000 oil rigs in Nigerian waters.

Drilling contracts, oil field services, and engineering and construction projects in the sector are predominantly awarded to foreign firms, limiting opportunities for Nigerian businesses and hindering local capacity building and job creation.

2. Weak Enforcement of Local Content Laws

Despite the existence of laws like the Coastal and Inland Shipping (Cabotage) Act 2003, Nigerian Oil and Gas Industry Content Development Act and Merchant Shipping Act, Nigerian participation in key industries remains limited. The definition of "local content" is often ambiguous, creating loopholes in the legislation. There's a lack of robust monitoring and enforcement mechanisms to ensure compliance with local content laws across various sectors.

Some foreign companies use local subsidiaries as "pass-through" entities to circumvent local content laws, without truly involving Nigerian ownership or control. Companies may appear compliant on paper while beneficial ownership remains foreign. Foreign-owned vessels and rigs often operate in Nigerian waters without proper licenses and authorizations, violating the Cabotage and Merchant Shipping Acts. There's a tendency to favor foreign companies even when capable local companies are available, and weak enforcement of maritime acts has led to lost opportunities for Nigerian shipping companies.

3. Contractual Issues and Foreign Influence

The incorporation of foreign agreements often excludes Nigerian laws and designates adjudication forums outside Nigeria, contradicting local content policies. The complexity of these contracts often puts Nigerian entities at a disadvantage due to limited expertise in international oil and gas law. The use of foreign legal frameworks has sometimes resulted in unfavourable outcomes for Nigeria in international arbitrations. The arbitration between the Nigerian Government and Process & Industrial Developments Limited (P&ID) in the United Kingdom is a case in point.

4. Industry Structure Favoring International Oil Companies (IOCs)

The current structure heavily favours IOCs, resulting in a significant portion of revenues leaving the country. IOCs often have more bargaining power in negotiations with the government due to their technical expertise and financial resources. The dominance of IOCs has led to a lack of technology transfer and skill development among local companies.

5. Regulatory Issues

The dual role of NNPC as both a regulator and operator creates conflicts of interest and inefficiencies. Multiple agencies with unclear mandates lead to bureaucratic bottlenecks and inefficiencies. Frequent changes in policies and regulations have created an unpredictable business environment. Weak enforcement of existing regulations has led to non-compliance in areas such as environmental protection and local content requirements.

6. Tax Avoidance by Oil Rig Companies

Oil rig companies have formed a cartel for tax avoidance, with the Nigerian Maritime Administration and Safety Agency (NIMASA) confirming they do not collect tax from oil rigs. This represents a massive loss of potential government revenue. The revenue attributable from oil rigs is estimated at N3 Trillion yearly, approximately 15% of the National Budget. The loss of this revenue significantly impacts the government's ability to fund development projects and public services. The practice of tax avoidance by these companies creates an uneven playing field and discourages compliant companies.

7. Transparency and Corruption

Issues persist with the transparency and fairness of contract awards and renewals. Despite improvements, concerns about transparency in revenue management and overall industry operations remain. Corruption in the allocation of oil blocks, award of contracts, and distribution of oil revenues has eroded public trust. The opaque nature of some transactions has made it difficult to hold companies and government officials accountable.

Proposed Solutions

1. Addressing the Exclusion of Nigerian Participation in Key Value Chains

To increase Nigerian participation in legal services, shipping, banking, insurance, drilling, oil field services, and engineering within the oil and gas industry, several measures can be implemented. These include establishing a legal framework for developing a national fleet of vessels for oil and gas shipping, creating incentives for international firms to partner with Nigerian companies in these sectors, and developing specialized training programs in oil and gas law, maritime services, financial management, and insurance for the energy sector. Additionally, regulations requiring IOCs to maintain a certain percentage of their operational funds in Nigerian banks should be implemented, and support should be provided for Nigerian insurance companies to develop capacity in marine insurance.

2. Strengthening Enforcement of Local Content Laws

Rigorous enforcement of the Nigerian Oil and Gas Industry Content Development Act is crucial to increase indigenous participation. This can be achieved through stricter monitoring and penalties for non-compliance, including regular audits and public reporting of compliance levels. A transparent system for tracking and reporting local content achievements across all sectors of the industry should be established. The Nigerian Oil and Gas Industry Content Development Act should be reviewed and amended to address implementation gaps and strengthen enforcement mechanisms.

3. Addressing Contractual Issues and Foreign Influence

A comprehensive review of all existing contracts should be conducted to ensure compliance with Nigerian laws and local content requirements. Standardized contract templates that prioritize Nigerian interests and comply with local laws should be developed. All new contracts should include provisions for technology transfer and capacity building for Nigerian entities. Clear dispute resolution mechanisms should be established, including creating robust, local dispute resolution mechanisms to handle conflicts in the industry.

4. Balancing Industry Structure

The privatization process of NNPC should be completed to separate its regulatory and operational roles, improving efficiency and transparency. Strong corporate governance structures should be implemented in the privatized entity to prevent political interference and ensure professional management. Joint ventures between foreign companies and genuinely Nigerian-owned companies should be encouraged and incentivized.

5. Improving Regulatory Framework

The roles of different regulatory agencies should be clarified to reduce overlap and improve efficiency. A single, powerful regulatory body should be established to oversee all aspects of the industry. The Petroleum Industry Act (PIA) 2021 should be fully implemented. Environmental regulations should be strengthened and penalties for violations increased.

6. Tackling Tax Avoidance

NIMASA's capacity to collect taxes from oil rig companies should be strengthened through training, technology adoption, and increased resources. Stricter regulations and penalties for tax avoidance in the industry should be implemented. A comprehensive audit of all oil rig operations in Nigerian waters should be conducted to identify and address tax leakages. A specialized task force within the Federal Inland Revenue Service (FIRS) focused on oil and gas taxation should be established.

7. Enhancing Transparency and Combating Corruption

The Nigeria Extractive Industries Transparency Initiative (NEITI) should be strengthened and fully implemented to improve accountability. Open bidding processes for all contracts should be implemented and the award criteria made public. Blockchain technology should be utilized to create an immutable record of all transactions in the oil and gas sector. All companies operating in the sector should be required to publish their beneficial ownership information.

8. Head Hunting Talents

In addition to local content development, there should be a deliberate strategy to headhunt the best talents in the world to ensure that Nigeria's participation in the oil and gas industry increases from the current 30% to 70% in the next 3 years.

Potential Economic Impact of Reforms

By addressing the identified challenges and implementing the proposed solutions, Nigeria could realize substantial economic gains:

1. Revenue Increase: With improved efficiency, transparency, and local participation, Nigeria could potentially increase its oil and gas revenue by 30-40% within 5-10 years. This could translate to an additional $15-20 billion annually based on current production levels.
2. Job Creation: Enhanced local content implementation, downstream investments, and increased Nigerian participation in key value chains could create an estimated 500,000 to 1 million new jobs in the oil and gas sector and related industries over the next decade.
3. Foreign Exchange Earnings: With increased refining capacity, reduction in fuel imports, and the development of a national fleet for oil and gas shipping, Nigeria could save $10-15 billion annually in foreign exchange.
4. Tax Revenue: By addressing tax avoidance by oil rig companies, Nigeria could potentially recover up to N3 Trillion yearly (approximately 15% of the National Budget) in additional tax revenue.
5. Local Content Development: Strict enforcement of local content laws and capacity-building initiatives could increase Nigerian companies' participation in the industry from the current estimated 30% to 70% within 10 years.

Conclusion

The paradox of Nigeria's oil and gas industry lies in its vast potential juxtaposed against the limited benefits accruing to the nation and its people. By addressing the identified challenges and implementing the proposed solutions, Nigeria has the opportunity to transform its oil and gas sector into a true catalyst for national development.

The path forward requires a delicate balance between prioritizing national interests and maintaining a conducive environment for necessary foreign investments. It calls for a reimagining of Nigeria's relationship with its natural resources – one that places the welfare of its citizens and the long-term sustainability of its economy at the forefront.

The reforms proposed, while challenging to implement, offer a roadmap for transforming the industry's paradox into a paradigm of resource-led development. By addressing the full spectrum of challenges, Nigeria can create a more inclusive, efficient, and sustainable oil and gas sector that truly benefits its people and economy.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.