News has diminished value if it comes from far away. Just as terrorism gets more coverage if it occurs in Paris, much of the analysis of the consequences of falling oil prices has focused on the US shale industry and the North Sea. But spare a thought for some of the other losers, starting with Nigeria where the fall will not only further damage a fragile state but will pose risks which could affect all of us before too long.
It would be good to be able to be optimistic about Nigeria — a country which in the past has been listed as one of the possible economic powerhouses of the 21st century. Remember MINT (Mexico, Indonesia, Nigeria and Turkey), the successor grouping to the BRICS (Brazil, Russia, India, China and South Africa)? Great acronyms invented by the always imaginative Jim O’Neill, but in both cases the groupings look a little shaky and performance is well short of promise. Nowhere more so than in Nigeria, which provides a sharp reminder that even if Opec is broken, oil is still vulnerable to political upheaval.
Nigeria is one of the world’s richest countries in terms of resource wealth, with over 60bn barrels of oil and 7 trillion cubic metres of natural gas. Those numbers cover identified recoverable reserves and there is no doubt a good deal more to be found. But thanks to a system of government which the Economist described recently as “broken and kleptocratic” it remains one of Africa’s weakest economies, with tens of millions of people living in abject poverty. Opec values Nigeria’s annual oil exports at nearly $90bn, yet half the population still lack access to any form of electricity and subsist using firewood and agricultural waste to supply energy. An estimated 100,000 to 400,000 barrels of oil is stolen daily, leading to annual losses of $5bn a year — as much as Nigeria spends on education and health combined. Much of the stolen oil is processed in primitive illegal refineries with the waste residues simply dumped. The Delta is an environmental disaster zone.
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Such is life in one of the largest oil producing states outside the Middle East. The election later this month is unlikely to change anything and the situation will get worse as the effect of falling oil prices undermines the budget of a government which has planned on a minimum price of $77 in 2015. Oil revenue accounts for about 70% of the government’s income. The illusory economic boom in the south of the country is certainly over.
Poverty will persist, not least in terms of energy. The International Energy Agency’s excellent report on African energy, which was written before prices fell, suggests that Nigeria’s energy demand will rise by two-thirds by 2040, and that 80 per cent or more of the population will by then have access to electricity from the grid. Even at that level (which now looks very optimistic) Nigeria would still have the same number of people — around 80 to 90 million — living in absolute poverty because of the drum beat of population growth. Nigeria today has 170 million people. A recent estimate suggests that, by 2050, it will have 440 million, outstripping the United States and making Nigeria the third most populous country in the world. Some projections take the number to over 900 million by the end of the century.
But this is more than a self-imposed tragedy in a far away country. In the north east of Nigeria Boko Haram, the “freedom fighters” who kidnap schoolgirls and marry them off to fighters in the name of Islam, now effectively control an area the size of Belgium — creating a new Islamic state which is a direct threat to neighbouring states such as Cameroon and Niger. Looking more widely, the example of Nigeria casts a dark shadow across the continent, damaging the many countries which are making serious efforts to achieve economic and social reform and to fight corruption. The easiest decision for international companies — in the energy sector and beyond — is to not invest in Africa. The risks just seem too high. Without investment in an area which has a limited capital base, the infrastructure necessary for development across Africa — in roads, railways, schools. water supply and power grids — will remain inadequate.
And then there is energy itself. Nigeria holds the largest single resource base in Africa and along with Venezuela is one of the few oil producing nations capable of increasing production and exports over the next two decades. The resources are certainly there — of both oil and gas — but as the IEA points out, investment is slow. Onshore, the major companies are leaving, weary of the struggle and unable to protect their reputation as the situation in the Delta deteriorates. Offshore, much investment remains in limbo awaiting the long promised reform of the fiscal regime.
In these circumstances it is getting harder to see Nigeria maintaining output at the level of 3 million barrels a day predicted by the IEA and many other forecasters. A climate of lawless corruption and terror are not conducive to major investment.
The deteriorating situation adds one more layer of instability to the world oil market. Globalisation is not just about open markets and free trade. There is also a globalisation of risk. If Nigeria continues to drift towards being a failed state, we will soon discover that the end of Opec dominance does mean that the oil market is stable. Because of the situation in countries which should be the key sources of supply — including Libya, Iran and Iraq as well as Nigeria — the risks of major volatility and disruption are greater than ever.
Culled from FT
