• Friday, June 21, 2024
businessday logo

BusinessDay

Models for running oil sector efficiently

Models for running oil sector efficiently

Nigeria’s dire economic situation has never been this bleak. For the goose that lays the golden eggs, petroleum, the situation has never been this unwelcoming.

Oil and gas, the property of the Nigerian government, while representing a relatively small proportion of the gross domestic product, about 9 percent in 2020, has an outsize influence on Nigeria’s economy, easily making the economy susceptible to external shocks.

Oil provides more than 60 percent of government revenue, and while the number of indigenous oil and gas firms has grown, says Kasirim Nwuke, in a November 2021 Brookings Institution report, “so has the number of oil-producing countries in the region. Militancy in oil-rich communities, while remaining, has diminished.

Concerns over climate change have fuelled aggressive efforts to reduce global consumption of fossil fuels – driving divestment from oil and gas by companies, institutions, and countries.”

With no significant investments in the industry by International Oil Companies (IOCs) in nearly two decades, the outcome, notes Austin Avuru, the founding managing director of Seplat Energy, has not just been declining production. Much worse, he says, “the entire export pipeline network has been surrendered to vandals and illegal bunkerers. Thus, the phrase ‘crude theft’, which crept into the industry about 2010, has taken on a new meaning.”

As IOCs flee the country, investment in natural gas by the government and Nigerian firms has been very measly, triggering a crisis that is currently buffeting the electricity sector today. Nigeria’s oil and gas sector is a classic case of what happens in a landscape of bad government management, poor government leadership and asinine government decision-making that has made the industry the butt of global jokes.

Once upon a history: Bad management in Nigeria and lessons from Malaysia

Between 1990 and 2015, Nigeria’s average daily oil production was about 1.85 million barrels and rising, a significant contrast from the 1.4 million barrels per day between 2016 and 2022.

While Nigeria possesses a proven reserve of some 37 billion barrels of crude and 206 trillion cubic feet of gas, Malaysia holds proved oil reserves of over 5 billion barrels and produces some 1.7 million barrels of crude daily.

The development of Malaysia’s upstream oil sector has provided the basis for the development of Malaysia’s oil and gas industry, with an integrated value chain that has created opportunities for economic development.

While not falling into the ‘resource curse’ of an unquestioned reliance on natural resources, the oil and gas sector has been a key enabler for many aspects of the country’s economy and public finances.

Malaysia’s current account shows the significance of the sector, which has long accounted for a sizable proportion of merchandise exports and foreign exchange earnings.

In 1990, for instance, the country’s global exports of fuel and derived products totalled $5.4 billion and made up 18.3 per cent of all merchandise exports. In 2019, just before the COVID-19 crisis struck, the corresponding figures were $34.5 billion and 14.5 per cent.

Indications of the sector’s skyrocketing success are everywhere – most visibly in the country’s much-vaunted infrastructure. Examples include, but are not limited to, the Petronas Towers, the erstwhile tallest buildings in the world and centrepiece of Kuala Lumpur’s skyline; Putrajaya, the country’s administrative capital; and the Kuala Lumpur International Airport.

The sector, note Pritish Bhattacharya and Francis E. Hutchinson, has also underpinned many of Malaysia’s economic nationalist aspirations. Today, the government-owned corporate giant, Petronas, is a source of pride and was the nation’s sole Fortune Global 500 company in 2021.

The government has also sought to foster an ecosystem of local firms in the oil and gas sector to diversify the economy and foster more technologically-intensive tasks.

And, when demand calls, it has used the country’s national flagship firm to bail out capsizing corporate captains.

In Nigeria, the legal production of oil provides immense opportunities for corruption and fraud. It is a highly corrupt industry with the Nigerian National Petroleum Company at the centre of this pyramid of corruption.

According to a report by late economist Pius Okigbo, $12.4 billion of oil windfall simply vanished from the nations’ public coffers between 1990 and 1993.

Read also: IOCs lament threat to business as Nigeria loses $3.27bn to crude oil theft

Known for its lack of transparency, NNPC, says Marc-Anthony Perouse de Montclos in his 2018 report on oil rent and corruption in Nigeria, “is a kind of Bermuda triangle where public money disappears forever. It does not pay taxes and only transfers parts of its revenues to the central bank.”

In 10 years, the NNPC never paid dividends to Abuja from its liquefied natural gas plant (NLNG) in Bonny and export revenue from the Okono offshore field, OML 119, which has been operated by Agip since 2000. The amounts are not insignificant: from 2005 to 2014, it should have paid the equivalent of $12.3 billion.

Poor governance and outright corruption make it actually impossible to verify or dispute the NNPC’s statistics. Because of its majority position in joint-ventures and production sharing contracts with transnational corporations, De Montcloss posits, the national oil company is in fact the linchpin of corruption in the industry.

“It is literally the Federal Government’s “cash cow”, as it has to give back in one form or another the subsidies it depends on to fund its operations and investments by negotiating ad hoc credit lines or rebates on the income that it is supposed to send to Abuja.

The authorities do not hesitate to use the funds they need, particularly in electoral campaign periods. In the opinion of specialists, the NNPC is not designed and managed as a commercial enterprise, but as a ‘patronage instrument,’ which helps well-connected individuals and gatekeepers to exercise a sort of veto power and to collect commission on each transaction they have to approve”.

That Nigeria’s oil and gas sector is teetering on the edge of collapse can be traced to one major factor: corruption.