The Nigerian government’s take from every $100 revenue earned by it and its joint venture (JV) partners is about $77, confidential data seen by BusinessDay show, but mismanagement of the vital oil sector has worsened the economic woes facing Nigerians.
A profitability analysis of the joint venture economics shared with BusinessDay shows that at $100 per barrel, an average of $20 will be eaten up by production cost, $51 will go to the government as petroleum profit tax and $19 is paid to the government as royalties.
The Nigerian National Petroleum Company gets $5 as its own profit, while $2 will go to the government as Niger Delta Development Commission levy. This leaves the JV partners – private oil firms – with only $3 per barrel sold at $100.
The analysis also showed that by way of returns on investment, the Nigerian government stood to make $6 from every dollar it invests in the joint ventures.
This means that the government gets a 640 percent return on its spending, leaving many wondering why the government is not spending more, so it can make even more.
“Many of these joint venture fields are reaching their production limits and rampant crude oil theft is making it hard for local investors that have taken over the fields from developing them further,” said Ayodele Oni, energy lawyer and partner at Bloomfield law firm.
Above-the-ground issues have deterred both local and foreign investors from injecting capital in Nigeria’s troubled oil sector, once touted as the goose that lays the golden egg.
In chronicling the many painful evidence of the mismanagement of Nigeria’s oil sector, BusinessDay spoke to retired and serving Nigerian oil chiefs, international oil companies (IOCs) and local operators who said the clearest proof of the government’s failings is in its inability to meet OPEC quota, put an end to rampant crude theft and attract new investments.
According to an analysis by Tellimer, in the first quarter of 2022, on average, Nigeria under-produced by 200,000 barrels per day (bpd) versus the quota, which translates to $1.8bn in total lost oil revenues (based on a $97/barrel oil price) over the three months.
The value of crude oil stolen in the same three months calculated at the same global crude oil price at around 250,000bpd is another $2.25bn, making a total of more than $4bn for the first quarter of this year alone and which would have made a huge difference in terms of government revenues and the country’s foreign exchange crisis.
President Muhammadu Buhari who appointed himself petroleum minister, assisted by Timipre Silva as minister of state, is superintending over a sector where investors are ignoring and presents the best case study for state incapacity.
“It is bad that this theft goes on but what we have found worrying is the seeming failure of our colleagues in government to be stirred into taking the required action. Each time we go to Abuja for a meeting with them, the government people just sit there looking at us and you are left wondering if they understand or if they see it as a priority,” a CEO of an international oil firm told BusinessDay on condition of anonymity.
IOCs, which once made Nigeria’s joint venture scheme the envy of many countries, are fleeing the country. The result is the massive degradation of Nigeria’s oil infrastructure, rising cost of production, the fall in Nigeria’s capacity to produce oil and rising crude shut-ins.
For instance, the global leader in gas, British Petroleum (BP), came to Nigeria more than 10 years ago and was forced to pack up its bag and leave after waiting for years for the Nigerian government to come to the party.
“Nigerian government officials fumbled for years; they could not see the big picture but most tellingly, they failed to see into tomorrow. In the end, BP counted its losses which amounted to more than $100m and chose to leave the country,” said one senior oil sector official closely associated with BP travails.
The official said if BP had gone ahead with the aborted multibillion-dollar investment, Nigeria would not be struggling today to supply gas to Europe, which is facing reprisals from Russia.
Gas prices in Europe rose 20 percent Wednesday after Russia halted gas supplies to Poland. For weeks, European embassies in Nigeria have been making desperate calls to chiefs at Nigeria LNG Limited (NLNG), asking how the company can help meet the growing gap in European gas supplies following Russia’s invasion of Ukraine.
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BusinessDay gathers that the NLNG is facing its worst gas shortage in 22 years as oil production shut-ins compound the difficulties of the oil firms that supply it gas.
Most of the gas produced in Nigeria comes along with crude oil, and that is why the gas is called associated gas. So, when oil production is stopped because of crude theft or pipeline vandalism, gas production also stops.
Aiteo, an indigenous operator that secured seller financing years ago to acquire the Nembe Creek Trunk line, has abandoned the vital asset and does not even use it to carry its own crude oil because of oil theft and frequent attacks on the pipeline by organised crude oil thieves.
Some oil sector officials say that while the contempt for JV partners rose to a peak during the days of former oil minister Diezani Alison Madueke, the situation has yet to improve.
BusinessDay learnt that at one meeting with leaders of the legislature a year ago, a leader of that branch of government wondered why oil companies were still operating in Nigeria if things were as bad as they claimed. However, unknown to the senior legislator, the oil firms began leaving Nigeria quietly almost a decade ago and the pace of their exit has only become visible.
The oil sector has an outsize influence on Nigeria’s economy despite representing a relatively small proportion of the gross domestic product: about 9 percent. But, crude oil sales make up one-third of the government’s revenue and about 90 percent of the West African nation’s export earnings. Before the discovery of oil in 1950, agriculture was the backbone of the continent’s largest economy.
Nigeria’s dependence on oil has been very disruptive as evidenced in 2020 when it was hit by a massive shock at the onset of the coronavirus pandemic, as oil revenues collapsed by around 65 percent. But while revenues inched up slightly, the severe foreign exchange crisis in the country of 200 people has not abated.
