Nigeria and the oil fortune, by Nasir El-Rufai

13 July 2015, Sweetcrude, Lagos – There is every danger that addressing a topic like this might yield another exercise in vain lamentation when what our country needs to do is take and give effect to rational decisions about the oil sector. For instance, the discourse around the resource curse has had a deep resonance for many Nigerians because it vividly sums up the paradox between the huge earnings from oil and the reality of poverty and underdevelopment for most Nigerians.


oil priceThus we have jobless growth, a fact that statistics touting high GDP growth rates tend to obscure but which is painfully real for many people. And we continue to suffer the consequences of our affliction with the Dutch disease. The easy money from oil has led to the neglect of other endowments, most especially agriculture.


Yet talk we must when a problem persists in the embarrassing dimensions that Nigeria’s oil debacle represents, in the hope that we can deepen understanding about the precise nature of the problem, and build national consensus about the possible solutions. Even the crafters of the topic of this lecture imply that something is rotten in the governance and outcomes of Nigeria’s oil industry. Yet they helpfully infuse an air of optimism by not describing it as oil misfortune.


Thus I approach this assignment not as an fortune-teller, but as a Nigerian who has had the duty and the interest to pay more attention to this issue than most of my compatriots. During the Obasanjo years, I had the responsibility to constitute Oil and Gas Implementation Committee that led to the drafting of the original Petroleum Industry Bill as an instrument for reforming the oil sector. Eight years after the exit of that government, the PIB has not become law, mainly through the wilful neglect of the successor governments that prioritized their personalized stranglehold on the sector’s revenues above its reform and efficient performance for national benefit. We now have another chance to anchor our oil sector reform agenda on the current and projected realities in that sector. And we must do that in the knowledge that the world is not waiting for us, that while we dallied new suppliers have come in to the global oil business and buyers have more choice. Some of our traditional customers have become self-sufficient, while others have developed alternatives thus reducing their reliance on our ‘light, sweet crude oil’.


Is there an oil fortune?

In fiscal terms, the answer is a massive yes. That the revenues have declined, or not been used to build human capital or enduring physical infrastructure is another matter. Nigeria’s oil reserves relative to our population is puny by comparison to the Gulf states. But you only need to imagine what national budgets would look like without the oil receipts to appreciate the fact that some oil is better than no oil. And we are not talking peanuts here. Despite a 60% fall in oil price between June 2014 and the end of that year, Nigeria still earned USD 77 billion from oil exports in 2014. The Punch newspaper of 2 April 2015, quoting figures from the United States Department of Energy, placed oil export earnings for the year 2011 at USD 99 billion. Indeed in the five Jonathanian years, Nigeria earned nearly USD 500 billion from crude oil and gas sales.


The 2014 earnings of $77 billion is rather small compared to the $246 billion that Saudi Arabia made, but it cannot be sniffed at. So there are oil fortunes and there are oil fortunes. What we need to interrogate is how responsibly we have managed that fortune, how diligently we have tried to expand and sustain it and whether having that national fortune has impacted significantly on the fortune of the average Nigerian.


About 40% of Nigerians are estimated to be very poor. That is about 70 million living people living below the poverty line in a country that has earned  at least 1trillion in current dollars from oil in 50 years. For our vast masses, oil is no fortune. It is more of a mirage, but a more insidious kind, because the fortune is visible in the lifestyles of a few thousands of the privileged elite but is stubbornly inaccessible to tens of millions of ordinary people. Our rich enjoy the lifestyles of the richest in the world, while our poor are truly the wretched of the earth. This inequality is most unfortunate.


That wide gulf in living standards is clearly problematic. It is, in my view, a major responsibility of a democratic government to strive to move more people away from the attrition that extreme poverty inflicts. This is not attained by wishful thinking, or by merely affirming the intent. It is about managing our resources in a way that sustainably builds our people, diligently collecting revenues and applying them in a determinedly cost-effective and result-oriented manner. The best fortune a country can have is its people. But like many gems, they have to be polished and nurtured for their talents to glow. Spending efficiency and effectiveness is best reflected in outcomes such as more educated and healthy people, living longer lives productively and happily.


That, for me, is the major reason we must seek to enhance and responsibly manage Nigeria’s oil fortune. It must become the people’s fortune.


Sketching the Oil Industry

Let us examine some statistics to give us a picture of the oil industry in Nigeria. In 2014, Nigeria was producing on the average about 2.2 million barrels of crude oil per day, while importing most of its daily consumption of 43.5 million litres of refined petroleum products. That reliance on imports of refined products has seen unsustainable expenses on questionable subsidy payments, exemplified by USD 8.99 billion in the 18 months between January 2012 and June 2013.


About N971 billion was budgeted for subsidy payments in 2014 alone (more than twice that was eventually paid). You all recall how trillions of Naira were paid out as oil subsidy in 2011, when only N254 billion was appropriated.   No one has been successfully prosecuted for this scam. Huge deficits in gas supply have ensured that the country’s thermal plants cannot produce power at optimal levels. In the eight years leading up to 2014, joint venture production declined by 50.4%. Some 100,000 barrels per day, about five percent of total production, is estimated to be lost to organized theft. And we all dread the ease and rapidity with which supply shortages lead to endless queues, widespread panic and mortal consequences for the many victims of tanker accidents.


The long and short of the situation of our oil industry is best exemplified by the parallel government called the NNPC. In 2012, it sold N2.77 trillion of ‘domestic’ crude oil but paid only N1.66 trillion to the Federation Account. In 2013, it earned N2.66 trillion but paid N1.56 trillion to FAAC, in 2014 N2.64 trillion but remitted N1.44 trillion, while between January and May 2015, it earned N733.36 billion and remitted only N473.2 billion! That means that the NNPC only remitted about 58% of the monies earned between 2012 and the first half of 2015. A company with the audacity to retain 42% of a country’s money has become a veritable parallel republic!


The NNPC feels entitled to consume more resources than the 36 states, the FCT and the Federal Government combined! The example just given is only with respect to domestic crude oil sales. Similar leakages exist in NPDC, NAPIMS procurement and subsidiary budgets.


How could a country so dependent on oil revenues have been so lax about the proper governance, efficiency and security of its oil industry? How can a mono-product economy be so relaxed that it takes up to 24 months or more to make decisions on vital oil industry projects? Why is it that in this most crucial of sectors it has been possible for briefcase companies to walk away with big assets, billion naira subsidy payments and ‘local content’ contracts? Can an oil industry with virtually no serious barriers to entry yield fortunes beyond a narrow circle? For so great are the miracles that oil has performed in the lives of a few, there is not much left for the many.


Having strayed into lamentation in describing the Nigerian oil industry, let me quickly return to trying to draw lessons and to suggest ways by which we may successfully navigate a different track. We can agree that what passes for the oil industry is a mismanaged, costly, corrupt and grossly inefficient operation. These negatives are not the way to grow or retain fortune.


So what should we consider doing?

Let us first learn the appropriate lessons. We are neither immune from the laws of economics nor from the consequences of sheer folly. Now that more countries are producing and selling oil and gas, we can safely assume that barring a new phase of explosive global economic growth, oil will remain relatively cheap at the $50-$60 per barrel range, for the foreseeable future. What do we intend to do with these diminished earnings? If we persist in indulging our appetite to consume rather than save, import rather than produce domestically, or neglect to prioritize capital investments, we will simply sink deeper into poverty. We must resolve to spend wiser, and do more with less.


Our general national orientation has been impacted for worse due to our attitude to the oil cash cow. Let us firmly resolve that growing our peoples potentials will be a primary goal, and that in the pursuit of that aim, we shall commit to an efficiently and transparently managed oil industry. We can demonstrate this new purpose by slaying three huge dragons: (1) A fixation with public ownership and control of every major oil asset, (2) the corruption and distortion that oil subsidy is inflicting on our economy, and (3) the NNPC in its current form is in our collective national interest.


End the fixation with public ownership: You will recall the outcry when the Obasanjo government sold two of our refineries shortly before it left office in 2007. The successor-government reversed the sale. Eight years and millions of dollars in turn-around maintenance later, the refineries are at best a minor component of our supply sources for refined products while remaining a suction pump of our resources. One of the men whose purchase of the refineries was aborted is now building his own, and it can be expected to be more modern, far more efficient and more productive than the public facility we turned into an object of baseless veneration. Let us be realistic enough to choose the most pragmatic options when we confront national problems. We should incentivize competent investors to acquire majority shares and management control in all our refineries and sell to them crude oil at market prices, and remit the proceeds directly into the Federation Account!


Tackle the corruption and distortion in subsidy regime: I daresay that the oil subsidy regime has neither grown our people nor guaranteed stability of refined product supplies. What subsidy has achieved is create a huge hole in the budget and a new array of overnight billionaires. The downstream oil business in Nigeria has morphed into one optimised for the pursuit of subsidy payments. We see thinly-disguised periodic hostage-taking as the subsidy barons seek to pry open government coffers. It is time to tackle the corruption in the subsidy regime. We can discuss how the resulting subsidy savings will be spent to improve lives, while guaranteeing stability of supply to the domestic market. We have a president with both the integrity to responsibly manage the savings and the experience of managing special interventions based on subsidy savings. Let us say bye to foreign exchange drains, opaque crude swaps, offshore processing agreements and other devices that have derailed and distorted the subsidy regime, to our national detriment.


Reverse missed opportunities: I have already highlighted the fact that our country has neither saved nor wisely invested oil proceeds from the five oil booms that my sister Oby Ezekwesili identified. I may only add that the oil industry itself is a victim of this lack of proper investment. We have been as unable to utilize what it yields us as we are remiss about expanding what it can yield us, by prudent and focused re-investment.


Nigerias oil reserves are not growing at a fast enough pace. The gas potential is still largely that, an untapped potential amidst pressing needs. Since Bonny LNG we have not been able to complete and commission any other – Brass and Olokola LNG projects remain on the drawing board. The implementation of the national gas masterplan has stalled since 2009. And so there is simply not enough natural gas collected and dried to feed our power turbines, industries and households. There has to be a commitment to sustained investments to stimulate a proper gas sector. The multiplier effects of this will be immense, from contributions to improving the countrys power capacity, fuel homes and industries, create jobs and improve export earnings. We must be ambitious about what we can achieve here.


We similarly need to encourage more local refining, and not just to assure stability in the supply of refined products for the domestic market but to cut costs and save jobs. We also have untapped potentials in petrochemicals, which can help fast-track domestic industrial activity and improve export earnings.


In short, we must take steps to reposition our oil and gas sector as one that is properly integrated into the national economy, helping to create jobs, raise skills level, drive industrialization and earn more from exports. The rents therefrom can then be applied towards investments in human capital, physical infrastructure and economic diversification.


How do we attain this wish list?

We need a mix of fresh strategic thinking and a firm commitment to reform. We need to define exactly what we want the oil industry to be and to achieve, and then define the structure that can best deliver it.  An efficient and productive oil sector, able to create jobs, spur industrialization and earn more revenues requires that we tackle the monster that the NNPC has become. This country can no longer afford to maintain an NNPC that arrogantly, unlawfully and unconstitutionally spends an unhealthy proportion of national oil earnings on itself.


We should replace the NNPC with brand new organizations that are fit for purpose: – among others – a commercialized and corporatized national oil company and new industry regulators. This new national oil company should be capitalized once and for all, and then freed to fend for itself like other national oil companies do, seeking its financing independently from the financial markets and paying due taxes and royalties. The corruption and nonchalance that have hobbled the NNPC are symptoms that its best days are over. We should give it a deserved funeral so that a new institution, active and nimble, can promptly replace it. NNPC’s subsidiaries and associated companies can be reviewed, restructured and privatized or commercialized as appropriate consistent with national interest and objectives.


The government should review the Joint Venture strategy, with the governing principle being to shift the financing and operational risks to the markets and    operators respectively. Government should avoid owing the oil companies, and should more proactively review the terms and implementation of the Production Sharing Contracts (PSCs) and concentrate on collecting the royalties and taxes due to it.


No one is better qualified to do this than the person that birthed the NNPC through the merger of the NNOC and the Ministry of Petroleum in 1977 – President Buhari himself. No one can appreciate the gap between the vision of NNPC’s founding fathers, the beautiful baby of 1977 and the 38 year-old monster it has become better than President Buhari. The NNPC of today must make Chief SundayAwoniyi of blessed memory squirm in his grave. Something fundamentally decisive must be done to tame this monster.


We must have the political will to make all oil industry transactions transparent. There should be clear rules and processes for licensing, concessioning, procurement and contracting. Opaque systems tend to be corrupt, and it is time to shine the light. The president has already taken the commendable step of directing that all revenues be remitted either to the Federation Account or the consolidated revenue fund as required by sections 80 and 162 of the Constitution. President Buhari is therefore clear that oil industry revenues will no longer be treated as some slush fund of the federal government.


It is the national consensus that we arrive at regarding the oil sector that we can finally codify in a new petroleum act, which should be a simply worded, concise piece of legislation that spells out the general governing principles for the industry. Specific matters can then be based on subsidiary legislation, regulations and agreements. Complex and densely worded laws conduce to opacity and should therefore be avoided.


I am by no means underestimating the titanic struggles that might be necessary to change the Nigerian oil industry. The vested interests will be all out to thwart change and uphold the status quo. The media and civil society organizations (CSOs) have the major role of pushing for transparent disclosures and adherence to due process. No other institutions have the power of CSOs and media to advocate, educate and enlighten the public to support and demand the most pragmatic, rational and effective measures that can make Nigerias oil fortune become the peoples fortune. The media in particular must lead from the front in this effort.


To be in a position to accurately educate, the media must itself be knowledgeable about the issues. Apart from the obvious advantages of having specialists leading the reporting of certain industries, the media performs an immense service when it affords the public the resources to partake in informed debate. And the media must enhance its capacity for follow-up, to focus on an issue long enough to report its resolution. It must use the Freedom of Information Act maximally to ensure that wrong-doing and impropriety are not protected by official secrecy. If we successfully remake the oil industry, we would have significantly remade our country. And our poverty stricken majority will be the better for it. This, ladies and gentlemen, is the burden of responsibility placed on us as leaders in our various spheres of influence.


* The 2015 Wole Soyinka Centre Annual Media Lecture, delivered by Malam Nasir Ahmad El-Rufai, OFR Governor of Kaduna State, 13 July 2015.


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