64 years later, an oil extraction machine is creaking in Nigeria

After 64 years of independence and more than sixty oil explorations, oil accounts for less than 10 percent of Nigeria’s GDP but accounts for about 90 percent of foreign exchange earnings and more than half of government revenues.

Endowed with one of the world’s largest proven oil reserves of 37 billion barrels, Nigeria had the potential to enter the global arena and take an active position in decisions on international energy demand and energy supply issues alongside most of the world’s largest oil producers.

Nigeria and the Organization of the Petroleum Exporting Countries (OPEC) have jointly agreed on how much oil should be produced to have a significant impact on the global oil price and, understandably, keep it relatively high to maximize profitability.

In 1973, the cartel managed to influence the oil boom, which caused prices to quadruple from $3 per barrel to $12 per barrel.

Moreover, between 2006 and 2009, the price of crude oil increased from $74.59 to $109.25. Again, between 2010 and 2013, the price of oil increased from $84.24 to $100.95.

Life after oil

During boom times, most oil-producing countries have experienced economic success and also learned not to put all their eggs in one basket, intensifying plans for a life beyond oil that Africa’s largest oil-producing country has overlooked.

For example, Saudi Arabia, the world’s largest oil exporter, has taken full advantage of persistently rising oil prices to build new cities. The projects aimed to improve the country’s image, develop an oil-free economy, and generate enough jobs to maintain social stability.

For the United Arab Emirates, building an economy less dependent on the rise and fall of oil prices, but equipped with a skilled workforce in a wide range of industries, is beyond empty declarations. The country has a development plan for the next 50 years after 2021 titled “2020: Towards the Next 50”.

The plan aims to strengthen the country’s investment in future generations, with a particular focus on advanced technology, reduced dependence on oil by diversifying exports and imports, increasing social cohesion, improving the productivity of the domestic economy and building on Emirati values ​​for the benefit of future generations. generations.

In Norway, the government viewed oil revenues not as a source of immediate waste, but as “the transformation of wealth from a natural resource into financial wealth”, with an eye to the future by upholding the ethical obligation to share oil wealth with future generations.

Nigeria is different

In the case of Nigeria, the narrative is different. Policy mistakes, wasteful spending, and an inability to diversify beyond oil dollars or build a life after the oil plan have prevented the country’s economy from reaching its full potential and left it completely vulnerable to the famous “resource curse.”

“Without a doubt, IOC divestitures have created opportunities for local operators and service providers. However, poor management eventually suffocates everything. The government has a huge responsibility to catalyze, drive efficiency and sustain it so that the Nigerian oil and gas industry can thrive,” said Dimeji Bassir, CEO of Ofserv, in an interview with Africa Energy magazine.

Despite producing oil in commercial quantities for over fifty years, Nigeria’s oil production has not in recent years exceeded the 2.3 million barrels per day achieved in 1979. Nigeria’s oil production was insufficient to trigger a Middle Eastern-style economic miracle at that time.

“Since the inception of exploration in the Niger Delta region, Nigeria has been grappling with challenges related to crude oil theft and pipeline vandalism, leading to production disruptions,” analysts from Asset & Resource Management Company Limited (ARM) Group said in their 2024 report .

Read also: Nigeria’s oil sector turns into ghost town as FDI disappears

They added: “These issues have significantly impacted Nigeria’s ability to produce oil to its maximum potential, resulting in sequential declines in the sector’s growth rate.”

Recent modest gains, such as the passage of the Petroleum Industry Act (PIA), the growing number of domestic operators and the emergence of modular refineries, have been hampered by an inefficient domestic oil company, loss-making refineries and a decline in foreign direct investment (FDI).

“Nigeria’s refining capacity, while significant, has been limited by outdated infrastructure and poor management,” ARM analysts said.

They added: “Recent efforts to set up modular refineries have increased refining capacity, but they still fall short of meeting domestic demand.”

Rot in the NNPC

Analysts say an in-depth analysis of Nigeria’s national oil company is a starting point in ensuring citizens get maximum value from the country’s oil and gas resources.

“Nigeria is a fragile country and our oil and gas industry does not have a good reputation internationally, making it difficult to raise capital for greenfield projects. Refining is the newest of the various upstream, midstream and downstream sectors in the country, and while refiners in Nigeria are pioneers, they have great difficulty in securing raw materials,” said Michael Osime, president of AIPCC Energy.

NNPC, as the national oil company, is at the center of the chaos. The company, which was entrusted with 445,000 barrels of domestic oil production under various contracts with local and international oil partners, began switching crude oil to refined products over the years because it was unable to maintain its refineries.

When the company began opaque oil trading in 2010, its refineries were operating at only about 20 percent of their capacity. The following year, banks unwilling to finance more imports on open accounts that had deficits of more than $3 billion forced the government to begin granting waivers to marketers, ushering in an era of fraudulent gasoline subsidies.

“By looking at successful oil companies such as Shell and Exxon Mobil, Nigeria can learn valuable lessons in operational excellence. These companies are prioritizing efficiency, innovation and sustainability, setting the standards that NNPC and other local players should strive to meet,” a senior petroleum executive told BusinessDay.

He added: “For example, the use of technology in exploration and production can lead to lower costs and reduced environmental impact, making the Nigerian oil sector more sustainable in the long run.”

NNPC’s operating models also need to be cleaned up. It uses Joint Venture agreements with local and international oil companies to produce onshore and shallow water oil wells. It owns 60 percent of the benefits under these contracts, but often does not share in the costs, leading to what is known in the industry as cash arrears. However, it recently repaid $2.44 billion in cash obligations to international oil companies that are its joint-venture partners.

Most of these areas are affected by sabotage and problems of local communities, which forces their international partners to give up. Under Nigerian law, they are required to decommission these deposits – essentially leaving them as they have for the environment – but the costs are enormous. So they found a creative solution by selling their shares to local oil companies.

But the NNPC opposed this solution. Shell, ExxonMobil and most recently ENI have had difficulty exiting interests in onshore assets.

Also read: Nigeria pays $2.4 billion in monetary obligations to IOC and others

“If we analyze the production data, at approximately 1.3 million barrels per day, excluding the 600,000 barrels per day from deepwater, we will only be left with 700,000 barrels per day from onshore operations. This is a significant decline from the previous level of 2 million barrels per day,” Austin Avuru, executive chairman of AA Holdings, said in the Africa Energy 2024 report.

He added: “As the IOC transactions are completed and independents assume responsibility, I expect a sharp increase in the number of new investments made by these independent companies. “It is conceivable that onshore and shallow water production could reach 4.5 million barrels per day, perhaps in the near future.”

Apart from the upstream sector, ARM analysts say Nigeria’s downstream sector faces challenges such as mispricing of products, safety concerns and dilapidated infrastructure, despite being the world’s 13th largest oil producer.

“The sector faces a variety of challenges, including an inadequate supply chain, pipeline security issues, inconsistent supplies due to vandalism, outdated pipeline infrastructure, malfunctioning refineries and logistical challenges,” ARM analysts said.

The country is currently home to the Dangote oil refinery and is considering changing the prospects for Nigerian gasoline refining.