How oil-rich Nigeria failed to benefit from an oil boom

A surge oil prices can do amazing things. In Saudi Arabia, a futuristic city is set to emerge from the desert, filled with an artificial moon made from drones. The long beleaguered Angolan currency has suddenly become one of the best performers against the greenback. In the Middle East and Central Asia, oil exporters are on edge, as they could pocket $320 billion more in oil revenues this year than previously expected. Yet there is one conspicuous absentee from this merry petro-party. The net effect of the high oil price for the country which is usually Africa’s largest oil producer is “zero or negative”, laments Zainab Ahmed, Nigeria’s finance minister.

Africa’s most populous country, some 220 million strong, desperately needs the money an oil boom could bring. About 40% of its population lives on less than the equivalent of $1.90 a day. The government is struggling to repay its debts. Social services are disastrous. The dismal economy has contributed to the violence that afflicts much of the country. In the first half of this year, almost 6,000 people were killed by jihadists, kidnappers, bandits or the army.

Price controls are the main reason why the boom is ruining public funds. Elsewhere, as the price of crude rises, drivers pay more at the pump. Not in Nigeria. Petrol costs around 175 naira ($0.42) per liter, one of the cheapest in the world, but the government has not raised the official price since December 2020. In January, President Muhammadu Buhari reneged on his latest promise to reform the system, leaving the government to pay for the vast gap between Nigeria’s low fixed price and the world price. The state-owned Nigerian National Petroleum Corporation (nnpc) covers the fuel subsidy from its profits and sends what is left over to the government. But in the first half of this year, he didn’t send anything at all.

The prognosis is grim. The World Bank forecast in June that the government will spend 5.4 billion naira ($12.6 billion) on fuel subsidies this year, more than three times what it coughed up last year. This is more than the increase in revenue the government will derive from higher crude oil prices, the World Bank estimates (see chart 1). As a result, Nigeria’s net oil revenues are likely to be around 40% lower than last year, despite the high world price. It compresses everything else. In this year’s amending budget, the government allocated more to the fuel subsidy than to education, health care and welfare combined.

Price fixing has other harmful effects. Because gasoline is artificially cheap, Nigerians burn more of it. Gasoline consumption has fallen from around 58 million liters per day in 2021 to around 70 million this year, according to the nnpcimport figures. Some Nigerians, unsurprisingly, buy cheap subsidized gasoline, smuggle it across the border and resell it at a huge markup in neighboring countries. This smuggling is more lucrative when world prices are high. Moreover, although Nigeria pumps crude oil, its refineries are so dysfunctional that they have been shut down, so it imports almost all of its refined fuel. The rise in domestic consumption is therefore weighing on the current account.

Another reason Nigeria’s public finances benefit so little from high oil prices is that production itself has fallen to 1.13 million barrels per day, the lowest in over 50 years (see chart 2) , which partly explains why the oil industry has also been a drag on overall economic growth. Production has been slowly declining since 2005. This year it has plunged. Angola’s production has recently overtaken that of Nigeria.

One of the reasons for the decline in production is that nnpc is so cash-strapped after paying gasoline subsidies that it struggles to cover production costs for pumping crude oil. Yet another is that a large amount of oil is never counted in Nigeria’s production because it has been stolen.

Estimates vary, but the oil industry regulator says the thieves are stealing 108,000 barrels a day, or around 7% of production. It cost the government $1 billion in the first quarter of this year alone. Watchdogs estimate that between 5% and 20% of Nigerian oil is stolen. The Trans Niger pipeline, which can transport 180,000 barrels per day (about 16% of the country’s current production) has suffered so many thefts that its flow has been interrupted since June. Another large pipeline that carries 150,000 barrels a day has also been repeatedly attacked. Shell, a major oil company, said force majeure since March on all its exports of Bonny light, a high quality crude, allowing it not to respect its contractual obligations. Nigeria could produce an additional 700,000 barrels a day, but for theft and oil companies who have to cut production to avoid it, claims Mele Kyari, the nnpcthe head. The wave of vandalism at one point prompted the nnpc to shut down its entire network of pipelines, he said.

One way to steal is to overload legitimate cargo with more oil than declared. Another is to enter pipelines and siphon the oil, then cook it in bush refineries before selling it. Five years ago, the Stakeholder Democracy Network, a watchdog in the Niger Delta, conducted a survey that found more than a hundred such refineries in just two of Nigeria’s nine oil-producing states. For lack of other means of earning a good living, hundreds of thousands of young people are involved in illegal refining, explains Ledum Mitee, a local chief of Ogoniland, a region of the delta.

A lot of stolen crude goes directly to the international market. Small boats glide along the delta’s canals, filling up from illegally operated pipes. They deliver it to offshore tankers or floating oil rigs. Sometimes the stolen rough is mixed with the legal variety and then sold to unknowing buyers. Much of it, however, is bought by merchants who either claim they don’t know or don’t care that it’s been stolen. “There is a huge black market off the coast of West Africa,” says Alexander Sewell of the Stakeholder Democracy Network.

“This is perpetrated by the big boys,” Mr Mitee says. Tapping into large-volume pipelines, heated to maintain the flow of crude, requires real know-how. It also requires the complicity of some of the officials who run the pipelines and security forces supposed to guard them, says an observer who requested anonymity for security reasons.

A galaxy of thieves

The exact identity of the big boys is hotly disputed. Mr Kyari recently alleged that army officers, government officials and even religious leaders were involved. Navy spokesmen say such a large scale theft is implausible because – they say perversely – their patrols would have spotted the boats and stopped them. The nnpc itself is “the North Star in its [Nigeria’s] kleptocratic constellation,” says Matthew Page of Chatham House, a London think tank. It’s “transnational organized crime run by a lot of violent people”, warns the anonymous observer.

Mr Buhari promised a crackdown. The nnpcThe first decision was to hire private security companies to protect the pipelines – a telling indictment of the military. But it is unlikely that the problem will be solved. Two of the companies are partly owned by a former warlord, Government Ekpemupolo, better known as Tompolo. He led a guerrilla campaign in the 2000s for locals to control the delta’s oil, before agreeing to a deal to stop blowing up pipelines in exchange for amnesty and lucrative security contracts. That fell apart under the government of Mr Buhari, who in 2016 issued a warrant for his arrest. Yet Tompolo is now bizarrely both a government contractor and still on the wanted list of Nigeria’s anti-corruption agency, which claims to have earned $105 million from corruption. (He denies any wrongdoing.)

Ordinary Nigerians could at least take comfort that their gasoline is still cheap. However, it sometimes runs out, as price-controlled products often do. This year, there have been three episodes of shortages. Exasperated motorists in long queues ruminating on the country’s corruption can be forgiven for uttering a popular Yoruba slogan: Japanmeaning to emigrate.