Nigeria: Taking Political Risks for Oil

4 MINS READSep 5, 2012 | 10:29 GMT
Nigeria: Taking Political Risks for Oil
Nigerian President Goodluck Jonathan (R) on Aug. 9 in Accra, Ghana

The Nigerian Parliament will reconvene Sept. 17, and among the most important pieces of legislation slated for review is the newest draft of the Petroleum Industry Bill. First introduced in 2008 and reintroduced nearly every year since, the bill proposes an overhaul of Nigeria's lucrative petroleum industry, which produces roughly 2.5 million barrels per day. But despite high production, uncertainty surrounding the bill has reduced international investment in Nigeria's petroleum industry in recent years, leaving the West African nation unable to expand production beyond its current levels.

If approved, the newest iteration of the bill would ostensibly help rectify the production problem by delegating the responsibilities of Nigeria's state-controlled petroleum company to other entities, thereby improving transparency and reducing corruption and collusion. But the bill would also cut fuel subsidies, allocate funds to the oil-producing states of the Niger Delta to the exclusion of other states, and greatly empower the president. Unsurprisingly, Nigerian President Goodluck Jonathan — an ethnic Ijaw from the Niger Delta's Bayelsa state — supports the bill, but lawmakers outside the Niger Delta likely will oppose the bill, as will Nigerian citizens and petroleum industry businessmen who will be adversely affected by the unpopular subsidy cuts. As a result, the bill will not likely be passed in its entirety unless a weaker and more inclusive version is drafted.

Currently, the state-controlled Nigerian National Petroleum Corp. has extensive responsibilities in the energy sector. But the newest version of Petroleum Industry Bill — the fourth of its kind — would create independent entities from several of the company's divisions and reassign responsibilities for policymaking, granting concessions, research and development, natural gas regulation and upstream, midstream and downstream operations. Relieved of these bureaucratic duties, the Nigerian National Petroleum Corp. would concentrate on producing oil in joint ventures with foreign companies. The bill also includes a revised taxation and royalty system that would significantly increase government revenue.


Niger Delta Oil Fields

Niger Delta Oil Fields

Another key provision of the Petroleum Industry Bill addresses militancy and criminality in the energy sector. According to The Wall Street Journal, energy companies pay Niger Delta militant leaders anywhere from $3.5 million to $22.5 million per year to protect petroleum infrastructure. These multimillion-dollar security contracts have reduced militant attacks over the past several years. Nevertheless, bunkering (the act of illegally taking crude from pipelines and selling to traders) still costs the Nigerian government and international oil companies roughly $5 billion per year.   

The bill introduces a new measure called the Petroleum Host Communities Fund, which is meant to redress some of the grievances — the uneven distribution of oil revenue, for example — that originally incited militancy in the Niger Delta. Benefitting only petroleum-producing states, the fund is a mechanism to which every upstream production company would allocate 10 percent of their net profits per month. Proceeds of the fund would be used to develop the host community. It would also be used to repair infrastructure damaged by militants or criminals, a task that is currently the oil companies' responsibility. Even though the fund would compel Niger Delta communities to police themselves, militant leaders would continue to bunker and receive security contracts lest they lose their revenue streams.

Other provisions would centralize power in the presidency and the Petroleum Ministry, which is currently headed by Deziani Allison-Madueke, who also hails from the Niger Delta. The appointment power for any new petroleum agencies created by the bill would be shared between the president and the petroleum minister, with little parliamentary oversight to prevent them from doling out appointments to their political patrons. So long as she complies with Jonathan's wishes, Allison-Madueke would have near-total control of downstream licensures and leasing, as well as upstream licensures for liquefied natural gas and gas-to-liquid facilities, petrochemical plants and natural gas pipelines.  

Unpopular Provisions

Many of the bill's provisions, particularly those that concentrate power over the upstream energy sector, concern Nigerians outside the Niger Delta. Northern Nigerians believe the new bill gives too much power to the Niger Delta states and fails to distribute revenue equitably. Their reservations may be well-founded; Jonathan will run for re-election in 2016, meaning he could potentially hold office until 2021. In accordance with Nigeria's power-sharing agreement, no one from the Niger Delta will occupy the presidency for another 25-50 years. Jonathan likely wants to solidify the gains for his region in the short term at the expense of the north.

Northern governors have expressed their opposition to the bill and will issue a study of the bill's effects in three months. Their findings will likely confirm their suspicions, which in turn will prolong parliamentary negotiations. These negotiations will further dilute the bill, which has become steadily weaker with each new draft. Weakening the bill further probably would undo the provisions that increase government transparency.

Northern Nigerian lawmakers will not be alone in their opposition to the bill. Gasoline distributors, refiners and marketers earn $3 billion off Nigeria's $8 billion gasoline subsidy program, and therefore stand to lose a lot of money from the bill's proposed gasoline subsidy cuts. These businessmen, who are influential in Nigerian politics, likewise can be expected to oppose the bill.

The Nigerian public will also be against the subsidy cuts. When Jonathan temporarily removed the subsidies on Jan. 1, gasoline prices nearly tripled and public demonstrations and union strikes compelled the president to reinstate the subsidies.

In any case, without additional investment, Nigerian oil and gasoline production will continue to stagnate. This is especially true of upstream operations, where fiscal and regulatory changes are the most pronounced. The new Petroleum Industry Bill will not completely rectify this problem, but passing the bill would help Nigeria offer new exploration and production concessions. That it benefits the Niger Delta over the country's north in the short term will provoke the ire of northern political elites, but for Jonathan, the goal is to secure what gains he can for the Niger Delta while promoting investment in spite of the political battles that lie ahead.

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