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ECONOMIC IRRESPONSIBILITY AND NIGERIA’S OIL INDUSTRY

By NBF News

Is the NNPC, Nigeria's mega oil company, really broke? This is the major question surrounding the prospects of the economic viability, not to say the survival, of the nation's most important industry as the Golden Jubilee of national independence approaches. In spite of the fact that the nation has indeed survived great trials and tribulations over the last five decades it is now becoming clear that it has done so in spite of, not because of, the way that it has managed the affairs of this vital industry. Fifty years after independence and more than fifty-five years after exporting its first barrel of crude oil Nigeria's energy sector is in hock to the global petroleum cartel rather than being self-sufficient. Our nation is in danger of becoming an anomaly among oil producing nations.

Already in spite of the existence of vast petroleum and gas reserves we purchase the bulk of the refined products that we need abroad instead of producing our domestic needs from our raw material. There is a fundamental flaw in this process. Since the value added in the refining of our raw material abroad is passed on to the consumer through the price of the refined product the sale of our raw material cannot offset the cost of purchasing the refined product that we need. This is especially so because deficiencies in our industrial production generate extensive import-based commercial obligations.

The oil industry has not been able to lift either our agricultural sector or the manufacturing sector for basic commodities to any appreciable extent over the fifty years of our existence. Instead it has been responsible to a large extent for undermining the viability of other components of the nation's economic essence. It has also introduced debilitating elements of political dysfunction into the daily existence of those territories where it is located. Because of these and other reasons Nigeria's oil industry is largely regarded as a burden rather than an asset even though it supplies the bulk of the nation's income.

An objective study of the nation's reliance for its economic progress on the oil industry indicates the likelihood of a downward spiral in its fortunes. As long as the refining sector remains under-developed and the balance of imported purchases is weighted in favour of foreign producers the benefits of Nigeria's oil industry will be a systemic delusion. It is the attempt to sustain this delusion on the part of the government and the managers of its oil industry that has led to the controversy over the NNPC's true financial status.

In seeking to sustain the illusion of Nigeria's economic viability as a beneficiary of its status as one of the world's major oil producers the maintenance of a subsidy on the price of petroleum products in the domestic market has placed a debilitating burden on the NNPC's task of both managing the sale of the raw material and supplying local needs. Apart from this the spendthrift policies of several successive governments has generated losses rather than profits in several of the sub-sectors of the industry that are managed by the NNPC. This has been particularly noticeable in the distribution of refined products both by pipeline and overland.

For example it is surprising that Nigeria has not developed a railway freight system that could be linked to a network of refineries producing at optimal level to transport refined products throughout Nigeria and the rest of West Africa. This should have been a priority of past governments but for some reason it never seemed to occur to them. Today the ad-hoc cooperation that exists between private road haulage transporters and NNPC is one of the most unpredictable and volatile examples of the much touted public/private partnership in economic activities in the nation. Rather than promoting efficiency this partnership generates repeated breakdowns in the regular supply of petroleum products in the home market.

The present situation in the Nigerian oil industry also militates against Nigeria ever taking its rightful place as the major supplier of petroleum products (rather than crude oil for refineries in other nations) in West Africa. The NNPC has an exploration division that is meant to compete equally with multi-nationals in the exploitation of the raw materials but at the same time, through its participation in joint ventures, it is the major partner of all the players in the Nigerian industry. To some extent this might be a contradictory policy since it means that in some ventures the NNPC becomes its own competitor. Local experts have told us that this does not affect the expectations of viability that all of its joint venture operations predicate.

What we find difficult to comprehend though is why the joint venture operations do not seem to extend successfully into areas of local interaction such as the retailing arm of the company and the refining sector. Its major partners such as Shell, Chevron and Agip do not seem to have any commercial interest in these operations and it has emerged in recent weeks that these are the areas where NNPC has routinely recorded more loss than profit. The creation of the new local content development agency of the industry is a welcome development but unless there is a comprehensive transformation of the operational functions of the system as it serves relevant local objectives of the national economy this could eventually become as much of a siphon of resources as the joint venture enterprises have become. The services provided by NNPC must become more viable and sustainable as commercial ventures if the participation of local entrepreneurs in the industry is to serve the purpose of enhancing the economic responsibility that it represents for the national interest.

A substantial proportion of the oil and gas industry's obligations in the development of Nigeria's local economy is closely tied to its role as the key link between the national economy and the global financial arena. Nigeria's credit rating is actually maintained at an artificially superior level because the oil industry is its major collateral. The consequence of this is that Nigeria is granted substantial amounts of credit albeit at high rates of interest not based on its Gross National Product estimated on its population's size or productivity but rather on the anticipation that it will always have to produce oil to service its debt. At no time, not even when the insurgency in the Niger Delta cut the production of oil by nearly fifty percent, did the world's bankers regard Nigeria as a major credit risk. In spite of this global investors outside of the oil sector have never rated the nation as a major investment partner. Agro-allied industrialists who could find incredible sources of both raw material and skilled labour here for the production of processed goods have not shown any real desire to develop their interests here. The Nigerian Governments that should set the parameters for such investment have often paid lip service to the principle of diversification and reform.

However, instead of establishing practical methods of ensuring that revenue from oil sales can be used to actualise such policies these funds have been used to finance contractual obligations that often create new debts. Global financial managers observing these practices are inclined to treat Nigeria's oil economy as a source of capital flight rather than growth. The oil industry's economic irresponsibility has affected the political economy of the nation. Soon NNPC's insolvency will no longer be the issue and the real question might just be whether Nigeria needs an oil industry at all or whether it might not be better just to leave the oil in the ground.