Nigeria – can it break its oil curse?

A well produced video (see end of post) from the FT on the oil industry in Nigeria and asking if it is the classical example of a resource curse. There is a brief outline on the content below. There have been two significant changes in the oil industry in Nigeria – refining and subsidies.

Refining Nigeria has been a big oil producer for decades but very little of that oil has been refined. Therefore Nigeria sells oil abroad and then reimports it in the refined products that it needs. If they did have refinery they would be able to for it in local currency (Naira) and reduce the amount of US dollars required to buy the imports. With Nigeria pumping approximately 2 mn barrels per day there ought to be a refining process.

Some Nigerians think the worst thing that happened to an independent Nigeria was to discover oil. The currency becomes artificially overvalued, making it very, very difficult to produce and export goods because they’re too expensive and making it very attractive to import goods. So all sorts of Nigerian industries got wiped out. They ignored agriculture, which should have been the centrepiece of Nigeria’s economic development.

The government owns four refineries. But despite billions of dollars in investment over the years, they’ve never been able to refine petroleum products. Aliko Dangote, Nigeria’s richest businessman, is behind the Dangote Refinery is a $20bn project that, at its peak, is designed to process 650,000 barrels of crude daily. Dangote decided to take on the challenge. So he’s building the biggest single-train refinery in the world in the swamplands. In order for it to progress they had to:

• build their own port to receive manufacturing equipment as there was no port facility

• build their own trucking factory as there weren’t enough trucks in Nigeria to truck all the equipment.

• build their own power plant from the ground up as they couldn’t rely on the national grid

• import cranes as there are none for hire

When you import goods into your country, you are importing poverty and exporting jobs out.

Aliko’s investment in refinery, if it goes well, it should encourage both Nigerians and non-Nigerians to invest in Nigeria. Dangote thinks the refinery will reach 85 per cent capacity by the end of this year. Most people would tell you that that’s very optimistic. In December of 2023, the Dangote Refinery took delivery of its first 6mn barrels of crude and started test producing aviation fuel and diesel.

Subsidies For years, fuel subsidies have kept fuel prices artificially low. And one of the first acts of this government was to remove the fuel subsidies. Filling stations actually stopped selling fuel. And some increased their prices. So there was a kind of panic.

Fuel subsidies are part of the national psyche in Nigeria – people regard them as the only benefit they’ve gotten from their oil-rich rich country. But this is also a very expensive policy because it means that, as the oil price goes up internationally, the amount that you have to subsidise petrol also goes up. For Nigeria there’s very little money left for revamping its own pipelines or its own infrastructure, which contributes to the inability of the country to meet its Opec targets. But also, in terms of little money left to invest in trying to revamp the refineries as well.

When the fuel subsidies got to a peak of about $10bn in 2022, there was a sense that Nigeria could no longer afford this, especially because it felt like the government was paying these huge sums at the detriment of other sectors, including health and education, that have very poor outcomes in Nigeria. The cost of fuel has obviously driven people into poverty because Nigeria relies on fuel for not just power generation, but also moving goods and services and moving people as well from one part of the country to another. For years now, Nigeria has not been able to meet its Opec quota. A lot of it is because that oil is stolen. There are huge problems, reputational, logistical, criminal, and regulatory around these onshore wells. As the big oil majors pull out, local companies who either believe that they can or indeed are more able to negotiate some of these problems are moving in.

Empowering Africa. The country should be in the position to produce 2mn to 2.5mn barrels of oil per day. Today, we are only able to produce somewhere in the range of 1.2mn to 1.5mn barrels of oil per day. There are a three main reasons why not:

• theft of oil from pipelines etc.

• lack of investment caused by theft

• the global push for energy transition has made getting financing for oil and gas more challenging.

Nigeria is usually the biggest producer in Africa, it produces anywhere from between 1.3mn to 1.5mn barrels of oil a day. It’s a member of the Opec+ cartel. And it’s one of the top 15 producers of oil globally. The Nigerian government doesn’t collect that much tax. That means the government focuses a lot of its energy on making sure that the oil keeps flowing and the oil keeps pumping. In terms of GDP, it’s not as big as people imagine. It is not just oil as Nigeria has a very big banking, insurance and tech industry. Oil has been a blessing to Nigeria. It could have been more of a blessing, yes. And it can be a bigger blessing for the future. However, one commentator had a different point of view.

‘I feel that oil has been more of a curse than a blessing. You have a natural resource that takes over the national psyche so much that it’s kind of led to a lack of imagination. 2mn barrels of oil is not enough to make 200mn people rich. So what you get is you get a scramble.’

There needs to be more investor confidence created. You have to go from a transactional economy to a transformational economy.

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