TOPIC: POLITICAL ECONOMY OF OIL: A CASE STUDY OF NIGERIA PRESENTED BY: REV’D. KOLADE OLADELE POLITICAL ECONOMY OF OIL: A CASE STUDY OF NIGERIA INTRODUCTION At the beginning of this century, Africa surged into limelight of global energy security calculation with her about 9% of the world proven oil reserves. African oil has assumed critical importance in the context of a tight global oil market in the wake of increased global demand and the shrinking number of significant oil fields to replace rapidly depleting oil fields across the world. Africa occupies a very strategic place in the global political economy of oil amid growing US dependence on African oil imports, and the growing concern in the West following the recent arrival of energy-hungry Asian State Oil Corporations (Chinese, Indian and Korean) intent on securing a foothold in the Africa’s oil fields. Oil was first discovered in Nigeria in 1908, and exploration began during the 1930s by the Shell – BP Petroleum Development Company of Nigeria Limited under the control of Shell and British Petroleum (BP). It was however, in 1956 that the first commercial quantities of oil were found in West Africa, in the Niger Delta basin of Nigeria. Today, Nigeria accounts for 86% of total West African Oil Production and almost all gas production. In January 2006, Nigeria’s proven oil reserves stood at 35.9 billion barrels, equal to 32% of total African and 3% of World proven reserves. In addition, it has proven gas reserves of 5.2 trillion m3, 36% of total African and 2.9% of World proven reserves. During the last 10 years, Nigeria’s oil production increased by an annual average of 3% reaching 2.6mbpd and gas production by 18% to 20billion m3 per year. Oil and gas production will significantly increase over the coming years with recent discoveries coming on stream and additional LNG Plants becoming operational. There is no doubt that Nigeria has become a major player in the global economy especially because of her natural resources. THE SCOPE OF THIS PAPER This paper is structured using the “A4” research tool of Anecdote, Analysis, Applications and Actions. Beginning with the introduction, and anecdotal survey of importance and emergence of oil economy is sort, placing Nigeria at the centre point of the discourse. Analysis of the various significant elements of oil economy will be done and a contextual application of the many issues involved attempted. Actions that will help deal with the identified issues and challenges shall be proffered as the paper ends with giving hope and light in the dark “portions” identified. THE WORLD OF OIL The dynamics involved in political economy of oil cannot be properly understood without a clear eco-political mapping out of the various strategic state players. This mapping is what largely determines the “plumb line” of investigating the political, economic implication of oil on the various players. Where you stand determines what you gain or lose in the oil eco-political equation. In a simplified way, the world of oil can be divided into two “blocks”. One, high consumption net importing block composed of North America, Europe and Asia Pacific and another one, net-exporting low-consumption composed of the Middle East, former Soviet Union, Africa and Latin America. TABLE 1 Top 10 Consumers, Importers and Exporters in 2005 (in million barrels per day and % of World Total) Rank Consumption Imports Exports 1. USA 20.7 (24.6%) USA 13.8 (27.7%) Saudi Arabia 9.1 (18.3%) 2. China 7.3 (8.9%) Japan 5.4 (10.7%) Russia 6.8 (13.6%) 3. Japan 5.4 (6.4%) China 3.7 (7.4%) Norway 2.7 (5.4%) 4. Russia 2.8 (3.4%) Germany 2.6 (5.2%) Venezuela 2.5 (5.3%) 5. Germany 2.6 (3.2%) South Korea 2.3 (4.6%) Iran 2.4 (4.8%) 6. India 2.5 (3.0%) France 2.0 (3.1%) United Arab Emirates 2.4 (4.8%) 7. South Korea 2.3 (2.7%) India 1.7 (3.4%) Kuwait 2.4 (4.7%) 8. Canada 2.2 (2.6%) Italy 1.7 (3.4%) Nigeria 2.3 (4.6%) 9. France 2.0 (2.4%) Spain 1.6 (3.2%) Mexico 1.8 (3.6%) 10. Mexico 2.0 (2.3%) Netherlands 1.0 (2.1%) Algeria 1.8 (3.5%) Source: BP 2006 U.S.A. accounts for the highest consumption and imports of oil. 25% and 28% in 2005 followed by China on consumption. Middle East is considered the world petrol station because it accounts for almost one third of production and half of inter regional exports. Although, African accounts for 12% of global production at best, it is the second largest exporting region with 16% of total exports. Today, Africa accounts for a quarter of European Imports and 20% of U.S.A. and China’s Imports. World refining capacity is still heavily concentrated in the importing regions, with U.S.A. and Canada, Europe and Asia Pacific, each accounting for around 20% of global capacity. Africa accounts for 4% of total refining capacity of which 13% is in West Africa. In 2006, Africa had 17 crude oil producing countries. Nigeria is the African biggest oil producer with 2.6 million barrels per day or 25% of total African production. AFRICAN OIL’S ECONOMY PARADOX African has grown in more recent times from just agricultural producing continent to natural mineral producing continent. Oil is now becoming African’s most strategic and sought after commodity in the global market. As earlier stated, Africa continent has really emerged as a key factor in global energy calculation. This so-called new scramble for Africa’s oil is impelled in part by a rapid increase in global demand by emerging industrial powers and has not only contributed to the priotization of the continent’s prized hydro-carbon resource for global economic growth, but also included, in a post-cold-war world, its integration into a US-led paradigm of global security. Oil is now a key element of global power (Obi 2009, P.471). Thus, the stakes in controlling oil are now very high, and constitute a core interest of the World’s powers. It also means that Africa as a valued source of oil and gas supplies is central to the strategic calculations of the World’s oil-dependent dominant powers. Nigeria, being the largest oil producing State in the continent stands very strategic in this dimension. The discovery, production and exportation of oil have a multifaceted impact and consequences both economically and politically. There is the power relation between peoples, States and International oil companies. African oil owning States operates in partnership with oil multinational corporations that dominates the technology of oil production, alongside the global shipping powers and navies that ply and patrol the maritime oil supply routes. In this sense, African oil-rich States are locked into complex and opaque transnational ties with global powers based largely on the joint exploitation of oil enclave investments (Ferguson 2005, pp. 378-379). The problem of the class relations, contradictions and conflicts manifesting in the subordination of Africa and her resources to transnational processes and African elites embedded in globalised capitalist relations is largely responsible for the evident economy paradox manifests in violent conflict, poor economic growth or acting as a disincentive for peace (Basedau and Lay 2009, p. 758). It is the quest for oil money that is largely responsible for most of the armed conflict in oil producing African countries. Oil wealth has also increased propensity for corruption, misrule, authoritarianism or political instability. Of note is the recent work of Lujala (2010, pp. 15-16), which examines ‘empirically how the location of natural resources affects armed civil conflict, and concludes that ‘oil substantially prolong conflict when located inside the conflict zone; thereby rendering oil endowment a critical factor in the location, duration, and intensity of armed onflict. There is the established paradox of resource abundance, conflict and poor economic growth. The insurgency in Nigeria’s oil rich Niger Delta region has provided strong ground for this perspective. The case of Nigeria is worse in the face of these established paradoxes because Nigeria economy is a dependent and volatile economy relying majorly on oil and gas sector. Table 2: Nigeria’s Yearly Crude-Oil Production, Export and Domestic Consumption 1960-2008 (‘000 Barrels) Year Production Export Domestic Consumption 1960 6,374.0 6,244.0 1965 99,355.0 96,985.0 1970 395,689.0 383,455.0 12,234.0 1975 660,148.0 627,638.0 32.510.0 1979 854,463.0 807,685.0 37,778.0 1980 760,117.0 656,260.0 103,857.0 1985 547,088.0 486,580.0 60,508.0 1990 660,559.0 548,249.0 112,310.0 1995 715,400.0 616,900.0 98,500.0 2000 797,880.0 688,080.0 109,800.0 2005 919,285.0 846,179.7 73,105.9 2006 813,950.0 656,090.0 164,200.0 2007 803,000.0 791,826.5 Not available 2008 768,745.9 724,479.8 “ Source: CBN, Annual Statistical Bulletin Volume 18, December, 2007. Table 3: Contribution of Crude-oil and Gas Export to Nigeria’s Total Export 1960-2008 (Million Naira) Year Total Export Non-Oil Export Oil and Gas Export Oil & Gas Export as % of Total Export 1960 339.4 330.6 8.8 2.3 1965 536.8 400.6 136.2 25.3 1970 885.7 376.0 509.6 57.5 1975 4,925.5 362.4 4,563.1 92.6 1980 14,186.7 554.4 13,632.3 96.0 1985 11,720.8 497.1 11,223.7 95.7 1990 109,886.1 3,257.6 106,626.5 97.0 1995 950,661.4 23,096.1 927,565.3 97.5 2000 1,945,723.3 24,822.9 1,920,900.4 98.7 2005 7,246,534.8 105,955.9 7,140,578.9 98.5 2006 7,324,680.5 133,594.9 7,191,085.6 98.1 2007 8,120,147.9 169,709.7 7,950,438.3 97.9 2008 9,774,610.9 94,316.7 9,680.194.2 99.0 Compilation from the Central Bank of Nigeria, Statistical Bulletin Golden Jubilee Edition, December, 2008. NIGERIA AND OIL RESOURCE NATIONALISM Oil production is considered as the cornerstone of Nigeria’s economy, accounting for about 95% of the country’s foreign exchange. Oil operations account for 20% of the country’s gross domestic product and NNPC is responsible for nearly 65% of the budgetary revenue. Given the very sensitive role of oil in the nation’s economy and the fact that the commercial exploration which really began since late 1950s was left in the hands of the foreign multinational companies, it became very necessary for the Nigeria government to work towards the control of the resource. The Nigerian government introduced its first tax regulation of oil industry profit in 1959 whereby profits would be split 50-50 between government and Shell-BP Petroleum Development Company of Nigeria Limited. By mid-1960s, the government formulated its first agreement for taking an equity stake in one of the oil companies, the Nigerian Agip Oil Company, jointly owned by Agip of Italy and Philips of the United States. By 1971, the Nigeria government was pushed into taking equity stakes in the Western Oil Companies that would constitute the basis of the NNPC’s holdings. Government questioned the contribution of the foreign oil companies to national development. The foreign companies were also not ready to work towards transfer of technology, social development, and employment of indigenous staff. So, on 1st April, 1971, Nigerian National Oil Corporation (NNOC) was born. The NNOC was established under the terms of government’s Decree No. 18 of 1971. NNOC was to “participate in all aspects of petroleum including exploration, production, refining, marketing, transportation, and distribution”. More specifically, the corporation was given the task of training indigenous workers; managing oil leases over large areas of the country; encouraging indigenous participation in the development of infrastructure for the industry; managing refineries, only one of which was operational at this time; participating in marketing and ensuring price uniformity across the domestic market; developing a national tanker fleet; constructing pipelines; and investigating allied industries such as fertilizers. The failure of the NNOC is traceable to the inherent limitations in the decree establishing it. Any activities beyond the scope of Decree No. 18 required government approval, and the government was well represented on the NNOC’s board which was chaired by the Permanent Secretary of the Ministry of Mines and Power. Thus from the very start, an establishment so crucial to the future prosperity of the nation was subject to close government manipulation and control. The operating failure of NNOC of the 1970s became publicly known at the time of the 1980 Crude Oil Sales Tribunal. One of the stunning revelations of the tribunal is the failure of NNOC and NNPC between 1975 and 1978 to collect some 182.95million barrels of their equity shares of oil being produced by Shell, Mobil and Gulf with potential estimated revenue over $2 billion. This happened because NNOC could not find buyers for its oil at the price it wanted. It had, however, paid the full share of operational period. In addition, NNOC had not produced audited account from 1975 onward. On April 1st 1977, NNOC was reconstituted as the Nigerian National Petroleum Corporation (NNPC). The establishing Decree 33 vested the assets and liabilities of the NNOC in the NNPC, and conferred on the NNPC responsibility for some functions of the Ministry of Mines and Power. NNPC was also given some additional commercial freedom as the ceiling on contracts that it could award rose 50-fold and it was granted limited borrowing powers. The Decree No. 33 also enabled the establishment of the Petroleum Inspectorate, which was given responsibility for issuing licenses for various activities for enforcing the oil Pipelines Act and the Petroleum Decrees and for other duties. The Indigenization Decree of 1977 enabled NNPC on July 1, 1979 to raise its stakes in the Nigerian businesses with Elf, Agip, Gulf, Mobil, Texaco and Pan Ocean to 60%. NNPC’s stakes in the Shell venture was raised to 80% on August 1, 1979 after BP lost its 20% stake following disagreements with Nigerian government over South Africa. THE WOES OF DEPENDENCE AND TRANSNATIONAL TIES It has been stated previously that African Oil-owning States operate in partnership with oil Multinational Corporations (MNCs) because they dominate the sophisticated technology, management skills and globally integrated operations of the upstream section of the oil industry in Africa. Again, is the dependence on the global shipping powers and navies that ply and patrol the maritime oil supply routes. In this vein, most oil-rich African States can just be described as ‘revenue – collecting, oil dependent States’.Failure in development and economic growth is not only because of internal corruption of the nation but also the deficient oil company remuneration for drilling and extracting, and sharp corporate practice which simultaneously denies and removes profits (Bracking 2009, pp. 3-17). There is also the challenge of capital flight. Substantial resources that could have been invested in development are lost to capital flight. Between 1970 to 2008, Africa lost an estimated $854 billion to capital flight, with its “fuel exporters” being the largest losers, underlining the connection between oil endowment and high rates of capital flight from the continent (Kar and Cartwright – Smith 2010. Pp. 10-12). Nigeria, between 2000 and 2008 is estimated to have lost capital at the rate of nearly $10 billion per year (1bid). In this same context, MNCs made record profits (Boles 2006 and Macalister 2007, 2008), and their earnings both in terms of what they make from Africa’s oil fields and in terms of leveraged profits from their partnership with African States remain largely hidden behind opaque international accounting and banking practices (Adusei 2009, Brucking 2009). According to Kar and Cartwright-Smith (2010, pp.1) Capital flight also resulted from the “proceeds of Commercial Tax evasion, mainly through trade mispricing’, and much less to do with the ‘proceeds of bribery and theft by government officials”. This position is given much credence by the study by Ndikumana and Boyce (2008)and reports from Tax Justice Network (2008, 2009) that emphasized how the ‘aggressive tax avoidance policies of multinationals are among the darker sides of globalization’ (Tax Justice Network 2008), and also cause African resource – endowed countries to suffer the loss of massive amount of capital. With the aforementioned, African organized, transnational, evil milking, Africa’s oil remains anchored in a global political economy, consigning the continent to the position of a supplier of capital. This process of subordination of Africa’s oil production to domination by oil – MNC and transnational capitalist elites, and the demands of the global market has meant that oil investments ‘have been concentrated in secured enclaves, often with little or no benefit to the wider society’ (Ferguson 2005, pp. 378). In Nigeria for example, corruption is not an entirely internally driven process. Oil MNCs are complicit with political and economic elites in engaging in corruption and violence, taking advantage of the nature of the Nigerian Petrol-State and elites to reap super-profits. NIGER DELTA PHENOMENON Hardly can anything be written about Political Economy of Nigeria without reference to its oil production. The impact of the oil sector on the nation’s politics, economy and socio-ethnic relations and governance process can in no way be over emphasized. The current issue/crisis and insurgency in the Niger Delta area of Nigeria is not unconnected to the issue of oil production and oil-wealth distributions. Nigeria accounts for 86% of total West African Oil Production and almost all gas production. The majority of Nigeria’s oil reserves are found in the Niger Delta basin, an area of 75,000km2 which stretches into Cameroon and Equatorial Guinea. Though, confounding but it is the paradoxical reality that the regions (Niger Delta) with very rich natural resources, the bulk of the population are living below poverty line. (Aghalino and Eyinla, 2009). The situation has resulted in insurgency in the region with militias fighting government forces, sabotaging oil installations, taking foreign oil workers hostage and carrying out lethal car bombing. At the root of the crisis is underdevelopment exacerbated by emergent issues of gross distortion of Nigerian Federalism in respect to resource control, citizenship rights and environmental degradation. The truth is that these militias are not only fighting the government but they are also at war with the extension of global capitalism represented in the region by the multinational oil companies. The fact that depravation economic and socio marginalization and environmental damage of Niger Delta are the reason for the birth of militias in the area is better attested to by the defense of late Ken Saro Wiwa, the murdered leader of Movement for the Survival of Ogoni People (MOSOP) during his trial at the Military Tribunal: “My lord, we all stand before history. I am a man of peace, of ideas. Appalled by the denigrating poverty of my people who live on a richly endowed land, distressed by their political marginalization and economic strangulation, angered by the devastation of their land, their ultimate heritage, anxious to preserve their right to life and to a decent living……..”. (Ken Saro-Wiwa, http//www.unitedijawstates.com. Corruption in high places, accessed June 27, 2007). The roots of violence in Niger Delta do not lie in pools of oil; they lie in the inequitable (transnational: local, national and global) power relations embedded in the production of oil and the highly skewed distribution of its benefits and pernicious liabilities (Obi, 2007, 2009). The bane of the matter is the unholy exploitation and pollution of the Niger Delta area by a State- transnational oil alliance whose activities alienated the indigene from the land and means of their livelihoods, poisoned the eco-system, deepened pre-existing inequalities and grievances, and paved the way for the descent into violent conflict (Ukeje 2001, Okonta 2005, Obi 2010). The WAC Global Services (2003) document has established how some oil companies through largesse to local elites and youth groups to ease entry and provide “protection” to company interests and assets provided “fuel” for conflict between the groups and within and between communities. The large sum of money devoted to oil Company Corporate Social responsibility (CRS) budgets for the Niger Delta have not adequately addressed the needs of the region rather it has fed into fed into cycles of intra-and inter community violence (Human Rights Watch 2002, 2005, Best and Kemedi 2005, Ikelegbe 2006). The benefit of the wealth of oil exploration in Niger Delta goes to the political elites, global financial institutions and oil corporations, while the real curses goes to the people of the region whose lands and livelihoods are polluted or expropriated, and whose rights are trampled underfoot as they continue to live out a paradoxically impoverished existence in an oil-rich, but blighted context. POLITICAL ECONOMIC REFORMS OF THE OIL SECTOR Several administrations of Nigeria government came up with various “rescues” policies to help arrest the many problems of the oil sector. Special attention is given to some of these reforms starting from the start of 80s with the effects of the oil sales tribunal. The reform focus of the then government mainly focused on decentralizing the NNPC. As a result of this policy reform, nine(9) subsidiaries were established in 1981:  Nigerian Petroleum Exploration and Exploitation Company  Nigerian Petroleum Refining Company, Kaduna Limited  Nigerian Petroleum Refining Company, Warri Limited  Nigerian Petroleum Refining Company, Port Harcourt Limited  Nigerian Petroleum Products Pipelines & Depots Company Limited  Nigerian Petro Chemicals Company Limited\  Nigerian Petroleum Marine Transportation Company Limited  Petroleum Research and Engineering Company Limited In addition to this diversification, in March 1988, the Babangida Regime gave three areas of responsibility to the NNPC as Corporate Services, Operations and Petroleum Investment Management Services – the idea is to transform the NNPC into a financially autonomous and commercially integrated oil company. A new sale policy was also introduced, eliminating middlemen and setting out three (3) types of purchases to which the NNPC could sell its products: Joint venture producing companies, foreign refineries in which Nigeria has a holding and indigenous and foreign firms exploring in Nigeria. Around this same time, the NNPC’s subsidiary nomenclature was changed to eleven:  Nigerian Petroleum Development Company  Warri Refining and Petrochemicals Company  Kaduna Refining and Petrochemicals Company  Pipeline and Products Marketing Company  Hydrocarbon Services of Nigeria Company  Engineering Company of Nigeria  Nigerian Gas Development Company  LNG Company  Port Harcourt Refining Company  Eleme Petrochemical Company  Integrated Data Services Company One positive development was the increasing involvement of NNPC in the development of Nigeria’s gas resources. Its 60% holding with LNG Company was the springboard for an ambitious $2.5billion liquefaction project. All along, with all these developments, the fact that the NNPC was still learning how to master the technological and commercial complexities of the oil industry was still very much visible. The economic reform under Obasanjo from 1999 – 2007 was tailored towards Bretton Woods Institutions economic template. It was principally based on liberalization through privatization of the nation’s ailing public enterprises by the Bureau of Public Enterprise set up by the regime to coordinate the implementation of the privatization process. Another major highlight of the reform programme is the deregulation of the downstream sector of the nation’s oil industry and removal of subsidies from oil products. The implementation of deregulation exercise in the downstream sector of the oil industry was particularly tenuous as the removal of subsidy resulted in hike in the price of petroleum products, a situation that contributed to the worsening of living condition of the poor giving the centrality of petroleum products pump price to general commodities prices in the country. At the last count, the Obasanjo regime increased fuel price nine (9) times within eight (8) years with the price rising from N20 per litre in 1999 to N65 per litre for petro at the end of the regime tenure in 2007. However, the failure of the regime to sanitize the operation of the NNPC, control massive corruption that characterized the management of the agency and put the four moribund national refineries in operation is a major dent in the regime often touted economic reform programme. THE WAY FORWARD In concluding this work, as I look retrospectively I also see prospects and better tomorrow for our nation if only we can have the political will to tackle the hydra-headed problem identified in the submissions above. Certain fundamental flaws must be addressed to revamp Nigeria economy and reposition the State for prosperity and economic reckoning in the community of nations. I want to submit that: 1) Nigeria economy exhibits most of the pathologies connected with the ‘Dutch disease’ syndrome and our national wealth management reveals rentier mentality. There is the need for Nigeria to consciously rise from the resource dependent economy and move toward industrialization like the good case of emerging economies in the like of Malaysia, India, Korea and China. 2) The menace of corruption is a major economic cancer that the Nigeria State will have to seriously combat. The oil boom years expanded opportunities for unbridled corruption and profligacy in the process of national spending. The effect of the oil boom again is the filling of the State’s coffers with windfall revenue in billions which were actually, mostly spent frivolously. This has promoted corruption, encouraged patronage in the dispensing of public service and gingered a rentier economy that is tilted towards the wasteful spending of oil rents rather than productive creation of wealth in Nigeria. 3) Corruption must be genuinely fought, not just to a standstill but to grave, if Nigeria economy will move forward. 4) The problem of under investment must also be addressed. Of a major concern especially to the Nigeria’s oil economy is the non performing refineries. The total petroleum product production in the whole of West Africa (Nigeria, Cote d’Ivoire, Ghana and Senegal put together) is 385,000 barrels per day whereas the Nigeria’s petro daily demand stands at 400,000 barrels. Inspite of the fact that we are a major global crude oil producing State we still largely depend on imports of oil products from other countries. Bulk of real revenue that would have been gained by the exploration is lost through the exportation of the crude oil and the importation of more expensive oil products like petrol, kerosene, diesels etc. It is high time Nigeria emerge a leading refining State to supply not only our region but also nations in other continents. 5) Our oil development discourse should not center just on the rentier mentality we have being following before but on a diversification idea by which proceeds from oil can be used to develop and drive other aspects of our economy. This has been the sad departure line of Nigeria’s oil economy. The current ethos only serves narrow interests and hegemonic and transnational forces intent on fostering the integration of the continent into the global capitalist system on clearly disadvantageous terms. 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