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washosy's Blog
washosy's Blog
Nigeria’s paradoxical ways with its oil
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Oil remains our national lifeline and the predominant basis

for national sustenance and development… yet, we have never

had a transparent and cutting-edge managerial approach or continuity in our oil policies.



Last August, barely three months into his presidency, President Umaru Musa Yar’Adua confronted what was perhaps the best-kept secret in Nigeria; that those charged with managing Nigeria’s oil wealth were operating a bottomless cesspool. As several Nigerian papers reported then, Mr. Hamman Tukur, the chair of the Revenue Mobilization Allocation and Fiscal Commission (RMAFC), unequivocally told the president, that Nigeria was losing monstrous amounts of money from oil revenue because of lack of “transparency and accountability in computation and procedure of payment.”



More specifically, Tukur reportedly told the president that “Nigerian National Petroleum Corporation (NNPC) between December 2004 and April this year, fleeced the nation of some N555 billion” and may have “defrauded the country of N502 billion through production of crude oil far in excess of the quota assigned by the Organization of Petroleum Exporting Countries (OPEC).” (The Sun, 22Aug.’07)



Almost one year after the Obasanjo regime left office, there are increasing revelations that much more unsavory acts took place during the eight years he was in charge of the petroleum portfolio. At issue: what happened to the excess unrefined crude, routinely allocated to the four nationally owned refineries, which everyone knew, were operating well below their respective and collective capacities?



Some of the recent revelations are mind-boggling. For instance, it has been determined by a recent report that, “The value of this unrefined excess ‘domestic’ crude (even at the then low spot market price of $60 per barrel) approximated to about N51 billion per month at the then prevailing exchange rate of N135 to the dollar.” It is perhaps best to allow the reader to do the arithmetic of the cumulative sum of N51 billion per month over 96 months. Astonishing!



When in the mid-1970s, Gen. Yakubu Gowon remarked that Nigeria’s problem was how to “manage our prosperity” many ridiculed his take. In hindsight, he was quite prescient. Indeed, the recent revelation by House Speaker Hon. Dimeji Bankole that, “there is no record anywhere in Nigeria of how much a barrel of oil has been sold. There is no clear record of the prices of oil in the last 40 years” is troubling as it is tragic. Yet, Point 3 of President Umaru Yar’Adua much touted seven-point governance agenda titled “Wealth Creation”, states, “70% of all revenue comes from oil; need to keep this focused and extended to other areas.” On paper and as a policy option, this focus along with the other six points looks good and purposeful. The devil, however, is in the details of its implementation, more so, since our oil policy has always been opaque and its implementation always conducted in the dark.



Nigeria is a richly blessed nation in many regards. As a nation, we have earned respectable sums from oil, sufficient to turn our country into an equally respectable, Medium Power. But we have squandered our riches. In the 1970s, we had the oil boom; in the early 1990s the first windfall, and now, we are reaping unprecedented high revenue from oil. The question is how is the revenue being managed and accounted for, and whether there will be any tangible evidence in the end, that we did something substantial and meaningful with the windfall that is presently accruing to us under Yar’Adua’s leadership?



Hitherto and as is the case now, Nigeria rely heavily on oil and gas revenues, and will do so for the near future, despite agriculture and manufacturing being prospective high revenue earners. Oil remains our national lifeline and the predominant basis for national sustenance and development. Yet we manage it callously with utmost levity since we have never had a transparent and cutting-edge managerial approach or continuity in our oil policies.



Such a paradoxical disposition with our oil calls into question, our leadership’s grasp of the fundamentals of nation building, their responsibility towards the national population, and their basic understanding of the essence of short, medium and long-term national planning. Furthermore, there seems to be a careless indifference, if not delusional assumption on the part of our leaders and technocrats, that our oil resources are infinite.



The year 2008 marks the beginning of a new season and a season of new beginnings for the global oil industry of which Nigeria remains a key player. But there has been an added twist to it all. Unheralded, a new drawn has arrived in the global oil industry that might rewrite the rules of the game. The Middle East geopolitics, notably the crisis in Iraq, and the strains between Iran and the West, coupled with many years of wars and sanctions have combined with the crisis in the Niger Delta region of Nigeria to push global oil prices to a new all-time high.



New oil Barons, namely, Mexico, Norway and Russia, who share a common bound of being outside the OPEC Cartel, are leveraging their clout and capitalizing on OPEC’s espirit de corps, without the name-calling that goes with it. Such an unholy alliance has guaranteed that current oil delivery for April, May 2008 and beyond will average around $120 plus per barrel. Still, when the world recovers from its present state of shock, only the shrewd policymakers and oil producing nations with strategic foresight would have adjusted well to the evolving realities. It should be discernible that the situation at hand foreshadows a global energy crisis, with dire consequences. If not, why would U.S. Senator Charles Schumer (Democrat-NY), propose withholding U.S. arms sales to under producing OPEC members until they sufficiently raise oil production to offset current record high prices. He was unusually hard on a key U.S. ally, Saudi Arabia, in observing, “They have to understand this is a two-way street. We provide them weapons, our troops provide them protection, and they rake us over the coals when it comes to oil.”



Ironically, while many oil producers including Nigeria are reaping huge windfalls, the corollary is that Nigeria’s overall production has dropped from about two million barrels per day to 1.3 million barrels, thanks to the Nigeria Delta crisis. Yet, in tangible revenue terms, Nigeria is earning now, trice what she earned in 2000; and seven times her earnings under the Babangida regime, when it earned some $12 billion in windfall during the 1990-1991 Gulf crisis.



One certainty about global petroleum policy is the definite uncertainty. Before now, it would have been unthinkable to contend that oil prices would reach $100 per barrel. Indeed, it would have been heretical to say so or forecast as much. Now, we know better. There are still vast imponderables and almost a glut of uncertainties about which direction and the extent things might go henceforth. Nevertheless, as we know, conventional wisdom has already been trashed and the econometrics of oil supply severely skewed. If not, how does one explain the fact that higher prices of oil have not attracted the attending suppression in global demand, nor attracted new and increased production?



If I were President Umaru Yar’Adua, who is Nigeria’s current oil czar or Mr. Odein Ajumogobia, Nigeria’s Minister of State for (Petroleum) Energy, I would promptly cut Nigeria’s current oil production levels, if possible, by half, notwithstanding Senator Schumer’s threat. Why, one would ask? Well, let us call it a strategic national interest consideration. As current market forecast contends, “Oil prices might exceed $200 a barrel by 2012,” which alternatively, will reflect “$7-a-gallon gasoline in the United States”. Indeed, this projection is rather conservative. $200 per barrel is indeed foreseeable by March 2009, were one to use the current prices and the "futures-spot spread" model. At that rate and a much-reduced output, Nigeria would still make more money than it did in December 2005, when oil prices hovered around $62 per barrel and far more than in 2000, when the prices averaged $30 or in 1998, when it was $10 per barrel.



Some may wonder what sense it would make for Nigeria, a developing nation, to pursue such a unilateral policy option. First, the policy proposal is introspective since domestic policies drive foreign policy. Second, every nation must leverage it clout to its own benefit. Simply put, an untapped barrel of oil in the ground is easily worth $500, which would be about 500% mark up from the present rate. Moreover, the notion of cheaper alternative sources of energy is already proving to be bogus. Surely, the technology exist for developed nations, but is the world ready to make a choice between an increasingly starving global population and the sustainable opportunity to fuel the appetite of those nations that produce less energy but consume more than others? Not quite likely. Several other factors also complicate the global oil situation. Whereas, the search for alternative sources of energy such as biofuel has increased, the reality is that several dominant established sources of oil, such as Britain, Norway, and Alaska are pumping less oil and indeed, their once huge reserves are depleted.



So far, Nigeria has not done much for itself with its oil by way of industrialization and development. Hence, it risks being in the long term, a poorer country when its oil runs out, simply because it has not planned judiciously, conserved its oil and invested its oil wealth, but rather, has adopted the “Lottery Winner’s” mentality in the use of its oil revenue. A critical point that still confounds many is why the nation has not industrialized. The seemingly intractable crisis in the oil-producing Niger Delta and the environmental degradation and underdevelopment of the region are emblematic of how badly Nigeria has handled its oil wealth. Across the board, Nigerians wonder how it is, that despite the surfeit of revenue from oil, the nation’s energy-generating sector is in such a sorry and dismal shape, that power supply was far more reliable in post civil-war period than now. Certainly, no nation can seriously claim being developed, when its power supply is unreliable and so epileptic.



The present situation could easily prove a Catch-22 for Nigeria. To make up for the high oil demand and the attendant global shortfall, the world is diverting its attention to grain, and sugar-based biofuel, which has concomitantly resulted in the current global food crisis. Nigeria is at risk of being trapped in the global food crisis, and would be required to spend more money on food than it does presently. Nigeria will certainly need all the financial resources at its disposal to import food to supplement its domestic production, were we to arrive at that critical juncture.



What Nigerian energy policymakers must begin to ponder and focus on, is that the present gasoline crunch will not go away anytime soon. That fact alone, should instruct the formulation of its oil policy henceforth. Pumping more oil to help assuage the global crunch will therefore be defeatist in the long term. Simply, it makes no sense. Why sell huge amounts of oil when pump prices currently stand at $3 per gallon, but are forecasted to rise steeply to a range of $7-$10 per gallon in the next 3-5 years.



If the shortfall in global oil production does not guarantee such a spiraling growth, then, the humongous demands from burgeoning and mega economies of India, China and cash-flushed Middle East, will definitely ensure that such demands will not abate. Indeed, Nigeria stands to gain more, if it can maintain a steady rate of production over a span of five years. Eventually, it can boost its production at the critical juncture when the OPEC cartel will be required to increase supply in order to meet the consumption demands that are projected at some 60 million barrels per day, which would amount to a 180% upward spike from the current ratio.



It is unlikely however, that those who lead Nigeria and who are in charge of its oil will do so out of conviction or out of altruism for Nigeria’s posterity. Even with the best intention, an entrenched system of corruption, murky transactions and greed will dictate otherwise. Political and other self-serving consideration also remain critical considerations. In a sense, the current leaders can rationalize that there is no assurance whatsoever; that the succeeding governments will retain and not squander whatever savings they have made for Nigeria’s posterity. Such logic would stand on firm ground. Indeed, one discomforting truth is that every successive Nigeria government, except for the Muhammad-Obasanjo and the Buhari-Idiagbon military regimes, has been far more reckless in their handling of Nigerian oil resources than the government they succeeded.



It is therefore only reasonable to expect every Nigerian government to seek to justify the use the resources at its disposal for governance purposes and current needs. But the life of the nation is not so ephemeral as to warrant not thinking of posterity and the succeeding generation. In fact, the awareness that the life of a nation is a continuum from one generation to another, is singularly compelling and a key variable in considering and planning social welfare policies, housing, employment, and national reserves.



It may seem quite a feat of achievement that Nigeria’s foreign reserve rose to $60 billion in March 2008 -- as compared to $16 billion in 2004 and $7 billion in 2003 -- and ranks second in Africa only Algeria's $100 billion. Nevertheless, there are several African countries with far smaller foreign reserves, economies and population, which have far better infrastructure, employment rates and reliable supply electricity than Nigeria. Such a paradox ought to give us pause. It must also inform our oil policy mindset and outlook.



A Warm Happy Mother’s Day to yours and mine and all the Mothers of the world!



With neither anger nor partiality, until next time, keep the law, stay impartial, and observe closely.