Lessons from Nigeria Oil Experience

Mikidadu Mohammed

New Mexico State University, Las Cruces

Mikidadu Mohammed holds a Master’s degree in Economics from New Mexico State University (NMSU) and works at the Arrowhead Center, Office of Policy Analysis. His research interests include economic development, energy economics, and policy analysis. This report was funded by NMSU Department of Economics Summer Fellowship. The views and opinions of the author expressed herein do not necessarily state or reflect those of NMSU Economics Department, Arrowhead Center, or any agency thereof.

Oil prospecting in Nigeria began earnestly as early as 1908. Dreams of prosperity rose with the discovery of crude oil in the Niger Delta in 1956. The first commercial oil exports would follow two years later in 1958. Everything seemed possible – but almost everything went wrong.

Nigeria’s economy has been intricately linked to oil production since the mid-1970s. Petroleum exports are responsible for 95% of the country’s export earnings, 80% of the government’s revenue, and more than 40% of the country’s GDP (Garry and Terry, 2003). In 1969, Nigeria adopted the Petroleum Decree, which entrusted the federal state with “the entire ownership of all oil and gas on any land in Nigeria, as well as under its territorial waters and continental shelf.” In 1971, the government nationalized the oil industry by creating the Nigerian National Oil Corporation (NNOC). The same year, Nigeria joined the Organization of the Petroleum Exporting Countries (OPEC) after meeting one of its key membership requirements - nationalized oil industry. Oil production in Nigeria has since taken place by means of joint ventures with foreign oil companies; however NNOC always had a majority share (ICG, 2006)

Since the early 1970s, Nigeria has become heavily dependent on oil revenue. Revenue from oil exports between 1971 and 2005 was $390 billion, 4.5 times the country’s 2005 gross domestic product (GDP) (Budina and van Wijnbergen, 2008). According to the Nigeria National Bureau of Statistics (NNBS), revenues from oil and gas exports amounted to $196 billion between 2006 and 2010 ($59 billion in 2010 only). Ironically the Nigeria agriculture sector’s contribution to GDP continued to decline since the 1950s when it represented nearly two-thirds of Nigeria’s GDP. In 1950 agriculture production contributed 64.4% to Nigeria’s GDP. By 1993, the agriculture sector’s contribution to GDP shrunk to 35.7%.

At independence in 1960, agricultural products such as palm oil, cocoa, and rubber made up nearly all Nigeria's exports; today, they barely register as trade items on Nigeria’s export bill (O’Neill, 2007). Nigeria has gradually moved from being self-sufficient in food at independence to a massive importer. In 2002, Nigeria had to import nearly one-third of the rice it consumed, making it the second world’s largest market for rice (WARDA, 2003).

So what went wrong? Why the “want in the midst of plenty?”

Serious internal divisions existed before the first oil gush from the Niger Delta’s marshy ground in 1956. Prior to the unprecedented petroleum boom in the 1970s, Nigeria already exhibited signs of a distress state (6 unfortunate but successful and several failed military coups, a civil war, 3 inconclusive transitions to democracy, recurrent factional violence, and dissociation between citizens and government). Coupled with the blatant corruption that followed in the subsequent years Nigeria’s oil plight though avoidable proved inevitable.

Managing Nigeria’s oil wealth is at the heart of the country’s oil experience. Oil revenue distribution between the federal government and the states disproportionately favored the federal government to the detriment of the oil producing states. Between 1960 and 1963, 50% of the revenue was return to the states from which it was derived. By late 1990s, the states’ share had dropped dramatically below 3%. In 2000, a new revenue-sharing system was introduced which increased the states’ share to 13%.

Although the state’s share continues to remain under 50%, revenues obtained by the oil producing states have increased overtime. Oil producing states received $120 million in 1999 and approximately $1 billion in 2000. In 2004, the states obtained in excess of $6 billion from the Federation Account, with nearly 33% going to the four major oil-producing states namely Akwa Ibom, Baylesa, Delta, and Rivers. Perhaps the problem is not how much each oil-producing state or local government authority (LGA) receives but how well these states and LGAs invest or utilize the revenue for development purposes (ICG, 2006).

Environmental degradation is another aspect of the Nigeria oil experience. Nigeria had no federal environmental protection agency until 1988, 30 years after its first commercial oil exports. Astonishingly, environmental impact assessments were not mandated until 1992. Between 1976 and 1996, 4,835 oil spills, estimated at 1.8 million barrels, were formally reported to the Nigerian National Petroleum Corporation (NNPC) but the real figures were potentially as much as ten times higher. The government documented 6,817 spills between 1976 and 2001—practically one a day for 25 years.

The oil spills had far reaching effects on the local communities’ ecology, livelihood, and health: atmospheric pollution, groundwater and soil contamination, constant heat around the flare pits, and abnormal salinity of the pool water (O’Neill, 2007). Though agencies such as the Niger Delta Development Commission have been set up to assist in alleviating the developmental and ecological problems of the oil-bearing communities, their task is insurmountable because of the rate at which the oil spills are occurring.

While there are other factors at play, it seems fair to say that oil revenue mismanagement and environmental neglect are the twin ills of the Nigeria oil experience. Nigeria, like most developing countries, and even some developed ones, find the challenge of managing their resource wealth overwhelming in the face of the immense temptation for corrupt behaviors. Nigeria has clearly not yet mastered this challenge (ICG, 2006).

Perhaps it is premature to conclude that the Nigeria economy has been subverted by the very thing that gave it promise five decades ago – oil. Nevertheless, Nigeria’s oil experience serves as a lesson to Nigeria and West Africa’s new oil producing countries such as Ghana, Ivory Coast, Sierra Leon, and Liberia. Deemphasizing the immense temptation for corrupt behaviors and honest management of oil wealth in West Africa’s new oil producing countries may avert a situation similar to Nigeria’s. This can be achieved via the establishment of effective local institutions to productively reinvest the proceeds of oil depletion.

In addition, stringent environmental controls are necessary as oil spills are bound to occur in West Africa’s new oil producing countries once oil drilling begins (Ghana encountered its first oil spill of 706 barrels of low toxicity substance at a drilling fields in West Cape Three Points in 2010). Mere establishment of a regulatory framework is not enough but the enforcement of the regulations is vital. Most importantly, the regulatory framework should be without loopholes and ambiguities to properly regulate the activities of the oil companies.

In summary, a responsible and clearly laid out legislation for the oil sectors in the respective economies of West Africa’s new oil producing countries will be beneficial to all stakeholders in the oil industry.

References

Gary, Ian, and Terry Karl. 2003. Bottom of the Barrel: Africa’s Oil Boom and the Poor. Catholic Relief Services. Available at: http://www.arts.ualberta.ca/~courses/PoliticalScience/474A1/documents/IanGaryandTerryLynnKarlBottomoftheBarrelAfricaOilPoor.pdf

International Crisis Group. 2006. Nigeria: Want in the Midst of Plenty. Africa Report No. 113

Available at: http://www.crisisgroup.org/~/media/Files/africa/west-africa/nigeria/Nigeria%20Want%20in%20the%20Midst%20of%20Plenty.pdf

Budina, Nina and Sweder van Wijnbergen. 2008. “Managing Oil Revenue Volatility in Nigeria: The Role of Fiscal Policy.” In Africa at a Turning Point? Growth, Aid, and External Shocks, ed. Delfin S. Go and John Page. Africa Development Essays Series, The World Bank. (Forthcoming)

O’Neill, Tom. 2007. “The Curse of the Black Gold,” National Geographic. Available at: http://ngm.nationalgeographic.com/2007/02/nigerian-oil/oneill-text

West Africa Rice Development Association (WARDA). 2003. “Why Nigerians are Hooked to Imported Rice: Insights from a Comprehensive Rice Sector Study,” Essence of WARDA No. 1

Available at: http://www.warda.cgiar.org/newsletter/no%201/Essence%20No%201%20Jan-Mar%2003.pdf