Nigeria’s vast reserves of oil and gas have generated great riches but are also blamed for fostering conflict, corruption and poverty. Now the country’s leaders want to almost triple its crude production just as a warming world seeks to accelerate a move away from fossil fuels.
What is Nigeria doing? After years of stagnant oil output, the government finally enacted a long-delayed law cutting taxes levied on energy companies to more globally competitive levels. Production royalties will now range from 5% to 15%, depending on where fields are located, down from the previous range of 7.5% to 20%. The government also wants to revamp moribund state-owned refineries to help wean Africa’s largest crude producer off refined fuel imports. The legislation also seeks to end the sort of legal and regulatory uncertainty that’s delayed investment and led to lawsuits and disputes over licenses. The hope is to avert the so-called stranded assets problem confronting oil, gas and coal companies.
Are other countries doing something similar? Nigeria’s drive to attract foreign capital faces stiff competition from the likes of Saudi Arabia, Russia and Angola, which also want to extract more crude while there’s still demand.
Who stands to gain from Nigeria’s changes? Mainly local energy firms, most of which established themselves by buying assets from international oil companies including Royal Dutch Shell Plc. Prime candidates include Nigerian tycoon Tony Elumelu’s Heirs Holdings, which sealed a $1.1 billion deal in January to buy one of Shell’s oil blocks, and Seplat Energy Plc, which has expressed interest in acquiring more onshore and shallow-water fields. Shell, which has been active in Nigeria for more than six decades and has faced a string of lawsuits from communities accusing it of damaging the environment and destroying their livelihoods, is looking to offload its remaining onshore assets. The Anglo-Dutch giant says it’s repeatedly fallen victim to theft and sabotage that’s resulted in oil spills. The government is wagering the law will convince the oil majors to proceed with deep-water developments that already account for about half the nation’s output.
Who could lose out? Communities impacted by exploration wanted oil companies to be compelled to allocate the equivalent of 10% of their operating expenditure toward local upliftment projects, but had to settle for 3%. Fuel retailers oppose a clause that they said could hand Aliko Dangote, Africa’s richest man, a dominant position over the sale of petroleum products when he completes building one of the world’s biggest refineries. Consulting firm Welligence Energy Analytics warns that plans to establish separate regulatory agencies for the oil and gas industries could result in additional red tape and further delay new projects.
What do the changes mean for oil markets? Nigeria currently pumps about 1.5 million barrels of oil a day. That’s down from a peak of 2.5 million in 2005, a decline attributed to a lack of investment in new wells, oil theft and its adherence to quotas set by the Organization of Petroleum Exporting Countries. The country attracted just 4% of the $70 billion committed to Africa’s oil and gas sector from 2015 to 2019, partly due to uncertainty over its regulatory environment, according to accounting firm KPMG. President Muhammadu Buhari’s administration is banking on an influx of capital to boost production to 4 million barrels a day by 2025. Any such increase could cause heat with other members of OPEC+, which limits supply to keep prices up.
Isn’t the world using less oil? Not yet. While demand fell following the onset of the coronavirus pandemic, it’s since picked up, thanks mostly to the developing world. The International Energy Association projects oil and gas consumption in Africa — potentially a key market for Nigerian fuel — could double by 2040 as economies and populations grow. Much of the additional demand is set to come from within Nigeria: Its population of more than 200 million people is projected to double by the middle of the century, making it the world’s third-most-populous country after China and India.
What’s at stake for Nigeria? Oil is the lifeblood of the west African nation’s economy. It accounts for about half of government income and more than 90% of foreign-exchange earnings in a country where 80 million citizens live in abject poverty. Swings in oil earnings create instability and have led to devaluations of the naira. Whether a new energy windfall will benefit the populace at large remains an open question, however. Nigeria has a long history of oil riches largely going to a politically connected elite and producers, and has long been held up as a poster child for the resource curse.
