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Nigeria: More go-slows ahead for oil reforms

By Hector Gonzalez & Leonard Lawal
Posted on Monday, 25 May 2009 13:45

Reform of the national oil company to produce a less political

and more rational oil sector is being snagged by a combination of

political considerations and conspiracies

Production, earnings and investment are down, relations with international oil companies, local communities and unions are strained, and corruption allegations are rife. Nigeria’s oil industry is in crisis. The cabinet agreed proposals for a major overhaul of the sector months ago and a white paper has been drafted, but the chances of early progress towards structural reform are slim.

Petroleum resources minister Rilwanu Lukman wants to reorganise the state-owned Nigerian National Petroleum Corporation (NNPC) into 17 new entities. One of the reform architects, Mohammed Ibrahim, says the aim is to shift the focus from being a crude oil exporter to being primarily “a crude oil and gas producer and processor”, subsequently exporting processed products and excess crude. Deputy oil minister Odein Ajumogobia says one of the planks of the reforms is to “separate regulation from policy and policy from operation”.

Hollowed out and stumbling on

The NNPC, having failed repeated attempts to conduct an audit, is urgently in need of rebooting. Set up by military decree in 1972, the corporation has the central role of managing Nigeria’s oil resources but has been subject to shoddy management and political interference. Successive governments have seen it as a vehicle to reward supporters with oil-lifting licences and oil leases, a process shrouded in secrecy.

The need for reform is urgent, but bringing about change is proving easier said than done. A serious cause of difficulty is that the NNPC has never been able to sustain its share of development spending under the joint-venture agreements that have prevailed in most of the onshore production activity since the 1970s. The idea is to create a new National Petroleum Company of Nigeria that could source its funding from financial markets instead of depending on the vagaries of government budgets. For now, the joint ventures are being held together by piecemeal agreements with companies, most recent among them with Elf Petroleum Nigeria (a subsidiary of Total) and Mobil Producing Nigeria (a subsidiary of ExxonMobil).

A further urgency, also delayed for decades, has been the need to get the refining industry working again by allowing private operators to participate. Instead of this, the almost-permanent shortcomings of the NNPC’s refineries continue to provide huge profits for fuel importers.

Despite the clear rationale and explanations, one of the major upstream operators, Royal Dutch/Shell, voiced its concerns at a conference in Abuja in February over an absence of consultation in the preparation of the reforms, which had been drafted in 2007 and 2008 by a committee chaired by Lukman.

The big oil-and gas-producing companies agree that the present structure cannot deliver adequate financing and encourages corruption. But they complain the new system would oblige them to cede additional control over operations to the new national oil company and could be used to tighten terms.

For its part, the government has been finding it hard to promote the case for reform. Established interests in the state-owned NNPC are understood to have made life difficult for Mohammed Barkindo, who was appointed group managing director in January, and the other pro-reform executives. The National Assembly appears deeply divided even before it has begun to debate the reform bill.

In April 2008, the House of Representatives set up an investigatory committee into allegations of improprieties in the award of oil blocks since the restoration of civilian rule in 1999. It is understood to have uncovered myriad indications of corruption but to have ignored others, apparently after heavy lobbying. Officials say there are no plans to debate its report in the House or to send it on to the presidency.

Flat price could tip the balance?

“All the signs are that the National Assembly does not have the capacity or the will to do its proper job with the reform bill,” said a source at the presidency. “We will continue to try to push it through, but the opposition is formidable; and the irony is that everyone knows the current system is unsustainable.” Privately, the reformers are resigned to further delays unless oil prices fall further. Should the current crisis deepen, the balance of political risk could tip in favour of reform.

The move to a wholesale NNPC shake-up was especially appealing to the national leadership last year, as oil prices were soaring ever upwards, thus providing the promise of a profitable renegotiation of all of the complex arrangements underpinning oil and gas production in Nigeria. This was despite the fact that the country was already losing about a quarter of its OPEC quota to militant activities in the Niger Delta and the theft of crude oil by criminal syndicates.

Now, with oil prices two-thirds lower than a year ago, Nigeria has lost much of its potential leverage in any new negotiations with the international oil companies, which cannot help comparing the problems of the Delta unfavourably with conditions in other Gulf of Guinea countries like Angola, Equatorial Guinea and new producer Ghana. In this climate, the finance for costly new deep-water exploration risks drying up.

In early April, President Umaru Yar’Adua offered an amnesty to Delta militants who laid down their arms, but their response was not encouraging. An even greater difficulty is presented by criminal syndicates, many of whom have significant political influence.

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