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NIGERIA’S ENERGY POLITICS: Reversal of fortune

By Emerging Markets Editorial Team
24 May 2010

Africa’s most populous country is looking to reposition its oil industry after years of stagnation. A $23 billion deal with China might just help

China’s $23 billion offer to build oil refineries and other petroleum infrastructure in Nigeria could prove a watershed for the country’s ailing energy industry – and its waning economic fortunes.

Although the plan is in its early stages, a memorandum of understanding signed mid-May between China State Construction Engineering Corporation and the Nigerian National Petroleum Corporation (NNPC) for three new oil refineries and a fuel complex could provide Nigeria with a substantial economic boost.

Despite being Africa’s leading energy producer, Nigeria imports roughly 85% of its fuel, as the bulk of its existing refineries languish in disrepair. To do so, the state pays a $10 billion subsidy, roughly equivalent to its entire annual capital spending.

In recent years, Nigeria’s position as king among Africa’s petroleum producers has begun to look increasingly untenable as investment in the sector has all but dried up. An ongoing struggle with militants in the oil-rich Niger River delta, together with losses from theft and alleged corruption in oil and gas administration, and a funding shortfall for new explorations have all weighed heavily on the sector.

Moreover western oil companies have been disinclined to build and operate refineries in Nigeria because of poor financial returns.

But this has hardly stopped China. The new refineries are expected to add some 750,000 barrels per day capacity in Nigeria and position NNPC in the international trading of refined petroleum products.

Meanwhile Africa’s most populous country is also seeking to reposition its oil industry, as it vies with Angola to be the continent’s top oil producer. Under a proposed oil industry law still being debated in parliament, the government hopes to make the sector more profitable and transparent. If passed, the so-called Petroleum Industry Bill would restructure the state-owned NNPC to allow it to compete with international oil firms operating in the country.

But foreign oil companies have slammed the proposed legislation as a resort to resource nationalism. Ann Pickard, Shell’s former vice-president for Africa, has said the bill is “a cumbersome document that lacks insight into the very basics of our industry”. She has also warned that the country could lose $50 billion in investment in the next decade if the bill is passed in its current form.

The draft law would significantly tighten Nigeria’s hydrocarbon fiscal regime, according to its critics, making the sector one of the least investor-friendly in the world. The bill would also allow for the reacquisition from international firms of marginal fields; moreover, existing joint venture arrangements could be altered, threatening the operational independence of foreign firms. There are also concerns about a removal of fiscal incentives for offshore drilling.

The worry is that other emerging oil states, including Ghana, Uganda and Equatorial Guinea could prove more competitive destinations for fresh investment. And for a nation where crude oil exports account for over 90% of foreign exchange receipts, the consequences of a loss in investment could be severe.

By Emerging Markets Editorial Team
24 May 2010