Nigerian oil wealth is mostly wasted

Oct 27, 2008 01:00 AM

by Carmen Gentile

Nigerian energy officials acknowledged that despite generating hundreds of billions of dollars in wealth, the country's oil industry has done little to enhance the lives of the Nigerian people.
Speaking to private sector energy officials at a conference in Lagos, Nigerian Petroleum Minister Odein Ajumogobia said he regretted the failure by the federal government to improve the lives of Nigerians, particularly those in the oil-rich Niger Delta, where some 70 % of the population lives on less than $ 1 a day. The minister also expressed regret that Nigeria's National Petroleum Corporation, or NNPC, has not procured a larger percentage of the industry dominated by foreign oil interests.

The NNPC has less than a 20 % stake in oil and gas projects in Nigeria, said Ajumogobia. The goal for Nigeria's energy sector, he said, was to obtain a 70 % stake by 2010. Nigeria's energy sector is the subject of much scrutiny, both at home and abroad, considering the overwhelming poverty and rampant corruption plaguing the West African country.
The minister's remarks, some speculated, are an indication that at least some officials recognize the political graft and wastefulness that have plagued the industry.
"I think this is yet another indicator why there is greater need for transparency in the oil sector," said Emira Woods, co-director of Foreign Policy in Focus at the Institute of Policy Studies.

High unemployment in the delta, environmental degradation due to oil and gas extraction, and a lack of basic resources such as fresh water and electricity have angered some of the region's youth and incited them to take up arms, forming militant groups such as the Movement for the Emancipation of the Niger Delta. The increased violence has caused Nigerian oil output to decline by 650,000 bpd, the West African country's vice president noted earlier.
A recent spike in clashes between militants and Nigerian soldiers and private security has cost the country about 115,000 bpd in output,Nigerian energy officials admitted earlier. All losses incurred by continuing attacks by armed militant groups on oil and gas installations in the Niger Delta are costing the country almost $ 68 mm a day in lost revenue, according to government estimates.

In September a "peace council" commissioned to discuss ways of ending the violence in the delta proved fruitless. MEND warned that the recent violence was just a preview of its intended escalation of the conflict raging in the delta.
"Oil companies are warned to move out their workers within the next 24 hours, because a hurricane is about to sweep through oil installations in the entire Niger Delta region," read a statement in September by the self-styled MEND spokesman known as Jomo Gbomo. "This may be the beginning of a full-scale oil war."

Even the recently announced creation of the Niger Delta Ministry to tackle the ongoing concerns of widespread poverty in the region did little to placate MEND and other militant groups in the region angered with the country's handling of oil wealth. Meanwhile, Ajumogobia expressed concerns that lower global oil prices would hinder Nigeria's ability to meet its federal budget for the year.
"Nigeria would be comfortable to have the oil price at $ 80, in view of the production cost and in view of the fact that Nigeria is looking for more money to finance its budget," said the minister.

The crisis isn't here yet but Nigeria's prepared
The credit crunch has not really hit Nigeria yet but the West African oil producer, already weakened by a fall in crude prices and output, is gearing up for it. The government's economic team trooped into the Senate to go through all the possible worst-case scenarios and to deliver a double message: the economy is still stable but a tsunami could happen any time.
"The first question is: do we have a crisis here, and the response is no. Now are we sheltered from the global financial crisis? And the response is no, we are not," warned Finance Minister Shamsudeen Usman.

After years of "wasting oil revenues", to use the expression of the head of the International Monetary Fund Dominique Strauss-Kahn, who was in Nigeria briefly in February, the trend is now for sensible money management. One of the first measures was to cut the 2009 budget to reflect the drop in oil prices.
Nigeria, Africa's most populous nation and the second largest exporter of crude, bases its budget on a benchmark crude oil price. Crude prices have more than halved in value since striking record highs above $ 147 per barrel in July, slashing the revenues of oil producing countries.

"There have been a number of serious measures taken to reduce expenditure and improve efficiency," Usman said after an extraordinary cabinet meeting in the administrative capital. He said cabinet discussed next year's budget in detail and it was being fine tuned before President Umaru Yar'Adua presents it to parliament.
Oil Minister Odein Ajumogobia said the 2009 budget would be based on a "very conservative" $ 45 per barrel, lower than the $ 59 benchmark used as the basis for last year's budget.
"We want to be able to meet our budgetary requirements for 2009. As a result of that, we have advocated a reduction in the benchmark which has been effected," the minister told. "We are realistic as to what the price will be. The benchmark is now $ 45 per barrel which I think is very conservative," he added.

Algeria based its budget on $ 37 a barrel. If the chief economist with financial daily Business Day Ogho Okiti wrote "this is the first sign that the crisis really is here", the World Bank representative in Nigeria, Onno Ruhl, said the government made the right move.
In the space of a few months Nigeria has seen its oil revenue reduced by half. Moreover, the national oil company Nigerian National Petroleum Corporation (NNPC) is unable to keep up with its share of investments in the joint ventures it has established with multinational oil companies. And crude production is seriously affected byinstability and violence in the Niger Delta, with output down to between 1.8 and 2 mm bpd against 2.6 mm bpd two years ago.

The finance minister admits that the global economic crisis could "lead to a reduction in our exports, particularly of our oil". For paradoxically Nigeria's Achilles heel today is oil, the very commodity around which it built its economy in the years of global growth, notably in China and India
"Lower demand for oil = lower prices = lower revenues for the State = a drop or a levelling-off in reserves," writes Okiti.

Sanusi Daggash, who heads the Senate Planning Commission, says he is "starting to notice" in Nigeria the factors that caused the economic crisis elsewhere.
Central bank governor Chukwuma Soludo meantime tries to reassure the public on the health of the banking sector, which had a thorough overhaul in 2006.
"No bank will fail", the currency is strong and foreign currency reserves are in a very good position (at around $ 63 bn), he says.

Onno Ruhl backed him up recently, saying that the local banking system has practically no exposure to the risks coming from the US.
Moreover, he emphasised, Nigeria does virtually no borrowing on international capital markets.

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