Nigeria needs radical action to bring its oil crisis to an end-FT

Written by William Wallis

Wednesday, 29 July 2009 08:24

Militants in Nigeria's oil-producing Niger delta have been tapping pipelines and illegally exporting crude for the best part of a decade. Their activities have grown into a multi-billion dollar racket with tentacles reaching far into state institutions and criminal connections that stretch from Abidjan to Odessa.


Now, inhabitants of the delta have started processing crude. In small, modular refineries they are producing kerosene and other fuel and selling to the local market from so-called mushroom enterprises in the creeks and swamps.

In the context of an industry in precipitous decline, beset by a campaign of sabotage and a crisis in funding, this might seem a detail. It is indicative, however, of fast eroding state authority and the failure of government to regain control of a resource on which the nation's development depends.

It is not quite business as usual in Nigeria. Far from leading an African economic renaissance, the country from which one in five black Africans hail is hovering close to the brink. Nigerians have lost faith in the ability of President Umaru Yar'Adua's government to govern in their interests.

One manifestation of this has emerged this week in the north of the country where security forces are battling followers of an Islamist sect that has thrived on poverty and despair. Another is the slump in oil production.

Nigeria should be producing upwards of 3m barrels a day, contributing to global energy security and using its gas reserves to power an industrial revolution at home. Instead, it is Angola, with a third of the reserves, that has taken over as Africa's leading oil producer.

Nigeria's oil industry has been crippled by a campaign of theft conducted by militants demanding, and increasingly taking, a greater share of oil wealth. Amidst uncertainty over broader policy, fresh exploration has ground to a halt.

Not since the late 1960s has onshore output fallen so low. Nigeria is exporting less than half the crude it did in 2008 by some estimates and selling at about half the price. Moreover, most production is now offshore where the state has far less lucrative terms.

There is one school of thought that sees Nigeria consistently muddling through such crises. Its political leaders often approach the brink but step back to close ranks when under sufficient pressure. But Nigeria's ability to muddle through has depended to a great extent on oil and on the patronage system it spawned and which has glued elites together.

That system has long since reached its sell-by date. It is matched now by parallel criminal networks, such as those exporting oil illegally, which are eating away at the state.

With oil production in decline, the funds with which government could create a system in which power stations and refineries function, businesses thrive and services are delivered, are in dwindling supply.

Mr Yar'Adua has two plans on the table to bring them back. The first is legislation - in parliament this week - which promises transformation of the oil business. This would break up the corrupt state company into commercial ventures able to raise funding on the market, open transactions up to public scrutiny and deliver better terms for the state through contract renegotiation.

The western oil majors don't like the change because it would make operating in Nigeria more expensive and foster competition from China.

Furthermore, inhabitants of the Niger delta are not impressed and are threatening to scupper the president's second plan: an amnesty for delta militants with daily stipends to persuade them to lay down their arms. This might bring a pause in the violence. But a far more ambitious approach is needed if the Niger delta is to be persuaded of the federal government's good intentions.

One way would be to devote a percentage of any oil output recovered from current lows into a fund for the development of the region. This would give its long-suffering inhabitants a stake in the renaissance of the oil industry. Radical plans, although needed, are unlikely to fly. A few, powerful Nigerians profit from the status quo. Even as it becomes less and less viable, they are clinging on.

Copyright The Financial Times Limited 2009