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Nigeria’s Petroleum Sector Reforms: Debunking the Venezuelan Model

January 23rd, 2010 | Author:
Nigeria, a member of the Organization of the Petroleum Exporting Countries, OPEC holds the world’s seventh and tenth largest reserves of natural gas and crude oil respectively. Nigeria’s offshore oilfields are part of the giant Atlantic petroleum provinces (which extend from Angola through Gabon and Ghana to Guinea) and which have attracted significant interests from major International Oil Companies, IOCs as well as National Oil Companies, NOCs. In 2008, Nigeria was the fifth-largest supplier of crude oil to the United States.
A Petroleum Industry Bill, PIB, for the restructuring of the country’s notoriously opaque petroleum industry is pending before her legislature. The bill, if passed would see the most elaborate reforms in the country’s petroleum sector in decades. The reforms include provisions for greater, sectoral transparency and efficiency. This has pitched the government against several interest groups in the country. International Oil Companies have decried the bill describing it as economically asphyxiating while labor unions have deemed it a ruse for gasoline price increases – gasoline prices in Nigeria are unsustainably subsidized. There have been allegations of bribery after revelations that legislators were invited by IOCs to a neighboring country for a “briefing” on the bill.

One of the alternative petroleum sector management models that have been bandied about by interest groups opposed to the PIB, is that of Venezuela, which holds the sixth and eighth largest crude oil and natural gas reserves respectively (A recent report however indicates Venezuela may have the world’s largest recoverable crude oil reserves). They cite in particular, Venezuela’s low gasoline price regimes (one of the world’s lowest), which they say, have been stable.

If Venezuela’s gasoline price regimes have been low and stable, the social, economic and political costs may be untenable. That country’s leftist president, Hugo Chávez has since coming into office been implementing the items on his “21st Century Socialism” list. This has entailed massive capital outlays for a series of ambitious projects and wage hikes, funded largely from the export proceeds of an improperly managed petroleum sector. For example, Chávez nationalized the country’s oil industry and oil majors were forced to give up majority holdings; those like ExxonMobil and ConocoPhilips, which objected, had their assets taken over. The country’s state-controlled oil company has been systematically enervated. Revenues slumped from lower production (due mainly to the harsh operating environment) and lower prices. With spiralling inflation, Chávez was just a few days ago forced into a two-tiered devaluation of the country’s currency against the U.S. dollar. The result saw one U.S. dollar exchanging for 2.60 bolivars for priority items, down from the previous fixed rate of 2.15 bolivars; for other items, it was 4.30 bolivars. Parallel market exchange rates however, saw the dollar strengthen to about 6.10 bolivars. (Two years ago, the country’s currency was revalued at the rate of 1,000 old bolivares to 1 new bolivar; the previous devaluation was in 2005) With price adjustments inevitable, the Venezuelan army shut about 70 stores a few days ago, fulfilling the president’s threat to close down businesses that hike prices because of the devaluation. More than 200 businesses have so far been shut. According to the finance minister, the devaluation will probably add 3 to 5 percentage points to the inflation rate; but with the later hovering about 30%, analysts believe it could reach 40% this year, leading to a further devaluation. The president also announced the rationing of water and power supplies across the nation due to low water levels at the country’s hydroelectric plants; but scarce funding for alternative energy development and poor infrastructure maintenance have been two major contributing factors. It remains uncertain if these measures can lift the nation out of the current economic slump or bolster the president’s fading, political fortunes in this year’s elections.

It is therefore not altogether clear what attracts opponents of Nigeria’s PIB to this Venezuelan model. The Nigerian economy is, in some respects similar to that of Venezuela. (See Table 1 below)

Both are major oil-exporting, emerging economies with oil accounting for at least 90% of export earnings. The major power generation facilities in Nigeria are gas-based but gas infrastructure remains largely inadequate. Only about 40% of Nigerians have access to electricity while less than 50% have access to pipe-borne water. Many industries have collapsed due to lack of (mainly power) infrastructure – about 30% of business loans goes towards provision of operating infrastructure and about as much or more of operating costs, towards maintenance of the infrastructure. Provision of critical infrastructure has been one of the planks of the country’s president Umaru Musa Yar’Adua’s 7-point agenda. A major power sector reform under the previous administration saw a staggering US$16 billion unaccounted for and that, with little if any structure to show. The report of a consequent legislative probe into the issue ended up shamefully in a political dunghill. Gasoline prices in Nigeria are subsidized, which subsidy has been the subject of alleged monumental fraud. In a clearly unsustainble trend, the gasoline subsidy is set to exceed the effective capital expenditure of the country’s budgetary appropriation.
An oil-producing country, Nigeria for over a decade has been importing a great proportion of her refined petroleum products such as gasoline, kerosine and diesel. The shameful lack of domestic refining capacity stems in the main, from woefully inadequate petroleum sector, management policies – a long thread that until now, has run through successive administrations.

The Nigerian petroleum sector clearly needs urgent reforms if the country must show any meaningful development; but the Venezuelan management model is not even remotely, one worthy of adoption.
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Posted in economy, energy, nigeria, oil and gas, venezuela

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