John O. Ifediora.

In natural resource-dependent economies the prevalent and common understanding is that the principal natural resource that sustains the economy is endowed by nature to the citizens, and thus collectively owned. Its development, exploitation and maintenance are always and everywhere entrusted to the central government whose primary duty is the efficient governance of the affairs of the citizenry, and the assets held in trust on their behalf. It is in this sense that governments are entrusted with the husbandry of natural resources that sustain the nation, and judiciously apply revenues derived from such resources to human and capital development. Botswana and Saudi Arabia, in application of this basic principle, have successfully moved their respective economies to greater levels of productivity and impressive growth. Their citizens, without exertion of much effort, have benefited and continue to benefit from the efficient management of their natural resources. This is the way it should be, and must be until the country achieves a certain level of diversity in its economic base through industrialization. That this is the case for a developing country dependent on one predominant natural resource is understood with relative facility, for the simple reason that citizens of a nation fortunate enough to be located in a geographic competence favored by nature with a marketable resource that generates the bulk of their national income ought to have reasonable expectation that such resource is held in good care for their collective well-being. Nigeria once adhered to this principle, but successive governments beginning in the 1980s have betrayed this public trust by systematically selling off or allocating to private individuals the various oil wells that constitute the primary source of the country’s national wealth. The policy that informed this outright misallocation of a national treasure was never publicly debated nor placed on a national referendum as a plebiscite. It was simply disguised as part of a market-driven agenda of privatization of state-owned enterprises recommended by the country’s international creditors in the 1990s. On all accounts it is a rotten policy for the country, and for millions of its long-suffering citizens who, on any given day, are deprived of the most basic of civilized social amenities.


But before corrective actions may be recommended, it will do to understand why and how such ill-informed policy that has drained the country of billions of dollars since its inception became part of the apparatus for macro-managing the national economy. The oil and gas industry accounts for approximately 90% of Nigeria’s foreign exchange earnings, and 80.6% of the federal governments revenue; thus it is a major and commanding sector in the economy that sustains the annual expenditure of federal and state governments. In 1956 when oil was discovered in Oloibiri, Nigeria, foreign oil companies such as Shell have had working arrangements with the federal government that gave proper consideration to the investment made by these firms in exploration, drilling and extraction of oil, and in return the government received a certain percentage of the revenue derived. But at all times, ownership right of discovered oil wells resided with the government; the oil companies were in effect lessees. Under such regime of revenue sharing, the federal government was assured receipt of funds it could expend on national development projects, and any residual sum not expended would ideally go into established Sovereign Wealth Funds. The formulaic process need not detain us here, but such understanding informed best practices adopted by Nigeria and other members of OPEC, and still do, but alas without Nigeria. The federal government of Nigeria, for reasons best known to its political elites, allocated oil wells (oil blocks as commonly described) to individuals whose only qualification for such entitlement is their proximity to the center of political power. The unintended consequences of such policy have been detrimental – both economically and environmentally.

In conformity with other oil exporting countries, the Nigerian oil and gas industry is customarily divided into two operational sectors: the Upstream sector is principally concerned with exploration, drilling for oil, and production of crude oil, while the Downstream sector concerns itself with refining, marketing and distribution of the final product to consumers. The worrisome and disturbing practices by Nigerian elites is the unconscionable looting of oil wells that comprise the Upstream sector from where the wealth of the nation derives, and where competent and established international oil companies with expertise, industry-specific knowledge, and the requisite financial resources for safe exploration are systematically marginalized.

The problem with this new reality is that guaranteed revenue made possible by the agreement between the federal government and international oil companies become vanishingly smaller, thus leaving the federal government with fewer resources to meet its obligations. And because existing social institutions lack adequate regulatory capacity, Nigerians now in possession of oil producing wells either sell off their allocations to other prospecting firms or form what passes as oil producing companies that quickly perfect the act of lifting crude oil and shipping it abroad for sale to foreign refineries. The foreign refineries in turn would either ship back to Nigeria refined oil products at exorbitant cost to the federal government for domestic distribution at highly subsidized prices to consumers, or the refined oil is sold in the international market to any buyer. Either way, Nigeria loses its share of revenue from the initial crude extraction, and pays for the imported refined product with revenue from established international companies still operating in the Upstream sector. Put quite simply, the allocated oil wells to indigenous firms or Nigerians generate windfall profits that remain in private hands, and since private Nigerians seldom pay taxes, federal and state governments are thus deprived of an essential source of revenue. And so are the average citizens.


Once the policy of ‘privatization’ of a collectively owned national treasure was firmly in place (without a public referendum), prospective inheritors of Nigeria’s oil wells began a criminal campaign to disinvest foreign oil companies of their contracted rights to oil wells they had invested so much resources to bring into production. They accomplished this through various avenues, but the two most harmful are deliberate destruction of oil pipelines, and kidnapping of foreign oil workers for incredible ransoms. This campaign of terror has paid off handsomely for would be beneficiaries of oil-well allotment, and subsequent acquisition of assets owned by departing international oil companies at very favorable prices; Shell, for instance, has sold off its assets and ceased operations in Warri (a major oil exploration city in the Delta region of the country) and is gradually scaling back operations in Port Harcourt with the intent of complete withdrawal from Nigeria. The ensuing oil spills caused by organized vandalism have been extremely harmful to the delta regions of the country as well, depriving residents of their fishing rights and their traditional means of sustenance. But this is a ‘minor’ inconvenience prospective oil-well inheritors are willing to inflict on citizens, for the ultimate goal is to frustrate and marginalize foreign firms to the extent that they find it unsafe and unprofitable to continue their operations in Nigeria. The federal government, a partner in the long-established relationship with international oil companies has so far been unable or unwilling to provide foreign oil firms needed security for their employees or investment. This is unacceptable.

The policy recommendation from the Council is a complete reversal of this potentially destabilizing, and short-sighted privatization of the Upstream sector of Nigeria’s oil and gas industry. It would be wise to first stop the practice, and then put in place a process to recover and return to the federal government already allocated oil wells. This may be done through the use of eminent domain and pay back what private individuals paid for the oil wells or outright confiscation in instances where the individual received property rights to the wells without pecuniary outlay to the federal government. This should be complemented by complete revocation of all outstanding licenses for private exploration and drilling for crude oil within the territorial competence of Nigeria. Privatization of the Downstream sector of the oil and gas industry (refining and distribution) is an entirely different matter, and should be subject to the dictates of a market-driven economy.


This topic would be the focus of future write-ups, and extensive analysis by the Council in the coming months.