The president's first term fell short of the changes needed to modernize the sector. Can he make headway in his second?
Muhammadu Buhari, re-elected as president of Nigeria in February, has a second four-year term to revive the economy and address the needs of the country's ailing oil and gas sector. But to do so, he will need to push through complex regulatory reform and take on deeply entrenched vested interests in politics and industry that have long profited from the status quo, and have significant capacity to resist change.
Oil production remains lower than it was 15 years ago. State-owned refineries operate at a fraction of their capacity, and Nigeria has struggled to remain competitive in a global market where heavy crude is driven by US sanctions and light sweet crude dominated by US shale.
For all the president's talk of diversification away from oil and gas in his first term (2015-19), the sector remains crucial to Nigeria. It accounts for more than 90% of foreign exchange earnings and almost half of federal revenues. Nigeria has enviable oil reserves and much potential to find more, but without reform, output could start to decline in 2022 as mature fields deplete. Gas riches continue languishing in the ground.
Complacency in a changing market
The Buhari government, like others before it, remains complacent over Nigeria's attractiveness as an investment destination relative to other oil producers, and the impact of low oil prices in making investors more risk averse.
The world has changed. Global prices for Nigeria's once coveted light sweet crude are set by US shale, which has mostly displaced Nigeria as a top-five supplier to the US and sharply increased competition in Nigeria's global markets. New refining technology in Asia has boosted appetite for heavier more sulphurous crudes that can be upgraded, at the expense of light sweet crude.
In the worst irony of all, Nigeria's four state-owned refineries at Warri, Port Harcourt (where there are two) and Kaduna have worked at a fraction of their overall capacity of 445,000 barrels per day, forcing the government to barter crude production - up to 330,000 barrels per day - for gasoline refined elsewhere. This means losing revenues that could be invested in health, education and infrastructure.
Compounding matters, a price cap at the pump - a de facto subsidy on petrol - continues to drain public coffers and muddy the finances of Nigerian National Petroleum Corporation (NNPC), the state oil company.
Many of these problems have been caused by mismanagement of the NNPC. Nigerian leaders and politicians have habitually regarded NNPC as a patronage tool to buy favours and reward supporters. This has often taken the form of hidden commissions on contracts for crude oil marketing or refinery upgrades, which were rarely carried out. Refineries remain unmodernized, poorly maintained and, in some cases, barely operating.
This has also damaged inward investment. The NNPC owns majority stakes in all joint ventures operating assets in onshore and shallow waters. Yet it has rarely paid its way on time, forcing partners to choose between slowing expansion or lending to NNPC by carrying its costs.
The deepwater sector, where NNPC is not a partner, has seen investment stall due to uncertainty over taxes and royalties since legislation to change investment terms was first proposed in a new Petroleum Industry Bill (PIB) in 2008. Total's 200,000 barrel per day Egina operation, which went on stream in January 2019, was the last big project approved before oil prices crashed in 2014, and the first of its kind for six years.
President Buhari could have abolished the petrol subsidy early in his first term when international prices dropped below the pump price. Legislation to reform the sector and improve investment terms was also within reach, when the Senate took the lead on unbundling the long-stalled PIB.
However, the presidency rejected the first subsequent piece of legislation, the Petroleum Industry Governance Bill, that would have paved the way for the NNPC to divest some of its stakes in the joint ventures and refineries, and brought in private investment.
The reasons for such failures lie partly in the president's instinctive statism. President Buhari and his advisers feared that privatization would put the assets of the NNPC in the hands of Nigeria's businessmen, and instead hoped management changes, a bit of housecleaning and tightening the terms of crude for product swaps in NNPC's favour would suffice to improve performance. Instead of privatizing the refineries, his team tried to get oil traders to finance refurbishment and upgrades with repayment in refinery output.
The approach failed. Buhari's first-term legacy was to strengthen NNPC with all its distortions, leaving much of its corruption intact. NNPC has meanwhile become less tolerant of questions and criticism from some journalists and civil society actors.
The politics of reform
Some five different groups are battling to influence the president. These range from young reformers in the finance ministry to older people with nationalist and statist outlooks in the president's inner circle. The reformers hope that the lack of results in the sector during his first term will convince the president to change direction.
Nigeria's politics could provide more space for action. Nigeria's two-term limit frees him from the pressure of contesting another election, and Buhari's All Progressives Congress party also won a majority in the Senate and House of Representatives, which might ease previously tense relations between the executive and the legislature.
Reformers argue this could pave the way to more controversial policies, such as removing the gasoline subsidy, the sale of NNPC's equity in some oil fields to free up capital for investment or the privatization of the refineries. Privatization would need to be conducted in a professional and transparent manner on attractive terms to gain public confidence, attract quality investors and maximize revenues for the state.
Such measures would require a fresh impetus on the PIB while amendments to the Deep Offshore and Inland Basin PSC Act could address the concerns of potential deepwater investors.
However, the reformers are struggling to be heard - while the president's inner circle has the upper hand. His advisers have indicated privately that there is no appetite in the presidency for the PIB or the privatization of oil sector assets, and without a radical shift in the balance of power they are likely to prevail. Nigeria could face another four years of drift.
Christina Katsouris Associate Fellow, Africa Programme