Beyond the fiscal crisis that has resulted from the collapse in the global oil price, Nigeria’s flagging petro-economy has equally serious underlying structural issues to contend with. The task facing Nigeria’s newly elected President – Muhammadu Buhari, a former military dictator from Nigeria’s northern and predominantly Muslim region – in overcoming Nigeria’s oil related troubles in 2016 is truly immense. There is no doubt that, if he upholds his electoral pledges to clamp down on government corruption and rebuild Nigeria’s institutional capacity, his presidency has great potential to help Nigeria transition onto a new path of prosperity.

Nevertheless, if Nigeria is to successfully address the underlying structural issues associated with its inadequate capacity to regulate and enforce its oil industry, there are a number of prominent challenges that need to be carefully considered over the coming year. In this article I argue that these center on the Nigerian National Petroleum Corporation (NNPC), the oil industry’s regulatory bodies, industrial scale oil theft in the Niger Delta, the burgeoning indigenous oil sector and the President’s ability to award discretionary oil contracts.

Five Key Challenges

1. The NNPC: At the root of Nigeria’s troubled relationship with its oil wealth is its opaque National Oil Company, the Nigerian National Petroleum Corporation (NNPC). Problematically most government officials outside of NNPC – including many working in the central bank and the Ministry of Finance – are not fully aware of the true extent of corruption that takes place within its bureaucracy. What is clear, though, is that the NNPC has functioned as a patronage machine with studiously crafted opacity: every transaction enabling well-connected politicians to profit from the contracting process and the siphoning of oil revenues. Unsurprisingly, the NNPC is the lowest ranked National Oil Company (NOC) on Transparency International’s transparency ranking, with a score of zero.

Fortunately, reforming the NNPC has been at the top of President Buhari’s list, and he has already begun to overhaul the NNPC by firing a number of its senior officials. These officials have been replaced as part of a reform process that will hopefully transform the state run oil company into a more effective organisation. Nigeria’s new vice-president, Yemi Osinbajo, has likewise begun to overhaul the operation of the state’s government agencies, giving the federal government greater oversight of its treasury accounts and thereby minimizing the ability of government officials to divert state funds. Previously the NNPC’s revenue and expenditure was not reflected in the national budget, which allowed substantial leeway for corrupt officials, whilst at the same time multiple treasury accounts maximized opacity.

Yet there is still a long road ahead: Despite nearly 50 years of operating the NNPC still has an extremely limited level of technical expertise in oil extraction. Indeed it remains reliant upon international oil companies (IOCs) such as Shell and Chevron to complete practically all activities related to oil extraction. Although it does have an oil producing subsidiary called the Nigerian Petroleum Development Corporation (NPDC), the NPDC has for a long time produced only an insignificant portion of Nigeria’s total capacity; approximately 10,000-50,000 barrels per day (bpd) of a two million bpd capacity, which it has only recently increased to nearly 200,000 bpd. Although the Former Minister of Petroleum Resources – Mrs Diezani Alison-Madueke, who was arrested in the UK on suspicion of corruption last October – commended the NPDC early last year for raising production up to 200,000 bpd, severe questions remain over its actual technological capabilities.

This is not to mention the NNPC’s woeful inability to refine its own oil produce. Ironically Nigeria is a net importer of refined oil, with its economy dependent upon oil subsidies due to the fact that nearly all of the crude that is extracted is exported and refined abroad. Whilst the state does have four domestic refineries they currently operate at around two per cent capacity due to their dilapidated condition. Thus if Nigeria is to capture the full value of its oil wealth there needs to be a sustained reconfiguration of the role of the NNPC.

2. Regulation: The primary regulator of Nigeria’s oil industry is the Department of Petroleum Resources (DPR), which is tasked with the regulation of health and safety, environmental and operational measures and, until 1988, operated under the NNPC. However, the Ministry of Petroleum Resources and the NNPC have watered down the DPR’s ability to perform its regulatory functions both independently and objectively. The mandate of the Ministry of Petroleum, which sits above both the DPR and NNPC, is to maximize production and encourage investment in the industry, signifying an inherent conflict of interest: Its willingness to lower its production in order to enforce regulatory standards is questionable. Indeed Shell has highlighted how “SPDC [Shell Petroleum Development Corporation] has received instructions from the government not to decrease production to reduce flaring” in one of its sustainability reports. There is also a case of self-regulation within the NNPC itself. As well as being an industry participant, the NNPC has assumed a number of regulatory functions such as the National Petroleum Investment Management Services (NAPIMS). NAPIMS is a division within the NNPC and oversees the spending of the Joint Ventures and supervises the Production Sharing Contracts.

Nigeria does possess a number of environmental laws, such as the Federal Environmental Protection Agency Act (FEPA 1992), the Environmental Guidelines and Standards for the Petroleum Industry in Nigeria (EGASPIN revised 2002) and the Environmental Impact Assessment Act (EIAA 1992), however these are rarely adequately enforced. Accordingly the problem does not lie in the legislation, but rather with the regulators who have failed to do their jobs properly, due to either conflict of interest or a genuine lack of resources. Indubitably there is a clear case of regulatory capture because there is little incentive to impose penalties on gas flaring violations: if the DPR penalizes its Joint Venture operations with the oil majors, such as Shell, the costs are borne largely by the NNPC and therefore by the Nigerian government itself. This is compounded by the fact that both the Ministry of Petroleum and the NNPC can exert significant influence over the DPR, which itself suffers from low capacity. Given these internal conflicts of interest it is unsurprising that the 2011 United Nations Environment Program report recommended the “Transfer oversight of the EGASPIN legislation from DPR to the Federal Ministry of Environment”.

Concurrently the primary body tasked with oil revenue transparency, the Nigerian Extractive Industries Transparency Initiative (NEITI), is extremely limited in terms of enforcing any infringements of the law. Moreover NEITI reports are only published two years after any incident takes place, entailing a substantial time lag in picking up on offences that have occurred. This is problematic because there is no mandate beyond the NEITI that requires agencies that deal with oil – including the DPR, NNPC, Central Bank and Ministry of Finance – to disclose information and data to one another. Accordingly, whilst the NEITI has been greatly beneficial for increasing transparency, as an instrument in itself it is relatively limited.

3. Oil Theft: Industrial scale oil theft has been a continued blight on the Nigerian states ability to capture the full value of its oil reserves over the last few decades. It is estimated that somewhere between 100,000 and 400,000 barrels are stolen from the Niger Delta every day, which has caused the Shell Petroleum Development Corporation (SPDC), Shell’s Joint Venture with the NNPC, losses of over $7 billion in recent years as production levels have fallen by over one third of capacity. Oil theft is organized by militants and local community groups in the Niger Delta and was the driving force behind the government’s decision to grant amnesty to all militants in 2009. This theft has been a primary cause of oil spills in the Delta and is cited as a major reason why the IOCs are divesting their assets onshore. The fundamental problem is that oil theft is inescapably intertwined with government corruption: Nigeria’s Joint Task Force (JTF) chiefs are complicit in allowing stolen oil to be refined in the Delta and exported to offshore tankers, providing they receive a bribe. Oil theft has caused the oil majors considerable losses in revenue and has contributed to these firms divesting their oil blocks in the onshore areas and moving into offshore regions. Unsurprisingly, plugging this industrial scale oil theft poses a significant challenge for the new President.

4. Indigenous Participation: Rather than increasing GDP per capita, oil wealth has continually been channeled into the hands of a select group of Nigeria’s wealthy elite; largely those with close ties to the President. During previous oil licensing rounds, predominantly those in 2005, 2006, and 2007, former Presidents have used their discretionary powers to allocate licenses to politically connected firms. The introduction of Local Content Vehicles (LCVs) prior to the 2005 and 2006 bidding round, for example, forced international oil companies to offer up 10 per cent equity in their oil blocks to private Nigerian oil firms. These indigenous Nigerian firms have often lacked any prior experience in oil extraction and many are controlled by Nigeria’s political or business elites. A recent report the independent think tank ‘The Nigeria National Resource Charter’ has stressed how “the quality of participation and the processes by which indigenous companies are chosen to participate in the sector both require careful observation”.

The recent Strategic Alliance Agreements (SAA’s) are another example of this kind of political favoritism. SSA’s have enabled private Nigerian oil firms to operate state owned oil blocks run by the NNPCs de facto producing arm, the Nigerian Petroleum Development Corporation (NPDC). Nigeria’s ex-central bank governor, Lamido Sanusi, has claimed that these agreements contravene the Nigerian constitution because they transfer control over revenues and profits on state-owned assets to private firms. Out of a total of $7 billion in revenues generated under these arrangements only $400 million has been paid in taxes to the state. Monitoring the quality of this indigenous participation will undoubtedly be one of the largest tasks facing the new President.

Simultaneously oil theft has had a disproportionate impact on Nigeria’s indigenous sector. These firms’ ability to cope with financial loss from oil theft is especially problematic given their dependency on Nigerian banks and one incident can wipe out all revenue for one or two years. Unlike the IOCs who have been able to absorb the costs of theft due to their diversified asset portfolios, indigenous firms are considerably more financially exposed. Although local firms such as Oando claim that they are able to deal with theft more effectively than the majors this has not proven to be the case so far. These problems are compounded by the fact that revenue losses from low oil prices have already had a disproportionately negative impact on indigenous firms in relation to the IOCs, due to their smaller size. This underscores the need to critically reflect on whether the institutional and financial environment is strong enough to nurture this industry.

5. Discretionary Powers: The Petroleum Act 1969 – the primary piece of legislation that governs how oil licenses are awarded in Nigeria – has for decades allowed the President to hand out oil licenses at his discretion. This completely undermines the transparency and accountability of the bidding process, as well as enabling the President to intervene in functions assumed by the DPR. During the last three licensing rounds, in 2005, 2006 and 2007, many of the IOC’s competitive bids were overruled through these rights to award oil blocks. This discretionary power has become an increasing point of contention in the redrafts of the Petroleum Industry Bill; if the new President wishes the state to move forwards he should remove it outright.

The Forlorn Petroleum Industry Bill

The Petroleum Industry Bill (PIB), whose passage has been delayed for over seven years, is the primary attempt by the Nigerian government to overhaul and transform the oil industry by updating its existing laws governing oil extraction, most prominently the Petroleum Act 1969. Whilst the PIB has undergone multiple revisions, in its current form it is set to break up NNPC and introduce a new tax regime along with new regulatory agencies. The previous President, Goodluck Jonathan, presented the most recent draft of the PIB to the National Assembly in 2012 and it has lain dormant ever since. The challenge for President Buhari will be to successfully integrate the aforementioned five points of concern into a new strengthened PIB in order to bring greater regulatory stability to the sector and change the industry for the better.

However there are no guarantees that the President will be able to overcome the tensions that have delayed the PIB’s passing over the last seven years, even if his electoral mandate did state that he would be tougher on corruption. The fundamental issue is that too many politically connected individuals have benefitted from the current structure of the industry for there to be any incentive for reform that would allow Nigeria’s oil wealth to be used for the general benefit of its population. There is resistance to industry change throughout the Nigerian government, stretching from Joint Task Force (JTF) chiefs, who are complicit in the oil theft that takes place in the Delta, all the way to corrupt Ministers within the NNPC. Unfortunately the government in Nigeria is immensely strong and resistant to change in the status quo. Whilst the challenge facing the new President is immense, initial signs have been immensely positive, particularly with regard to the reform of the NNPC. The question will be whether Buhari – nicknamed ‘Baba go-slow’ due to the six-month period it took to submit his list of ministers to the senate and then assign them posts – can engineer this transformation within his four-year term. The progress he makes over the course of 2016 will be instrumental in determining his overall success.