Assessment of Foreign Investment in Nigerian Upstream Petroleum Sector

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Introduction: Background of the Study

Foreign investment in the current state of the upstream petroleum industry in Nigeria portrays an optimistic outlook all things been equal. According to the Oil and Gas Journal (OGJ), Nigeria ranks among the top 10 nations in proven oil and natural gas reserves, worldwide. As of January 1, 2007, the estimated crude oil and natural gas reserves are 36.2 billion barrels and 181.9 trillion cubic feet (TCF). To expand Nigeria’s proven oil reserves to 56.0 billion barrels and increase its production capacity to 6 million barrels per day by 2015, the national government is willing to invest about $9-10 billion annually over the next ten years.

The upstream oil and gas industry outlook in Nigeria is robust. Nearly 200% of proved reserves produced in Nigeria from 1970-2005 have been replaced by new reserves, indicating that the petroleum business environment in Nigeria compares favorably with the global environment (see Figure 1).

 

Figure 1 Aggregate Reserves Replacement Ratio, 1970-2005

 

Launched in 2008, the Nigeria Gas Master Plan (NGMP) outlays the roadmap for the exploitation, rapid development and effective distribution of Nigeria’s robust gas reserves. Nigeria has over 187 trillion cubic feet (tcf) of proven gas reserve (comprising 97 tcf associated gas and 90 tcf non-associated gas); the 7th largest natural gas deposit in the world. Of note, there exists a tremendous potential to grow as the country holds the 4th largest reserves worldwide. Since the inception of the NGMP, the Nigerian gas sector has witnessed exponential growth, with the gas supply market increasing from 300 million to 2 billion cubic feet per day (cfpd).

The growth of upstream petroleum industry in Nigeria appears to have brought dramatic changes in the structure of the economy since 1970. In less than a decade, agricultures share of gross domestic product (GDP) declined from roughly one-half to less than 30% and its erstwhile preeminence as generators of state revenue and foreign exchange all but vanished.

Crude oil become one of the world’s most strategic natural resources required as a crucial input in contemporary economic activities. A versatile, non-renewable natural resource, crude oil is a highly demanded commodity in both rich and poor countries, providing about 50% of the global energy requirements (Anyanwu, 1997, Igbatayo, 2004).

The upstream sector of Nigeria continues to receive greater investment from Multinational Corporation due to the all importance of petroleum resources in driving the economy of any nation. The inflow of foreign direct investment is a key driver of any economy, and this has led so many government to adopt so economic policies that will attract foreign direct investment in such country.

The potential advantages of the FDI on Nigeria economy especially the upstream petroleum sector are that it facilitates the use and exploitation of local raw materials, introduction of modern techniques of management and marketing, provision of easy access to new technologies and could be used for financing current account deficits. Finance flows in form of FDI do not generate repayment of principal and interests (as opposed to external debt) and it increases the stock of human capital. Through on the job training, local enterprises are able to “learn by watching” if the economic framework is appropriate and it stimulates the investment in research and development (R&D). The amount of foreign direct investment increased significantly for developing economies during 1985 to 2000. It is observed from the World Development Indicators that the share of developing countries in world FDI inflows and outflows has risen from 17.4% in 1985-90 to 26.1% during 1995-2000 (WDI, 2008).

 

Holger and Greenaway (2004) notes that there is a considerable evidence that Foreign direct investment can effect growth and development by complementing domestic investment and by facilitating trade and transfer of knowledge and technology. Foreign direct investment is attached with great importance especially in the growth of an economy and because of this, Nigeria tries to attract greater volume of this important potential resource.

There appear to be consensus belief among policymakers to the effect that foreign direct investment (FDI) drives productivity in the host countries through the adoption of foreign technology know-how, which can happen via licensing agreements, imitation, employee training, and the introduction of new processes and products by foreign firms; and the creation of linkages between foreign and domestic firms. These benefits, together with the direct capital financing it provides suggest that FDI can play an important role in modernizing a national economy and promoting economic development.

In Nigeria, the upstream petroleum sector has been the major driver of Nigeria economy since the end of the civil war 1970-1974 contributing nearly 80% of government revenues and 90-95% of its foreign exchange earnings, on average, over this period. These facts notwithstanding, the impact of Nigeria’s industrial sector (petroleum sector inclusive) to the overall GDP remains abysmal.

The government has made so many investments in the upstream oil and gas sector and has equally made policy to attract foreign investment in the sector. The potential to derive maximum wealth and a sustained economic growth from the oil and gas industry should be indubitable. So the questions to ask are what does the future hold for oil and gas in Nigeria and how can Nigeria attain its economic aspirations using oil and gas industry as the prime mover of its economy in the next five years? Is there potential of attracting investment in the upstream petroleum sector in Nigeria?

Statement of the Problem

Undoubtedly Nigeria is facing an economic crisis/recession situation featured by inadequate resources for long-term development, high poverty level, low capacity utilization, high level of unemployment, high inflation rate and other Developmental issues which has made it increasingly difficult to achieve vision 2020.

In fact, one of the pillars on which the New Partnership for Africa’s Development (NEPAD) was launched was to increase available capital to US$64 billion through a combination of reforms, resource mobilization and a conducive environment for foreign investment (Funke and Nsouli, 2003). Nigeria as a country, given her huge natural resource base especially petroleum and large market size, qualifies to be a major recipient of foreign investment in Africa.

Promoting and facilitating technology transfer through foreign direct investment (FDI) has assumed a prominent place in the strategies of economic revival and growth being advocated by policy makers at the national, regional and international levels because it is considered to be the key to bridging the technology and resource gap of underdeveloped countries and avoiding further build-up of debt (UNCTAD, 2005).

The upstream petroleum sector has received much foreign investment and still has the potentials of receiving more investment than any other sector in the country. The petroleum industry has assumed a primate position in the Nigerian economy accounting for 80% of the nation’s GDP in the recent times where the upstream sector only account for 75% (Noko, 2014). The industry has also pushed Nigeria to the forefront of the global industry, making the country the 6th largest exporting and 7th largest producer of oil in the world. Revenue from petroleum sector comprising export earning, petroleum profits tax and royalties has grown steadily over the years. Between 1970 and 1998, earning from oil rose from 75.3% to a peak of 84.1% of the total federally generated revenue (CBN, 1998).

Also, IMF estimates showed, Nigeria’s earnings from crude oil increases from US $8,500 billion in 1989, and to $10.600 billion in 1990. By 1995, these earnings had declined to $7,001 billion and declining further to $5.276 billion in 1998. However, crude oil prices have increased steadily in the new millenium following the implementation of strict production quotas imposed by OPEC on members.

Nigeria is believed to be a high risk market for investment because of factors such as bad governance, unstable macroeconomic policies, etc. (Olajide, 2011). The significance of FDI in providing technological know-how, capital, management and marketing skills, facilitating access to foreign markets and generating both technological and efficiency spill overs to local firms (provided the right policy and business conditions are in place) has been recognized and emphasised by several studies.

By facilitating access to the above, foreign investment is expected to improve the integration of the Nigeria’s economy into the global economy, and further spurring economic growth through technological advancement.

In view of the above fact, Nigeria’s investment policies and regulations have been improved to contain provisions aimed at encouraging foreign investors to invest in the country. Since the enthronement of democracy in 1999, the government of Nigeria has taken a number of measures necessary to encourage foreign investors into the country. These measures include the repeal of laws that are inimical to foreign investment growth, promulgation of investment laws and oversea trips of image laundry such as “re-branding” campaign. Other measures include; the liberalization of the foreign investment regime to allow major foreign ownership, lifting foreign exchange controls and efficient and effective   privatization of Nigeria’s public enterprises.

The questions often asked by researchers is whether the Nigeria upstream petroleum sector has the potentials of attracting foreign investment continually? What are the impediment to the growth of Nigeria upstream petroleum sector and as it affect the economy? This and many other question will be addressed in this term paper to determine the potentials of attracting foreign investment in Nigerian upstream petroleum sector.

II: Literature Review

There is no doubt that the petroleum fiscal agreements (PFA) in Nigeria are good enough to propel Nigeria’s economy to its full potential. A study published in 2004 by scholars at Louisiana State University’s Center for Energy Studies, however, suggests that the type of contract offered is not as important as the design of the contract and the terms negotiated.

According to Table 1, the present worth of a project under production sharing contract arrangement (PSC) to an IOC is more sensitive to fluctuations in oil prices than it is for a joint venture project (JVA) projects. The sensitivity is, however, asymmetric with respect to decreasing or rising prices for both types of projects. The latter is also true for the present worth of the project for NOC.

On the other hand, the present worth of a PSC project for the NOC is less sensitive to price variation than it is for a JVA project. The opposite effects, however, prevail under JVA arrangement. So as the debate to convert JVs to PSCs in Nigeria continues, stakeholders must pursue fiscal systems with less emphasis on regressive fiscal elements such as royalty, bonuses, or sliding scales parameters with no adequate consideration for price and cost dynamics.

Authentic Indigenous Participation Issue: The use of the word authentic is very deliberate. There are many policies in place since the inception of the industry to accomplish this home-grown participation in the petroleum business. Oil blocks have been awarded to indigenous firms over the years, but only a few of these firms are actually authentic. Local content development policy is also in place. It may, however, be argued that these policies are set up to continue to fail not because of the lack human skills or technical expertise, but because of inadequate financial intermediation.

Resource Ownership and Control: The exclusive ownership of petroleum resources by the Federal Government in Nigeria, in my view, creates undue leakages in the economy. Secondly, exclusive ownership has promoted inefficiency in petroleum block allocation mechanisms, corruption, and limited transparency. Third, it has rendered ineffectual every strategy to indigenize the local petroleum industry and significantly repressed the development of the local economy in each of the petroleum producing communities. There are lessons to be learned from the U.S. regarding the role of petroleum producing state or province. In Nigeria, unlike the U.S., royalties.

Institutional and Human Capital Development: There is a myth in the international community that the oil and gas industry in Nigeria lacks skilled oil and gas professionals, thereby justifying the flooding of petroleum professionals and contractors into the country from abroad. An audit of local and international staff to delineate jobs and skills will help to address this myth. Although there is a lack of solid data at my disposal, I can on the basis of personal observations and interviews venture to declare that Nigeria has competent workers, but they are underutilized.

Regarding institutional issues, the statutory responsibilities of the Department of Petroleum Resources (DPR) in the Ministry of Energy have never been in dispute. Yet, attaining the autonomy and independence needed to effectively perform its function continues to be elusive.

Funding Options for the National Oil Company: Currently, the funding requirements for JVA operations from the government are substantial. The government spent, on average, $3.7 billion on the JVA upstream investments from 2002-2006 and the estimated projected annual funding requirement for JV operations alone ranges between $11 and $13 billion from 2007-201l [1]. The evidence is strong to suggest that the national government has received adequate revenue over and above its original investment. There is no reason to doubt that this will continue to be so. But is this the optimal way to use scarce resources when basic energy, transportation, sanitation and environmental infrastructures need urgent attention? Noko (2014) suggests that host government participation in oil and gas development may not be an efficient way to spend its oil wealth.

Continual Membership of Nigeria in OPEC: OPEC is an intergovernmental association created in 1960. Nigeria became a member of OPEC in the early 1970s and since then the shriek for it to withdraw its membership has not ceased to be passionate. Let me venture to say that Nigeria has been good to OPEC and staying in OPEC is also good for Nigeria in terms of production within the context of the exhaustible nature of petroleum resources.

Exploring Foreign Investment Upstream Petroleum Sector

The oil industry which has both petroleum resources and natural gas sub-sector has been driven by few challenges which has often hinder the sector to attain it full potentials in the development of Nigeria economy. Although existing global markets for natural gas is not as developed as that of crude oil, they are steady export markets for Nigeria’s natural gas in the industrialized countries such North America and Europe. Export market opportunities also exist in the West Africa sub-region. In order to capture lucrative export markets for Nigeria’s petroleum sector, the federal Government in collaboration with its partners has embarked upon an expansion of the petroleum industry and Nigeria liquefied natural gas (NLNG), with the aim of bosting its export earnings.

Other export-oriented projects that are vigorously being pursued are the West African Gas Pipeline (WAGP) and the proposed Trans-Saharan Gas Pipeline Project, which is a subject of discount between Niger and Algeria for sometime now. This trend has the potential to increase foreign exchange reserves and reduce the nation’s vulnerability to incessant instability associated with crude oil prices.

The Nigeria economy depends on the oil sector which has accounted for 85% of the foreign earnings. According to the 2011 report by the International Energy Agency (IEA), Nigeria has proven reserves of 37 billion barrels of crude oil and 187 trillion cubic feet (TCF) of gas, based on the yearly production of 90 million tons. The oil sector has a great influence on the Nigeria culture and structure and remains the foundation upon which the country’s economy rests. The production capacity in the sector is based on the joint venture operations. Shell and its joint venture partners are the leading producers that produce about 50% of total oil production. Nigeria’s GDP has recorded some success on the back of the sudden increase in oil production; though this has come with a severe cost to the environment.

Petroleum products provide annual revenue of an average US$ 60 to US$ 70 billion depending on market oil price and account for over 90 per cent of the nation’s total export earnings in the year 2010.The net export revenue earned by Nigeria in 2010 was US$ 65 billion, according to records from OPEC. Of this, crude exports accounted for 72 percent of current account receipts in 2010 (Lim, 2011).

The oil economy grew enormously due to success in new areas of exploration in deep and ultra-deep areas. Nigeria’s experience has shown that natural resource endowment can determine the level of economic activities and income generation capacity of an economy, but not the standard of living (Ian-Gary, 2003). The data below show the graphical relationship between Nigeria oil export and GDP growth.

 

III Findings and Conclusion

The petroleum industry has grown steadily over the years to become the cornerstone of the nation’s economy in recent times. Since the 1970s, the nation’s upstream petroleum oil Industry has contributed immensely to the government’s revenue profile. In addition to dominating other sectors, the oil industry has accounted for the bulk of the nation’s revenue and foreign exchange reserves. However, its displacement of agriculture as the main stay of the economy has created structural imbalances for the economy, undermining economic performance and national development. The sector continue remains the choice of the multinational corporation who want to invest in the sector.

Consequently, the economy has shown little real growth since the 1970s and has witnessed the emergence of endemic poverty in the midst of plenty. The negative economic trends have inspired economic reform within and outside the nation’s oil industry. This approach involves the development of the nation’s huge gas reserves and its monetization.

The upstream sector of the petroleum industry has remain in strategic position in attracting the majority of foreign investment in the country. The sector has been the major driver of Nigeria economy till date.

Despite the contribution of crude oil to economic activities and government revenue in Nigeria, the developmental impact of crude oil endowment such as income effects, welfare effects and other socioeconomic impacts remain an illusion. This is because economic growth has not been sustainable, even though the country is abundantly blessed with crude oil and other natural resources; it continues to showcase incredible poverty, accumulated debts and other economic and social problems that retard the growth of Nigeria economy.

Foreign investment in the petroleum industry has reduced drastically by 33% between 2008-2012 and this has enormous impact on the growth of Nigeria economy. This suggested that the productive base of the economy is yet diversified and adequate inter-sectorial linkages are yet established to enable full employment of resources in the country. Thus, posing opportunities for policy makers to make policy to increase foreign investment in the sector that is capable of driving growth and development at large. The sector from the analysis so far revealed the need for more investment as the sector has not been fully developed to its full capacity. Therefor government should make more investment in infrastructural development in the sector, reduce the tax rate by at least 5% and invest more in electricity to ensure stable power supply which has the potentials to attract more foreign investors.

References

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Igbatayo SO (2004). Nigeria petroleum industry and export orientation. A paper presented at the Society of Petroleum Engineers program, Abuja, Nigeria 18-23.

Lim. E. (2001). Determinants of and relationship between foreign direct investment and growth: A summary of recent literature. IMF Working Paper No. 175. International Monetary Fund, Washington, D.C.

Lukeman R (2003). Capacity growth in the Nigeria petroleum industry. A Keynote Address Proceedings of the SPC 26th Nigeria Annual International Conference and Exhibition, Lagos, Nigeria pp.4-9.

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Noko, J. E. (2014). Environmental regulations in the Nigerian petroleum industry: Compliance Status of Compliances and Implications for Sustainable Development, Research Report, ACBF/NCEMA, Ibadan

 

Olajide, G. (2011). Foreign direct investment and growth in Nigeria: An empirical investigation, Journal of Policy Modeling 26(2004),627-639

Sachs, J.D., & Warner, A.M. (2001). The curse of natural resources. European Economic Review (45), 827–838.

UNCTAD, (2005). World Investment Report 2005: Transnational Corporations and the Internationalization of R&D. New York and Geneva.

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