oil report new

8/8/2019 Oil Report New

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OIL REPORT

$1 billionNigerias foreign reserves in 1983 ascrude oil prices crashed. Thereserves were $10 billion in 1980Source: THISDAY Database

SIMON KOLAWOLE REPORTING

When the budget was beingdrafted in the last quarter of 2008,crude oil prices hovered in thevicinity of $100 per barrel. Thedrafters felt they were being con-servative with a benchmark of$62.50. After all, the 2008 budgetwas benchmarked against $59 yetcrude oil eventually hit $147.

In no time, however, prices began to wither; the $62.50 markwas no longer realistic. The bud-get drafters adjusted it to $45,thinking again that it was a wise,conservative decision.

But a week after theAppropriation Bill was presentedto the National Assembly byPresident Umaru Musa YarAdua,oil was selling for $40. There was,

expectedly, panic Nigeria was los-ing both in price and quantity.Countries like Russia have enough

capacity to make up for fallingprices with higher quantity. Nigeriawas limited on the two fronts. Withthe onset of militant activities in theoil-rich Niger Delta, production isno longer guaranteed to hit the2005 level of 2.7 million barrels perday (mbpd).

Energy Information Admin-istration (EIA), the statistical arm ofthe US Department of Energy, esti-mates that Nigeria currently has acapacity to produce 3mbpd, but forthe shut-ins. Nigerias plans of hit-

US President Barack Obama seeks energy independence for his country,which buys almost

half of Nigerias crude oil exports.Militants disrupt production and slow down fresh invest-

ments in the Niger Delta. Crude oil prices take an incredible plunge in the international

market.Is the end nigh for Nigerias oil-fuelled economy?

ENERGY EXPERTS must be fum-ing by now.

Last year, they predicted crude

oil could be going for $200 perbarrel by December. They werespectacularly wrong. From aheight of $147 in July 2008, oil isnow gasping for dear life at athird of that price.

Indeed, the protracted dilemmain fixing a benchmark forNigerias 2009 federal budget saidit all things are falling apart withthe countrys fabled oil wealthand its fiscal health is no longer atease. This is a major consequenceof the global economic crisiswhich has hurt crude oil prices.

Windfall PitfallOil windfalls flatter to deceive,creat-ing a false sense of unlimited wealth.Nigeria has a lot to learn from othercountries on how they manage theirwindfalls.PAGE 7

Deregulation DilemmaNigerians believe they should natu-rally enjoy cheap fuel because theircountry is well endowed with hydro-carbon but the government insiststhat full deregulation is non-nego-tiable.Crisis looms then.PAGE 11

Resource CrossNigeria is still battling with the appro-priate sharing of its oil revenue asagitations for resource controlfesterin oil-rich regions.What can thecountry learn from others?PAGE 12

NNPC:TheDwarfed GiantMany state-owned oil companies aredoing very well all over the world.

Nigerias NNPC offers a peculiar casestudy.PAGE 17

Local DiscontentDependence on foreign oil compa-nies often under-develops indige-nous capacity and denies the localeconomy enormous benefits,but,thankfully,Nigeria is now fighting thecause of local content.PAGE 20

Very Backward IntegrationWhy are IOCs deeply involved indownstream activities, specifically

power generation and refining,inother countries but stick mainly toupstream in Nigeria?PAGE 21

A Future Without Oil?What does the future hold for Nigeriaif crude oil goes out of fashion?PAGE 24

N I G E R I A A N D O T H E R O I L - P R O D U C I N G C O U N T R I E S : A C O M P A R A T I V E S T U D Y

Inside...

And now theCrude Crunch

Buyers wanted

CONTINUED ON PAGE 2

Exclusive:Okonjo-Iweala onhow Nigeria canbeat the oil crisisPage 22


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NIGERIA AND OTHER OIL-PRODUCING COUNTRIES: A COMPARATIVE STUDY> CRUDE CRUNCH THISDAY OIL REPORT 3most importantly, Nigeria has a past tolearn from. That alone should serve as adeterrent factor.

Obamas energy planThe present and the future do not look

too promising, in any case. To reducedependence on foreign oil, PresidentObama has proposed various strategies. Ifadopted into a policy, Nigeria could be amajor victim if it succeeds. He wants topump $150 billion into developing greenenergy in the next ten years. This is meant tooverhaul the energy system and break thecountrys addiction to oil (his words).That would mean development of hybridcars, wind and solar power, clean coal andmore fuel-efficient appliances. By 2012, hehopes that the use of renewable energy inthe US would have doubled.

In addition to fuel efficiency and greenenergy, Obama is also in favour of releasingmillions of barrels of crude oil daily fromthe Strategic Petroleum Reserve (SPR) tokeep the prices within a band. The SPR,

established in the 1970s during the cata-strophic Arab oil embargo, currently holdsabout 700 million barrels. In the last eightyears, the US has been saving 70,000 barrelsper day in the reserve. There are plans toexpand the capacity to 1.5 billion barrels.Obama is also in favour of limited off-shore drilling to increase local oil output inthe country. This is no good news forNigeria and other oil-producing countrieshoping for another era of oil boom. The USseems to have learnt from events of the pastand is bracing to forestall or minimise arecurrence in the future.

The global move to cut down on the useof fossil fuels in favour of bio-fuels is alsobad news for Nigeria. Climate change hasbecome an all-important topic in global dis-course. Carbon emissions are being discour-aged. The whole world is now discussingalternative, renewable sources of energy.With more and more countries working atachieving its carbon emissions target, theprojections for the future of crude oil are notflattering at all. Nigeria can take solace intwo things: one, it would still take ages torelegate crude oil to the background; and,two, Nigeria still has time to diversify itseconomy and avoid being held to ransomby oil.

Austerity measures againNigerias response to the latest crude cri-

sis has been surprisingly sober. Unlike inthe past when massive borrowing went into

bridging budget gaps, there has been asomewhat realistic approach. PresidentYarAdua has proposed pay cuts for politi-cal appointees and public offices holders.This is expected to cover all tiers of govern-ment federal, state and local. The emolu-ments for this category of public office hold-ers cost about N1.3 trillion (about $884 bil-lion) yearly. In August last year, RevenueMobilisation, Allocation and FiscalCommission (RMAFC) had raised someemoluments by 100 per cent, justifying theincreases on certain indices, includingexternal reserves, GDP, growth rate, rate ofinflation and the need for a living wage.Many states are also responding to thecrunch by scaling down their budgets andslicing some percentage off some fringe

benefits.Another pile-up of foreign debts, as it

happened in the Second Republic, may alsonot be entertained because of two signifi-cant developments: one, with Nigeriasordeal in the hands of the Paris Club, theFederal Government would be more reluc-tant to grant country guarantees to statesseeking foreign commercial loans (as distin-guished from concessionary loans grantedby development agencies such as the WorldBank); two, Nigerias financial sector is nowmore developed, opening ways for states topatronise the capital market rather than bor-row abroad. But the notion of a fresh debt

pile-up itself domestic or external is notsomething Nigerians want to contemplate

again, although domestic borrowing is aglobal phenomenon.These consolations notwithstanding, the

handwriting on the wall is getting largerand clearer: Nigerias dependence on oil

just has to stop. A country that nervouslymonitors movements in oil prices in orderto know whether to smile or sigh is livingdangerously. Oil contributed about 19 percent to the nations revenue in 1970, 80 percent four years later, and about 82 per centor more since 1989. When every budget hasto be benchmarked against the forecastprice of an unpredictable commodity, thecountry is effectively boxed into a corner.

Hope in the horizon?

Nigerians are quietly hopeful that therewould soon be a recovery in crude oilprices. It is not based on any data orinformed predictions; it is just that it musthappen to save the countrys economy. Thesigns are not very encouraging though, asforecasts cast doubts on any optimism in theshort run. The global economic meltdown which has seen a sharp rise in business fail-ures, unemployment and fall in demandglobally, with the worlds biggest compa-nies declaring record losses meansdemand for oil would continue to fall, atleast until measures being adopted by vari-ous governments begin to bear fruits.

At the Annual Meeting of the WorldEconomic Forum in Davos, Switzerland, in

January, the Premier of the PeoplesRepublic of China, Wen Jiabao, revealedthat China had stored up enough oil thatwould last for the next 22 months. With oilimports also dropping in the US, thedemand for crude oil is unlikely to rise inthe nearest future. If demand does not rise,price is not likely to rise.

Indeed, global oil demand is expected tocrash further this year amid untamedworldwide recession. EIA predicts thatthere would be a drop of 450,000bpd thisyear. US oil demand, according to its fore-cast, will drop to the lowest level in 11 years.The World Banks Global Economic

Prospects report said the five-year com-modity boom has come to an end.Nevertheless, some analysts are of the opin-ion that there would be a price recovery

between now and the next three years, butprices are not expected to rise above $75during the period.

For Nigeria, it should not matter whetheror not price would recover in the future. Theurgent task is to cut out wastages, scaledown mega projects, improve infrastruc-ture, entrench transparency in economicmanagement and pursue diversification ofthe economy with commitment.

Easier said than done, but better said thannot.

New rulers of the Niger Delta

Back to the future


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THISDAY OIL REPORT NIGERIA AND OTHER OIL-PRODUCING COUNTRIES: A COMPARATIVE STUDY4


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NIGERIA AND OTHER OIL-PRODUCING COUNTRIES: A COMPARATIVE STUDY THISDAY OIL REPORT

ROAD NOTES/SIMON KOLAWOLE

5

TO QUOTE the inimitable ex-US

President George W. Bush, I misunder-estimated the challenges ahead of mewhen I embarked on this survey Junelast year. It sounded so exciting to myears to say I wanted to survey five oil-producing countries on a comparativescale with Nigeria to draw lessons forthe countrys policy makers in the areasof policy environment, windfall man-agement, upstream-downstream link-ages, local content, operations of nation-al oil companies and all that. With thebenefit of hindsight, it was a suicideattempt. Thankfully, I survived it.

This report was originally scheduledto be published in September 2008. That,again, was a product of misunderesti-

mation. By that time, the work had onlybeen half-done, only to be undone by theevents in the international crude oil mar-ket. Crude prices were heading for theskies when I launched out. By the time Ifinished, they were diving for the abyss.So while the original intention was toemphasise how to manage the windfallby learning from other countries, there isan extended intention now to appraisethe dangers ahead. The good thing, itcan be said, is that Nigeria can learnfrom both scenarios.

The idea of Vision 20-2020 is thatNigeria will be among the biggest 20economies in the world by 2020. No oneknows how this will be achieved in acountry that is literally still living in theDark Age as a result of seemingly intractable electricity problems.The worlds seventh largest oil exporter is a net importer of petro-leum products as its refineries have, for decades, been epileptic atbest and have become a very lucrative drainpipe for public fundsunder the guise of maintenance.

Yet we should not be left in doubt about how the country canattain its ambitious Vision 2020: it must properly harness, manageand invest its petrodollars to the advantage of other sectors of theeconomy in order to get out of the hole of resource curse. Manypetroleum-rich countries are tackling the new reality of economicdiversification, but Nigeria is behind. The most tragic aspect ofthe Nigerian situation is that while many oil-rich countries maynot be able to boast of a liberal democratic polity, they can at leastpoint to excellent infrastructure as a benefit of petroleum riches.Nigeria is far, far behind in this area.

This survey is, in any case, intended to be a wake-up call.Nigeria compares too poorly to its mates in oil riches. It is not just

about the poverty in the country. It is also about the structuraldeficiencies in the oil economy. It is about the triumph of politicsover common sense. It is about gross underdevelopment of a sec-tor that can galvanise Nigerias rise to economic power. FormerPresident Olusegun Obasanjo, it must be acknowledged, madecommendable efforts to change the industry. He might have beencaught up in his own contradictions on transparency andaccountability, but he ranks way above others in trying to put aproper structure in place to make the industry function better. Buthis efforts were not enough, and not many radical changes result-ed from them. President Umaru Musa YarAdua, if he can breakthe vicious circle, has a lifetime opportunity to put things rightonce and for all.

Meanwhile, the most difficult aspect of this work was not thesurvey itself. It was fixing interview appointments with govern-ment officials in the selected countries. E-mails upon e-mails wentunreplied. Text messages were ignored. I had travelled for OPEC

meeting in March 2007 and met with officials from the countriesI wanted to sample. We exchanged cards. And that was it. Everyattempt to even communicate, much less fix appointments, failed.At a stage, I almost gave up. There was no way I could do thiskind of work thoroughly without getting first-hand information.

I got a big relief when I sent an e-mail to the Ambassador ofNorway in Nigeria, His Excellency Ambassador Tore Nedreb,who replied me in a matter of hours and detailed Havlor Musaeuto help me. In a few days, I got appointments fixed and my visasecured. In Oslo, Norway, an official of the Petroleum Ministry,Olsen Erik Just, spent hours with me, letting me into the worldof petroleum in his country and giving me all the documents Ineeded. Eddy Rich of the Extractive Industries TransparencyInternational, also in Oslo, was very helpful with materials. Dr.Ngozi Okonjo-Iweala, Nigerias former Minister of Finance and

MD of World Bank, magnanimously

squeezed out time from her hectic sched-ule to answer my questions despite herreservations about me.

The good people at OPEC helpedtremendously with securing appoint-ments while also allowing me to use thelibrary. The Head of PR, Dr. OmarFarouk Ibrahim, and Angela Agoawike,made my stay in Vienna, Austria, head-quarters of OPEC, worth the while.THISDAYWashington DC Bureau Chief,Constance Ikokwu , helped me secureuse of IMF/World Bank libraries, where Iwas overwhelmed with materials in twokey areas of my study. I value the veryuseful inputs ofWaziri Adio , who wasthe first person I discussed the idea with

in 2006 and who received it with enthusi-asm. He kept sending materials to me.Adio, who is currently doing a graduateprogramme at Harvard University, US,even sent me his lecture notes pertainingto the oil industry.

Richard Swann , Managing Editor ofUK-based Platts, broadened my horizon

by suggesting that I look beyond my cho-sen case studies. Deputy Editor of THIS-DAY, Tunde Rahman, always ably heldfort each time I had to travel. Tunji Bello,forever an inspiration, never failed toremind me how important this studywas. Bisi Ojediran went through thedraft reports even when it was inconve-nient. Gboyega Akinsanmi and BunmiOni , both my colleagues at THISDAY,

contributed their own quotas. Austin Avuru, Mike Oduniyi andHector Igbikiowubo offered invaluable technical advice. PeterBakare handled the graphics at short notice. Abdulmumin Bello,my Abuja uncle, helped facilitate my Saudi visa. He often calledme oil sheikh. How I wish!

The sponsors of this survey were marvellous without fund-ing it would have been difficult. The research was proudly sup-ported by (in alphabetical order) African Petroleum Plc, DiamondBank Plc, Nigerian National Petroleum Corporation (NNPC),Oando Plc, Rivers State Government, United Bank for Africa(UBA) Plc and Zenith Bank Plc. I am aware of my debt of grati-tude to those who facilitated the funding Mofe Boyo (DeputyCEO, Oando), Tony Elumelu (CEO, UBA), Dr. EdmundDaukoru (former Minister of Petroleum Resources), ShakaMomodu (my colleague), Malachy Agbo (Diamond Bank),David Iyofor (Rivers) and Timeyin Ejoor (Zenith Bank).

I, eternally, value the support and motivation of THISDAY

Chairman/Editor-in-Chief,Nduka Obaigbena, who apart fromoffering invaluable insights, kept on challenging me to deliver onthe project and always granted me the freedom to embark ontrips at short notice. He is one in a million. At THISDAY, you can

be what you want to be. Talents are allowed to flourish. I haveworked in eight media outfits in my career THISDAY standsout.

Meanwhile, I would like to remind the reader that this is essen-tially a journalistic survey not an academic research so the pre-sentation is more journalistic, simplified and ready to use. I madeevery effort to verify my facts in order not to mislead the reader.All errors, or inaccuracies, are regretted. The exchange rate keptchanging during this research, from N119:$1 to N150:$1. It wasdifficult keeping track and altering figures all the time, so whatyou would find in this report is a rate that is N145:$1.

Finally, I had a scary but lovely tune on my iPod which Isomehow often played on my flights. Its a song by the poet,

Beautiful Nubia, entitled Ife Oloyin. It says: Flying off in theair/Slicing through the clouds/Any moment from now could bemy last My wife, Abimbola, hated the lyrics! But I calmed herdown with the other lines which she now likes: Such a lonelyworld/Cant find no one to trust/Youre the only who under-stands/Wipe away your tears/Take me in your arms/This iswhere I belong/Im here to stay/Im coming back home/To giveyou all my love/To give you what you want/You will never belonely/I will always be there for you.

For flying safely thousands of kilometres around the worldalmost every month, I just have to thank God for journey merciesand the special grace for the conception, execution and deliveryof this project.

[email protected]

A journey into petro-dynamics

CREDITS

LEADERS & COMPANY LIMITED

Editor-in-Chief/Chairman:

Nduka ObaigbenaGroup Executive Directors:

Eniola Bello,Deji Mustapha

Divisional Directors:

Simon Kolawole, Emmanuel Efeni,

Israel Iwegbu,Benjie Ihenyen

Associate Directors:

Peter Iwegbu,Biodun Aminu,Gbayode Somuyiwa

General Managers:

Martins Egboh,Fidelis Elema,

Ayo Oresegun,Labake Yembra,Dele Ogbodo,Patrick Eimiuhi

Deputy General Manager:

Angela Okhakume

Group Heads:

Femi Tolufashe,Sola Obisesan,MoroophAlli,Peter Bakare,Ugo Nnakwe

Art Director: Obi Azuru

General Counsel: Jane Inyang-Disi,Chinwe Izegbu (Nations Capital)

Director of Photography:

Sunmi Smart-Cole,Contributing Editor:

Funke AboyadeYarAdua: Change agent?

THIS RESEARCHbenefited from the fol-lowing works:Facts,The NorwegianPetroleum Sector 2008 (NorwegianPetroleum Directorate,2008);Nigeriaand OPEC:36 Years of Partnership(Nigeria Ministry of PetroleumResources,2006); Wikipedia;NigeriaSweet Crude (Yakubu Lawal andHector Igbikiowubo,2007); Oil Revenue

Assignments: Country Experiencesand Issues (Ehtisham Ahmad and EricMottu,IMF Working Paper,2002); Issues

in Domestic Pricing in Oil-ProducingCountries(Sanjeev Gupta,BenedictClemens,Kevin Fletcher and GabrielaInchauste,IMF Working Paper,2002);Universo (Sonagol,Angola);TheEconomistandFinancial Times ofLondon;websites of Energy Information

Administration (EIA) and OPEC;Covering Oil:A Reporters Guide toEnergy and Development(OpenSociety Institute,2005).Norways OilFund Shows the Way for WealthFunds (IMF Survey magazine,2008).

PHOTOSPage 1: Dreamstime (main picture),World Economic Forum (Okonjo-Iweala); Page 2:AFP (Castro andObama);THISDAY;Page 3: Corbis.com(main picture),slate.com (illustration);Page 5: THISDAY ; Page 7: Flickr.com;Page 9: THISDAY;Page 11: Dreamstime, AFP;Pages 12-13: Dreamstime;Page 15:AFP;Page 17:AFP;Page 19: Dreamstime;Page 20:AFP;Page 21:AFP;Pages 22-23: WorldEconomic Forum; Page 24: Universo.


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NIGERIA AND OTHER OIL-PRODUCING COUNTRIES: A COMPARATIVE STUDY> WINDFALL MANAGEMENT THISDAY OIL REPORT9

slow-paced development.The other side of the coin, however, is

that given the poor state of infrastructure

in Nigeria, the pace of the countrys devel-opment will be too slow except govern-ment spends on infrastructural develop-ment. Without reliable power and trans-portation infrastructure, for instance, eco-nomic activities will continue to be ham-pered. Investors will continue to incurunnecessary costs (building roads,haulage, fuel etc etc) which could havebeen channelled towards real invest-

ments. Small- and medium-scale busi-nesses, which employ millions ofNigerians, will also continue to bearunnecessary costs, while real incomes willcontinue to dwindle as cost of livingremains high. It is also argued that hugeforeign reserves and excess crude savingswill lose value overtime: what $1 can buy

today may be less than what it can buytomorrow.

However, the argument may not be acase of black or white. Economists such asPaul Toungui, Gabons former Minister ofState and Minister of Economy, Finance,the Budget and Privatisation, favour apragmatic approach. He advanced asomewhat broad perspective in an articlein F&D, a quarterly magazine of the IMF,published in December 2006. He arguedthat a portion of the windfall should beused to finance social spending suchas education and healthcare while a por-tion should be saved to cushion theimpact of future external shocks.

Toungui endorses spending part of the

windfall to get out of debt (Obasanjo paid$12 billion to secure Nigerias exit fromthe Paris Club in 2005) so as to strengthenpublic accounts and make the economyattractive to foreign investment. Payingdown debt early brings greater benefitsthan building up savings that earn a lowrate of return, he wrote. But to attain theMillennium Development Goals (MDGs),there must be investment in basic socialand production infrastructure, he said,warning: The pace of spending has to becommensurate with the economiescapacity to absorb large additional spend-ing

Saving graceSeveral oil-producing countries, such as

Qatar, UAE and Norway, have madeenormous savings from the oil boom.Kuwaits savings are in excess of $260 bil-lion. Norway has over $390 billion, whichis almost the size of its GDP. The AbuDhabi Emirate in the UAE has a mind-blowing $900 billion in boom savings.

Nigeria, in contrast, has $15 billion whichis being shared monthly to make up forthe low oil revenue. Whereas other oil-producing countries operate their savingsas sovereign wealth funds (SWFs) whichare invested in shares, bonds, propertyand other securities across the world,Nigeria shares its own savings on a regu-

lar basis among the various tiers of gov-ernment. The windfall savings are kept aspart of foreign reserves. Political consider-

ations have limited the countrys ability toderive maximum value from it. The sav-ings are not invested as other oil-produc-ing countries do.

In 2006, the government of Obasanjodecided to draw down from the fund tofinance power infrastructure followingthe lack of success or speed in the attemptto get private investment to boost thecountrys power supply. Various powerplants were to be built under the NationalIntegrated Power Project (NIPP). This, in asense, represented a productive use of theoil windfall. In the years to come, Nigeriacould look back and celebrate utilising thewindfall to address the electricity problemonce and for all in addition to the exitfrom the Paris Club. The actual costs of

these projects are still a subject of conjec-tures, but figures ranging from $2 billionto $16 billion are being quoted.Accusations of corruption and improperplanning are still hanging on the project.

However, a bigger problem is doggingthe use of the windfall. It is being arguedthat operating a windfall account isunconstitutional and should be discontin-ued a development that may mean therewould be no special savings any more,which is indeed very dangerous, especial-ly when compared with the experiences ofother countries who now have enormoussavings for the years ahead. Some politi-cians argue that Section 162 of the NigeriaConstitution provides that all revenues of

the government must be pooled and putin the Consolidated Revenue Fund andshared by the various tiers of government.

This argument, which sounds verylegal and democratic, is nonethelessviewed as a ploy to transfer the windfallinto the hands of politicians from where itis highly susceptible to mismanagement.Social critics and activists are apprehen-sive that the country may end up with lit-tle or no benefits from the oil boom by thetime the constitutional argument isemployed to share the savings. It would

appear, however, that a political solutionmay be applied to address the constitu-tional question since it could never be

the intention of the framers of the consti-tution that the country should have nosavings. The various levels of govern-ment can strike an agreement to saverather than spend everything. The com-promise, at the end of the day, may be tospend some and save some.

Once-size-fits-all?Beyond the peculiar political environ-

ment of Nigeria, however, the UAE orNorway example does not really suit thecountry. Norway, for instance, was adeveloped country before it found oilwealth. It had a tax system in place. Thiswas not eroded by the oil wealth. The

basic infrastructure to keep the economygrowing was already in place. Also, its

population is small a little over 4.6 mil-lion. Nigeria, by contrast, has a popula-tion of 140 million with poor social andeconomic infrastructure. While Norwaycan afford to stash billions of dollars awayfor the future generations, the same can-not be said of Nigeria which is in direneed of the fundamentals to grow theeconomy.

Indeed, it is very difficult to find anycountry that is very similar to Nigeria interms of oil wealth per capita, state ofinfrastructure, a teething democracy and,most critically, a complex ethno-politicalconfiguration which is a major factor inthe way economic resources are man-aged. What would work very well for

UAE would be exposed to the politics ofNigeria. Politics almost always triumphsover economic commonsense, and thereis always this feeling of the country beinglocked up in a vicious circle.

Spend,save and investNigerias means of livelihood is crude

oil. The government has spoken quiteencouragingly about diversifying the eco-nomic base but oil still accounts for over80 per cent of government revenue and 95per cent of foreign exchange. The country

also has one of the worlds biggest gasreserves which are more than its oil.Therefore, it appears that for a long time

to come, the position of oil and gas in therevenue profile will be predominant.What is not sure is the price of oil.

Sudden oil windfall flatters to deceive,as the country has experienced in the past.The urge to spend and spend and spend isever present with little consideration forthe rainy days. Despite the horrendouspost-boom experiences of the past, theNigerian political leaders do not seem tohave learnt their lessons. Much of the oilwealth is still being mismanaged.Resource curse theorists will easily citeNigeria as a perfect example of the dam-age oil rents can do to the economy andthe polity.

Nigerias precarious revenue situationis worsened by militant activities in theoil-producing Niger Delta. New invest-ments in the sector are hampered. Crudeoil prices, meanwhile, have peaked andare on a downward spiral. Falling pro-duction and falling prices portend doomfor Nigeria. It makes a whole lot of sensefor the politicians to pause and think ofthe dangers that lie ahead if the oil wind-fall is not reasonably managed to avoid acrippling fiscal crisis.

Subject to the necessary legal backbone,a large percentage of oil windfalls oughtto be saved and invested for the sake ofthe future. The remaining portion could

be shared by the tiers of government onlyperiodically like when there are seriousshortfalls. The portion to be shared should

be targeted at social and economic infra-structure within assessable timelines. Thegovernment should also continue to pur-sue the public-private initiatives in infra-structural development. This has thepotential of containing excessive publicspending with all its side effects, as well ascreating wealth and jobs, in addition toefficient management, given that govern-ment institutions are still undergoingreforms intended to make them morecapable in service delivery.

WHEN IT comes to prudent manage-ment of the petroleum resources,

Norway is the global poster boy. Allthe diseases associated withresource curse, such as neglect ofmanufacturing sector, bloated publicservice, poor social infrastructure,environmental degradation andpseudo-democracy/outright dicta-torship, are alien to this Scandinaviancountry. Its Government PensionFund (GPF, savings from oil windfall)is hailed as a model for sovereignwealth funds. It was set up in 1990

and has so far saved over $390 billion which is almost the equivalent of

the countrys GDP. Nigeria can drawuseful lessons from the Norwegianexperience.

One, the Fund aims to save asmuch money as possible from theoil windfall and fund public pensionin the future,given the demographicstructure of the country which showsan aging population in the years tocome (in Nigeria, though, pensionsare no longer defined/paid by gov-ernment. Pensions are now contribu-

tory you get what you contributedwhile working, in addition to your

employers matching contributions).Two,the Funds investment strate-gy is very transparent. The financeministry,officially the owner of thefund, regularly reports on the goals,investment strategy, ethical guide-lines and results.Quarterly and annu-al reports are published by the cen-tral bank, the funds manager, on themanagement and performance of thefund in a very detailed manner.

Three, the fund is like an endow-

ment fund the long-term returnsare invested in financing the non-oilsector. In a way,the capital, derived100 per cent from oil revenue, is intactwhile the interest is spent to developthe non-oil sector.

Four, the fund is part of the budget every net allocation to it and pro-jected returns are reflected in theoverall budget of the government.

Five, to protect the local economyfrom getting overheated withpetrodollars, the funds assets areinvested abroad.

Is Norways Way the Best Way?

Obasanjo

NIGERIAS ECONOMY could have been ingreater trouble today but for the savingsfrom oil windfall in the recent years ofboom.Dwindling oil revenue has seen afreefall in federal allocation which isshared monthly among the federal,stateand local governments.N435.40 billionwas shared in December 2008,down toN285.58 billion in January 2009 repre-senting a 34.4 per cent drop.This furtherdropped by N50 billion in February.Tomake up for the deficit, the three tiershave agreed to share gradually from theExcess Crude Account.In February,$1.5

billion was shared from the $20 billion fund,although over $5 billion has already,beenpledged to fund the National IntegratedPower Project (NIPP).The foreign reserveshave also been dwindling as the centralbank tried to save the naira from falling.Butthe naira eventually depreciated as theapex bank also tried to avoid washing awaythe reserves.If crude oil prices do not wit-ness a significant improvement,thereserves and excess crude oil revenue sav-ings stand the risk of being completelydepleted.That would be very catastrophicfor Nigeria,in the short run,at least.

Post Script: Oil Savings to the Rescue


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NIGERIA AND OTHER OIL-PRODUCING COUNTRIES: A COMPARATIVE STUDY> SUBSIDIES THISDAY OIL REPORT11

A REDUCTION in petrol pump priceshould be eagerly applauded, shouldnt it?Not in Nigeria. An announcement by thePetroleum Products Pricing RegulatoryAgency (PPPRA) in January 2009 that thepump price of petrol had been reduced fromN70 (about half a dollar) per litre to N65 wasinitially met with cynicism and then outrightrejection. Why? Politics. Petrol pricing inNigeria has a long political history. Fordecades, the governments and the citizens

have been engaged in fierce battles overwhat the prices of petroleum productsshould be. Under the coinage of differentterms, petrol prices have always gone up.Sometimes it is referred to as appropriatepricing and other times deregulation andliberalisation.

The PPPRA, in announcing the reductionof petrol price, tied the decision to the fallingprices of crude oil in the international market(Nigeria imports virtually all the petrol itconsumes). It then dropped in the wordderegulation. This triggered an alarmamong Nigerians, especially the unionists,who immediately sensed that the govern-ment was preparing ground for a rise in fuelprices as soon as crude oil prices picked upagain. The debate is taking different shapes,

in any case: some even argued that petrolshould be cheaper than N65 if prevailingcrude prices were to be taken into account;others expressed the belief that the decisionwas too late as marketers had already madea kill since the crash in oil prices.

One of the biggest battles any governmentin Nigeria faces is the pricing of petroleumproducts. In the last couple of decades, it isone of the major crises an infant governmentruns into. Gen. Ibrahim Babangida, whotook over as military president in 1985,increased fuel prices in his first budget of1986 as economic recession continued to hitpublic finances. It became an annual ritual asthe economys managers sought to reducegovernment spending and provide for effi-

cient consumption of petroleum products.Most violent protests Babangidas govern-ment faced emanated from increases in fuelprices.

When he left office in 1993, the issue wasas hot as ever. Gen. Sani Abacha, who ruledfrom 1993 to 1998, also increased fuel pricesand faced the wrath of organised labour.When Abacha died in 1998 and Gen.Abdulsalami Abubakar assumed office ashead of state, he too preached the virtues ofderegulation, increasing the prices ofpetroleum products in his first fiscal mea-sures. The public outcry remained. TheOlusegun Obasanjo government waited fora year after assuming office before increasingthe prices, citing, also, the need to deregu-

late the downstream sector of the economy.For the eight years that he was in power, thesensitive issue of product pricing was ever asource of constant face-off between his gov-ernment and organised labour.

The current government of PresidentUmaru Musa YarAdua started off badly ithad to contend with the crisis of anotherlabour face-off over the issue of fuel pricing.He didnt increase the prices by himself Obasanjo had done so shortly before hand-ing over to him. But faced with a cripplingindustrial action by the unions, YarAduaeventually reversed or toned down the priceincreases. It was the most difficult way to

start for a new president, but YarAdua isnot alone. Most of the previous presidentsand heads of state always had to confrontthe thorny issue on assumption of power.

Subsidy can killThe government of YarAdua, who had a

socialist bent as a student and as a lecturer,had been hinting since last year that the

price of petrol would be increased. The ener-gy minister, Mr. Odein Ajumogobia, hadsaid by December 2008, the bill for fuel sub-sidy would hit N700 billion (about $5 bil-lion). This was unbearable, he said, and wasof no benefit to the ordinary people on thestreets. Indeed, it has been argued over theyears that the ultimate beneficiaries of fuelsubsidies are the contractors who import the

Deregulation DilemmaNigerians believe they should naturally enjoy cheap fuel because their country is well endowed with hydro-carbon. But government insists full deregulation is non-negotiable. Unions are ready to bring the country

to a halt. Crisis looms then

IRAQ,STILL smarting from an

internal war, has managed toput a new refinery on stream

despite its political and eco-

nomic fragility and the cli-

mate of instability.This is the

inside view of the new refin-

ery built by the Czechs in

record time.This crude oil

distillery unit at the Dura

refinery in southern Baghdad

was inaugurated on January

26, 2009. It will produce

70,000 barrels per day. At the

official opening ceremony,

Iraqs Minister of Oil,Husseinal-Shahristani, said his coun-

try would increase its oil

refining capacity to become

self-sufficient in oil produc-

tion by the end of this year.

The Nigerian government is

still clueless on when it

would achieve self-sufficien-

cy as all refineries are not

only down,they are inade-

quate to meet increasing

local needs.

Lessons from Iraq

products on behalf of the FederalGovernment. According to the government,the money is better channelled to providingsocial infrastructure from which the ordi-nary people will benefit rather than the fatcat contractors.

Several arguments have been canvassedagainst subsidy any form of subsidy at all.The neo-liberal economists argue particular-ly in the case of fuel subsidy that it bringsmarket distortions. Since the pump price isnot a true reflection of the cost and the eco-nomic value to be derived, the market isoperating at an artificial and unrealisticlevel. It allows for inefficient use of resources,they also posit. Another point of discussionis the smuggling of products which this canengender. If the cost of fuel is N70 in Nigeriaand N200 in Benin Republic, the fuel sellerwould rather take the product to Benin totake advantage of the price difference. But ifthe forces of demand and supply areallowed to determine the price, there would

be no distortions between the Beninoise andNigerian markets. There will be no incentivefor smuggling as a result.

Another argument is pursued by conser-vationists. If the price of fuel is too low, thetendency to waste is there. Charging a high

price will force people to conserve energyand reduce demand, especially since fossilfuels are non-renewable and reserves are notlimitless. Closely related to this argument isthe concern of environmentalists that fossilfuels contribute carbon emissions to theatmosphere, thereby worsening globalwarming.

In Nigeria, a few individuals, most ofthem fronting for their principals in govern-ment, have amassed enormous wealth justimporting petroleum products on behalf ofthe government. Before the 2007 elections,excessive contracts were believed to have

been awarded just to build up funds tofinance political campaigns. Many shipswere stuck offshore, unable to offload

because of limited reception facilities.Anything between N50 billion and N100 bil-lion is said to have been incurred in demur-rage over the years as a result. Fuel importcontracts are about the most lucrative sourceof rent collection in Nigeria. The refineriesare down or inefficient. Even if they areworking at full capacity, they cannot meetthe consumption requirements of the coun-try. Importation is therefore unavoidable.

At what price?

CONTINUED ON PAGE 15


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THISDAY OIL REPORT REVENUE SHARING


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TRIES: A COMPARATIVE STUDY> REVENUE SHARING THISDAY OIL REPORT 13

resource control and threatening to takethe law into their hands to actualise theirdemands.

Attempts to increase the derivation per-centage over the years have met brick

walls and worsened the relationship between the region and the hardlinersfrom outside the region. Since revenueallocation in Nigeria is a zero-sum game one states gain is anothers loss theNiger Delta is not short of antagonists inits campaign for more money. The mostfrequently asked questions are: what haveNiger Delta leaders achieved with the 13per cent they are collecting? Why shouldthey be asking for more? However, thishas not helped the debate, because thepeople from the region also maintain thatit is nobodys business what they do withtheir money. We demand fairness, theyoften argue.

Changing the provisions of the Nigerianconstitution is a very difficult, almostimpossible task because of the highly divi-sive political undertones. But if the deriva-tion is to be increased, it does not require aconstitutional change. The constitutiondid not put any upper limit on what thederivation should be. Section 162 (2) statesthat the principle of derivation shall beconstantly reflected in any approved for-mula as being not less than thirteen percent of the revenue accruing to theFederation Account directly from any nat-ural resources. The Ledum MiteeCommittee set up by the present govern-ment has recommended an increase inderivation, reportedly to between 25 and50 per cent over a period of time.

The third senario, which can in any casesupplement the second interpretation, isthat states should have power over theresources in their lands. The entire processof production and sale should be under

the jurisdiction of the states whichwould now pay taxes and royalties to thefederation account. In other words, thestates still do not need to get more than thecurrent 13 per cent derivation (althoughthey can get more), but they should be theones to decide what oil blocks to auction,what companies would handle explo-ration and under what conditions. Thegood aspect of this proposition is thatstates would take their own destinies intotheir hands. Amajor cause of the animosi-ty in the Niger Delta is that decisions aretaken above their heads by the FederalGovernment which does not think it isunder any obligation to negotiate theinterests of the people into the agreements

they enter with the oil companies. Sincethe people are the ones going to suffer theenvironmental consequences of oil explo-ration, they ought to be part and parcel ofthe negotiations and decision-making.

For or against?There are various propositions on how

resources should be controlled and howthe rents should be shared. EhtishamAhmad and Eric Mottu, in their essay enti-tled Oil Revenue Assignments: CountryExperiences and Issues (2002), arguedstrongly against revenue-sharing. Rather,they want the revenue to be centralised (inthe case of Nigeria, the FederalGovernment would be in charge) becauseof macro-economic stability. The alterna-tive, they argued, is for stable oil-tax basesto be assigned to the oil-producing areas,supplementing these with predictabletransfers (allocations) from the center.They argued that oil revenue-sharing hasnever solved the problem of keeping sep-aratist groups happy because oil-produc-ing areas would always feel they would bebetter off by keeping all their oil revenuesanyway.

From the economic perspective, Ahmadand Mottu wrote: Arguments for central-isation of oil revenues are based on a number of considerations. A central govern-ment can better absorb the uncertaintyand volatility of oil prices because it usu-ally has a broader tax base, less correlatedwith oil prices, than subnational (state) jurisdictions. And if subnational govern-ments do have other assigned taxes, oil-rich regions may have less incentive to usesuch bases if they are also assigned oil rev-enues this can lead to internal beggar-thy-neighbour outcomes within federa-tions and a misallocation of factors of pro-duction. Moreover, a central governmentcan contribute to horizontal equity byredistributing oil revenue betweenresource-rich and resource-poor regions.

In Nigeria, the current horizontal shar-ing formula already creates a big gulfamong the states. Various principles areemployed equality of states, need (popu-lation, land mass, terrain) and internal rev-enue generation efforts. Based on theseprinciples, every state would get similarallocations from the pool. The differenceswould not be massive. However, thederivation principle (13 per cent) alters thefigures significantly. Take, for instance, thefederal allocations in December 2008,which represents a general pattern. Thesewere the gross allocations to four oil states:Akwa Ibom, N13.7bn; Bayelsa, N9.6bn;Delta, N9.4bn; and Rivers, N20.6bn.And these were the gross allocations tofour non-oil states: Ebonyi, N2.4bn; Ekiti,N2.4bn; Bauchi, N3.3bn; and Zamfara,N2.8bn. The gap is enormous. Rivers gets

nearly ten times what Ekiti gets evenwith derivation being 13 per cent. Ifderivation were to go up to 25 per cent or50 per cent, the oil-rich would get richerwhile the rest would get poorer. On thisscore, many are against resource con-trol.

But these explanations are dismissed onvarious grounds, both emotionally andlogically. The arguments range fromwere not the ones who said you should-nt have oil in your ground to why not be creative with how you can makemoney rather than depend on our oil?Nigeria as a whole suffers from overde-pendence on oil, but most non-oil stateshave virtually gone to sleep since the shar-ing of oil revenues is guaranteed everymonth. Many states are rich in agriculture which can generate more jobs than oil but there is no incentive to develop it sincethey are not under pressure to feed them-selves independent of oil revenues. In thepre-oil boom era, regions were somewhatself-sufficient, generating income fromagriculture and taxation. These veritablesources are no longer treated as priority. Inaddition, many states are rich in solid min-erals which are left undeveloped, not forany strategic reason but for the easy flowof petrodollars. It is argued that if everystate is allowed to control its resources,non-oil states will be forced to developalternative sources of revenue.

The resource control camp has a com-pelling argument, obviously.

1946Pre-independence Nigeria dependedon taxes and mining rents.ThePhillipson Commission, set up by the SirRichards colonial government, recom-mended that the three regions (North,East and West) should keep direct taxes,mining rents and licensing fees,whilefederally collected import,export andexcise duties and company taxesshould be shared among the regions.

The colonial government received afraction for administrative purposes.

1951The Hicks-Phillipson Commissionsought broader tax bases for the

regions and proposed a sharing formu-la based on three principles one,import/excise duties to be sharedbased on derivation;two,population;three,special grants to police and edu-cation to be transferred to the regions.Every region seemed to like thearrangement because each benefiteddifferently:West liked derivation,Northliked the transfers based on populationand East liked the special grants.

1953Chick Commission altered the arrange-ment,recommending that miningrents,royalties and personal income taxshould be shared among the regionswhile derivation should be applied and

expanded to export duties.

1960Nigerias year of Independence.TheRaisman-Trees Commission allowedregions to retain personal income tax.Acentral pot (Distributable PoolAccount) was created for major rev-enue items to be distributed amongthe regions and the federal govern-ment.

1964Binns Commission abandoned deriva-tion.Distribution now to be based oninternally generated revenue effortsand quality of service provided by each

region.

1970The beginning of trouble? Nigeria wasstarting to earn good money from oil.Amilitary government had taken overpower in 1966.Decree No.13 was pro-mulgated to vest petroleum resourcesin the hands of the central government.Derivation principle was abandoned.Allocations to be based on need (asdefined by the population of each state now 12, created from the four-regionstructure),along with lump-sum trans-

fers.1971Federal Military Government took con-trol of all offshore rents and royaltiesvia Decree No. 71.

1975Decree No.6 transfers all revenue to thecentral,providing 20% for derivation.

1977Aboyade Committee recommendedFederation Account where all revenueswould be pooled for onward sharingamong the three tiers of government the first time local councils would be

considered. Each tier of governmentwas also to have its own tax base.Recommendations rejected by theConstituent Assembly in 1978.

1980Okigbo Commission wanted theFederation Account and three-tier shar-ing as recommended by Aboyade.Thepanel wanted revenue shared on theprinciples of population, social servicesand equality of states.Was against thederivation principle,but this was reject-ed.

1981Revenue Allocation Act allocates 3% to

derivation

1982Act nullified;a new derivation of 1.5%introduced

1984New derivation:1.33%

1989Derivation reduced to 1%

1990New principles introduced to revenuesharing:landmass/terrain (wetlands,plain and highlands).This was obvious-

ly designed to achieve balanced redis-tribution

1992Derivation increased to 3%; Oil MineralProducing Area DevelopmentCommission (OMPADEC) created tomanage the funds.

1999Constitution 162 (2) makes derivationof not less than 13 per centa key prin-ciple of the sharing formula for oil rev-enue.

Trouble Formula

Captured scapegoats

A brief history of Nigerias allocation arithmetic


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NIGERIA AND OTHER OIL-PRODUCING COUNTRIES: A COMPARATIVE STUDY> SUBSIDIES THISDAY OIL REPORT15However, the excessive rent collection

would not be so if there was no subsidy. Ifthe pump prices are free of official ceiling,importers can bring in products and chargeeconomic prices. Government would notneed to import, and there would be no infla-tion of import contracts encouraged by thepayment of subsidies. It follows, logically,that private enterprise will grow as investorsare allowed to operate freely in the market.But with the subsidy regime, a few individ-uals are handpicked and given governmentpatronage. In the end, they make billions ofnaira at the expense of ordinary Nigerians.This line of argument has been canvassedover the years by those who are against thesubsidy regime.

Subsidy can healBut there is also a robust cache of argu-

ments deployed to counter the anti-subsidycampaign over the years. One argument hasit that as citizens of a country endowed withoil wealth, Nigerians do not have to pay the

market price for fuel. Its God-given and thecitizens are not being done any favourthrough subsidy. Consumers in most oil-producing countries pay lower prices (seebox), so Nigerians are not benefiting any-thing unknown to mankind. The officialargument that the huge sums of moneyexpended on subsidy could have gone intofinancing social infrastructure such as healthand education is often frowned on by thisgroup, which says education and healthbudgets have never been well managed andpouring more money into those sectors is noguarantee that anything would change aslong as corruption is pervasive. It is easier,faster and more realistic to feel the impact offuel subsidy than budgetary allocations tosocial sectors which are often mismanaged,

this group believes.Another pro-subsidy argument is

anchored on the poverty level in Nigeria.Transportation is a major component of costof living. Any slight increase in fuel priceprovokes an equal or higher increase in thecosts of goods and services. By keeping fuelprices low, the government will contain theinflationary pressure on the poor peoplewho make up between 50-70 per cent of theNigerian population. This would seem toknock off the argument that the ordinarypeople do not benefit from fuel subsidy.Whereas it creates a few fat cats in theprocess, subsidy still trickles down to at least100 million Nigerians. There is definitely adifference between buying fuel at N70 per

litre and N100 per litre. For the ordinary peo-ple, the difference will be reflected in dailycosts of public transportation and feeding, inthe least. This appears to be one of thestrongest arguments of the pro-subsidycamp.

Removing fuel subsidies to curb smug-gling, in the opinion of this camp, is anattempt to inflict pains on millions ofNigerians because of the activities of a fewcriminals who ordinarily should be check-mated by the state were its institutions notweak. Astrict control of the borders and fullapplications of the laws against the criminalsand their collaborators are seen as betterways of checking smuggling rather than fre-quent fuel price increases. While this view-point seems to ignore the natural policing

that uniform cross-border prices can bringabout, it nonetheless tasks the state on theeffectiveness of its own institutions since it isnot only fuel that is smuggled. The Nigeria-Benin borders are by far one of the mostactive smuggling routes in Africa.

The government has long abandoned itsage-old argument that removing subsidieswould eliminate product scarcity. There hasbeen massive importation of products underthe subsidy regime for over eight years nowand fuel queues have disappeared. Theyonly emerge owing to non-subsidy-relatedissues, such as strikes, long public holidaysand accidents at the import reception facili-

ties. But then, the massive importation andavailability are at a heavy cost. Even at that,the pump price is not uniform nationwide.In remote parts, petrol is sold in cans at pricesway above the pump price. Filling stations inmany states also sell above the official price.There are therefore obvious leakages and

exploitation internally.Should there be subsidy at all?The issue of fuel subsidy in Nigeria is not

one that can be addressed conclusively, itwould seem. Perhaps the starting point ofthe debate should be: should there be anyform of subsidy at all in any country of theworld? If the answer is yes, what should besubsidised? If the answer is no, how do youaddress glaring imbalance, disincentive andwealth redistribution in the economy?Should government fold its arms and handover every aspect of the society to marketforces in the hope that the market will sortout itself and redress every imbalance in thesystem? This seems to be the direction offresh debates following the financial crisis

that has been torturing the global economy,leading to government intervention in capi-talist countries such as UK and US.

The first part of the question on the desir-ability of subsidies is better answered withthe fact that in every country of the world,even the most capitalist, there is one subsidyor the other. In the US, agriculture and steelsectors enjoy generous subsidies runninginto billions of dollars yearly. In the EU, farmsubsidies are ever present. In the UK, farmand transport subsidies are critical to theeconomic stability of the country and thegovernment does not shy away from thatfact. Essentially, then, subsidy is no perfidy,

but an economic strategy.The Nigerian aspect of the argument,

however, is a bit different. It is being arguedthat government should channel fuel subsi-dies to the agricultural sector instead

because the sector is the biggest employer oflabour and the biggest contributor to thecountrys GDP. Indeed, agricultural subsi-dies already exist in the form of cut-price fer-tilisers and tractors sold by government tofarmers. It is highly political, though, as ben-eficiaries are most often members or sup-porters of the ruling party in a state. It istherefore a tool of political patronage, likefuel contracts. More so, scams often sur-

round the purchase and distribution of thefertilisers. By some accounts, the fertiliserscandal is next to fuel in the siphoning ofpublic funds into private pockets.

Local refining firstThe debate on fuel subsidies in Nigeria is

poorly structured at present. Governmentoften bases its argument on the high cost ofimportation of products. This begs thequestion. Is subsidy related to just importa-tion? If Nigeria achieves self-sufficiency inlocal refining and importation stops today,would there still be a budget for subsidies?These questions are often taken for granted

by government officials, whereas they maybe at the heart of the debate. The focus has

always been on the amount spent onimportation of products without any atten-tion to several other issues that are criticalto answering the question.

In opposing the pump price cut in January, labour argued that basing localpricing on imported products is not a feasi-

ble way of calculating subsidy. The firststep is to achieve local sufficiency in refin-ing in order to be able to determine theactual economic price of the products. Thisargument, however, is subject to criticismon two fronts. One, the major difference in

The old excuse for deregulation

Petrol prices per litre in OPEC countries as at February 2009

Country ($:) N:K GDP Per capita

Algeria $0.34 N49.30 $240.2bn $7,100

Angola $0.53 N76.85 $114.6bn $9,100

Ecuador $0.51 N73.95 $107bn $7,700

Iran $0.10 N14.50 $859.7bn $13,100

Iraq $0.10 N14.50 $113.9bn $4,000

Kuwait $0.24 N34.80 $157.9bn $60,800

Libya $0.14 N20.30 $92.01bn $14,900

Nigeria $0.44 N65.00 $328.1bn $2,200

Qatar $0.22 N31.90 $83.29bn $101,000

SArabia $0.16 N23.20 $600.4bn $21,300

UAE $0.45 N65.25 $186.8bn $40,400

Venezuela $0.02 N2.90 $368.6bn $14,000

Sources:THISDAY Database,CIA Handbook,GTZ

CONTINUED FROM PAGE 11

the prices of imported and locally refinedproduct will be the cost of shipping which some say is negligible. For as long asthe local refineries buy crude oil at theinternational prices, the prices of end prod-ucts would be similar. Two, subsidy isdefined in two ways, the first being the dif-ference between the cost of production andsale price, and the second being opportu-nity cost, that is: at what price can I sell myproduct in another market?

In the abundance of waterAll the economic arguments about sub-

sidy, however, will face stiff oppositionfrom the evidence from the OPEC region all members subsidise petroleum prod-ucts in their local market. Their logic hasnothing to do with any arguments aboutmarket forces, appropriate pricing, efficientconsumption, smuggling, deregulation, lib-eralisation and such like. To them it is sim-ple: we have crude oil in super abundanceand our people must enjoy the benefits.

Whatever the arguments may be, how-ever, the YarAdua government appearsdetermined to lay the subsidy ghost to restas it seeks to reform the oil industry. But the

battles ahead, with unions in particular,promise to be fierce.


16/24



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NIGERIA AND OTHER OIL-PRODUCING COUNTRIES: A COMPARATIVE STUDY> NOCs THISDAY OIL REPORT17

THE NIGERIAN National PetroleumCorporation (NNPC), Norways Statoiland Malaysias Petronas were all set up asstate-owned oil companies in the 1970s.But that is where the similarity ends.Today, the now renamed StatoilHydro isthe biggest offshore oil and gas companyin the world. Last year, it was ranked byFortune magazine as the world's 11thlargest oil and gas company by marketcapitalisation, and the 59th largest compa-ny in the world. Petronas is ranked byFortune as the 95th largest company in theworld. It is the 8th most profitable compa-

ny in the world and the most profitable inAsia. Petronas now has business interestsin 31 countries.

And NNPC? Veteran joint venture part-ner, thats it. Without its partnership withShell and other oil majors upstream,NNPC is just an empty shell, a giant tod-dler. Downstream, NNPC has a clutch ofmega fuel stations and four refinerieswhich are perpetually in a rotten state.NNPC is seen as Nigerias most sleaze-rid-den organisation through which politi-cians and their cronies have been milkingthe national treasury for decades. It hadmetamorphosed from Nigeria National

After decades of indisputable inefficien-cy, the NNPC is finally facing the neededsurgery. Nigeria seems to be learning fromthe rest of the world already with the toneof the reforms proposed for the oil indus-try. The aim, it has been said, is to separateoil from politics. It may sound unthinkablein Nigeria, but this is the stated objective.Many energy analysts have often can-vassed that nothing short of full liberalisa-tion of the oil sector will suffice; they areabout to get their wish with the institution-al change on the cards.

Ex-President Olusegun Obasanjo had

set up the Oil and Gas Sector ReformsImplementation Committee (OGIC) in2000 to produce a National Oil and GasPolicy. It came up with radical recommen-dations, chief among which was the needto separate the commercial institutionsfrom the regulatory and policy-makingones. Obasanjo did not act on the report,

but President Umaru Musa YarAdua isgoing ahead with the reforms. He reconsti-tuted OGIC under the leadership of indus-try veteran, Dr. Rilwanu Lukman.

Its report, submitted last August, has been packaged as a bill and sent to the

Oil Company (NNOC), which was set up by the military government in 1971 toparticipate in all aspects of petroleum,including exploration, production, refin-ing, marketing, transportation and distrib-ution.

In practice, all NNOC was doing wasforcefully acquiring interests in the interna-tional oil companies operating in Nigeria.That was arguably the wrong foundationthat was laid, because it never saw itself asa potential global player. It first acquired33.33 per cent in Agip. Then 35 per cent inSafrap, the Nigerian arm of Elf. It later

seized 35 per cent in Shell-BP, Mobil andGulf. It went on and on, increasing its staketo 55 per cent in each company. The estab-lishment of NNPC in 1977 was part of asupposed reorganisation of the sector.

A Crude Oil Sales Tribunal had been setup to investigate the activities of NNOC.The tribunal found out that in three years,the company had failed to collect 182.95million barrels of their equity share of oil

being produced by Shell, Mobil and Gulf.The loss was estimated at $2 billion. (Thissum was mistakenly understood by thepublic to mean missing or stolen).However, the loss was as a result of

NNOCs inability to find buyers for itsshare of the oil production at a price itdesired, after having paid its full share ofthe production costs to the JV partners.NNOC had also failed to produce auditedreports for the same period under review.

Its successor, NNPC, has not fared bet-ter. It has always been under the control ofgovernment officials who realised quiteearly how massive a honey pot it is. Thestructure of the NNPC itself was and iscumbersome. It was not only FederalGovernments vehicle of participation inthe oil industry, it was also the regulator of

the sector. In one breath, it was a player. Inanother, it was a referee, through theDepartment of Petroleum Resources.Attempts have been made to reform thecorporation over the years. It was firstdecentralised into nine units in 1981. In1988, the corporation was commer-cialised into 12 strategic business units all under three broad areas of responsibili-ty, namely Corporate Services, Operationsand Petroleum Investment ManagementServices. But the symptoms and the dis-eases remained the same.

Separating oil from politics

NNPC:The Dwarfed GiantMany state-owned oil companies are doing very well all over the world.Nigerias NNPC offers a peculiar case study

CONTINUED ON PAGE 19

Higly inflammable corporation


18/24



19/24

NIGERIA AND OTHER OIL-PRODUCING COUNTRIES: A COMPARATIVE STUDY> NOCs THISDAY OIL REPORT 19National Assembly for the enabling laws.The report suggests solutions to the prob-lems affecting the industry in the country,highlighting operational strategy andaction items necessary to drive the nation-al oil company to a global status. It alsoproffers solutions to fiscal policy problemsand community issues affecting all seg-ments of the industry.

The major highlight of the reforms is tomake the national oil company indepen-dent of government finance and run as aproper business entity which can leverageon its assets to source funds for its projects.This would effectively put an end to theera of Federal Government paying cashcalls on JV projects. The bill listed the objec-tives of the fiscal regime to include thecreation of an economic climate thatencourages stability, the observance of therule of law, and the elimination of corrup-tion and the gradual elimination of sub-sidies in all areas of the petroleum indus-try.

Other objectives include:The establishment of a regime for taxa-

tion on petroleum products for the pur-pose of financing infrastructure in andaround the entire federation;

The establishment of appropriate rulesto discourage the consolidation of down-stream projects with upstream fiscalregimes;

Ensuring that the licensee, lessee orcontractor utilises cost effective measuresin the course of petroleum operations inorder to ensure efficient cost savings andmaximum economic benefits to the state.

A new structureThe structural problems are to be

addressed through the creation of newinstitutions as contained in the bill.

The Nigerian Petroleum Directorate (NPD):This will function as the secretariat of theMinister of Petroleum Resources and takeover any functions previously undertakenby the Ministry.

The Nigerian Petroleum Inspectorate (NPI):It will be the successor to the assets and lia-bilities of the Petroleum Inspectorate of theNNPC and the Department of PetroleumResources of the Ministry of PetroleumResources.

Petroleum Products Regulatory Authority(PPRA): This will regulate the downstream

sector of the oil and gas industry.The National Petroleum Assets

Management Agency (NAPAMA): Theagency will be in charge of monitoring andapproving costs of ventures in whichNigeria has investments or participatinginterests, with the objective of maximisingthe total revenue accruing to the govern-ment from the upstream petroleum indus-try in Nigeria and ensure that all operatingcontractual arrangements in the upstream,including but not limited to joint operatingagreements, production sharing contracts,and service contracts, achieve the objectiveof realising or achieving optimal financialreturns.

National Petroleum National Oil Company(NNPC Ltd): It will be the holding compa-ny and successor to the assets and liabili-ties of the Nigerian National PetroleumCompany of Nigeria (NNPC).

National Petroleum Research Centre(NPRC): This will be responsible forresearch and development in the petrole-um industry in Nigeria, specificallyupstream exploration and developmentmatters.

Speaking to the press late last year, theChairman, OGIC Sub-Committee onPolicy Framework, Dr. Mohammed M.Ibrahim, said once passed into law andfully implemented, it would have a seis-mic impact on the oil and gas industry.

He said the bill is transformative andwould have an impact of heightening pro-portion in the way the business of hydro-carbon is carried out and done in Nigeria.

We discovered that, there are four fac-tors that are responsible for the disrepairstate of the Nigerian oil and gas industryand these are what this bill has come toaddress.

Number one, we discovered that, thereis lack of designation of functions andresponsibilities in the Nigerian oil and gassector there was no clear separation ofthe policy framework for the Nigerian oiland gas industry, a complete absence of aclear cut policy for the Nigeria hydrocar-

bon industry.Secondly, we discovered there was

political interference in the function andfunctioning of the various institutions inthe Nigerian oil and gas industry.

Similarly, we discovered lack of capaci-ty by the operators of the Nigerian oil and

gas industry.We also discovered a complete sever-

ance between the oil and gas industry andthe larger economy in which case theNigerian oil and gas industry has notserved as a catalyst to developing theNigerian economy as a whole which willnow transform into socio-economic bene-fits to the Nigerian masses, he said.

Ibrahim, who was the Special Assistanton Petroleum to the former Head of State,General Abdulsalami Abubakar, was opti-mistic that if the bill is passed into law, for

the first time in the history of the country,there will be a clear-cut policy for the oiland gas industry It is a bill that is a prod-uct of almost a decade of hard work thathas carried stakeholders in the industryalong. It is a bill that is a product of holisticand audit of serious hydrocarbon terrainall over the world.

However, there are still questions overhow much accountability and transparen-cy should be expected from the reformedstructure because of a seeming lack of aninstitutionalised mechanism for openness.

Comparing and contrasting NNPC with itspeers in the world is not exactly heart-

warming.The gap is too wide.A fair callwould be that Nigeria is yet to start.It is allthe more worrisome because countriessuch as Brazil and Malaysia,which are notbigger petroleum producers than Nigeria,have national oil companies that are con-quering fields across different countries.

StatoilHydro (Norway)Statoil was established in 1972 but hasnow merged with Norsk Hydro to createStatoilHydro.It was privatised in 2001,andwas listed on both the Oslo StockExchange and the New York StockExchange as Statoil ASA,with theNorwegian government retaining a 64 percent stake.It merged with Norsk Hydro in2007 and became the biggest offshore oiland gas company in the world.It isinvolved in production in 13 countries,including Nigeria,and has 2000 retail out-lets in eight.The government still retains62.5 per cent in the company and collectsdividends from it every year.

Petronas (Malaysia)Petroliam Nasional Berhad (Petronas) wasfounded by the government of Malyasiain 1974.It is still wholly owned by the gov-ernment and is in charge of the entire oiland gas resources in the Asian country.The Petronas Group,which has 103 sub-sidiaries,19 part-owned outfits and 57

associated companies,is involved in broadpetroleum activities.It has about 100 sub-

sidiaries and 40 joint-venture companiesin which it owns 50 per cent stake.

Aramco (Saudi Arabia)State-owned Aramco has the largestproven crude oil reserves of 260 billionbarrels.It leads in production with 8mbpdand operates the world's largest singlehydrocarbon network,the Master GasSystem.Its annual production of crude oilalone is in excess of 4 billion barrels.Itmanages gas fields with 253 quadrillionscf reserves.It manages the worlds largestoil field and the largest offshore field.Aramco is by far the world's most prof-itable company,according to several esti-mates.

Petrobras (Brazil)The company,founded in 1953 by Brazil,was the countrys oil monopoly until 1997when the government liberalised the sec-tor.It has an output of over 2 million bar-rels per day,as well as being a major dis-tributor of oil products.Petrobras is aworld leader in the development ofadvanced technology,covering deep-water and ultra-deep water oil production.It is in 18 nations in Africa,North America,South America,Europe and Asia.Petrobrasis the third largest company of theAmericas,after Exxon Mobil and GeneralElectric.

Dwarf among equals

NNPC depot of confusion


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THISDAY OIL REPORT NIGERIA AND OTHER OIL-PRODUCING COUNTRIES: A COMPARATIVE STUDY> LOCAL CONTENT20

THE PETROLEUM Decree of 1969 (now anAct of Parliament) is notorious on manycounts, especially for transferring ownershipof oil minerals to the Federal Government atthe expense of the regions/states. But the Acttried to do something good: it required thatwithin 10 years of operation, oil companiesmust Nigerianise their most senior positionsup to 75 per cent and 100 per cent for othercadres. By 1971, the Federal Governmentstarted acquiring stakes in the InternationalOil Companies (IOCs) on the suspicion thatthey were reluctant to transfer skills and tech-nology to Nigerians.

To show governments seriousness inempowering Nigerians for bigger participa-tion in the petroleum sector, the military gov-ernment set up the Petroleum TechnologyDevelopment Fund (PTDF) in 1973 with aspecific mandate: To ensure the develop-ment of highly skilled indigenous manpower,through the training of Nigerian students,graduates, professionals, technicians andcraftsmen in the fields of geology, engineer-ing, science and management of the oil, gasand solid minerals sectors. But what havesolid minerals to do with petroleum technol-ogy development? Perhaps that was one ofthe indications that the government was nottoo sure of what it wanted and it was nosurprise that PTDF did not set sail until 27years after, with nothing significant to showas achievements to date, apart from grantinghundreds of scholarships.

The local content policy of 1969 and the settargets of 1979 turned out to be unrealistic.Successive governments did not show muchcommitment to it. The IOCs continued todominate the sector, in the process recruitingNigerians as casual workers not entitled tocertain benefits such as pensions. These mea-sures saved them costs, sure, but it has alsocost Nigeria full participation and full benefitsin the sector. Even the national oil company,the Nigerian National PetroleumCorporation (NNPC), established in 1977, isstill a toddler. The majority of the countryscritical oil and gas projects are operated byShell Petroleum Development Company(SPDC), which produces nearly half of

Nigeria's crude oil, under joint venture (JV)partnerships. Other JV partners areExxonMobil, Chevron, ConocoPhillips, Totaland Agip. But NNPC remains an onlooker.

Contents and intentsFormer President Olusegun Obasanjo, to

his credit, revived the local content policy, set-ting new targets and recording some level ofsuccess. He directed the IOCs to Nigerianisetheir contents by at least 45 per cent by 2006and 70 per cent by 2010. Unlike in the 1970s,however, the oil companies themselves hadstarted accommodating Nigerians in their topechelon. In fact, SPDC, for the first time,appointed a Nigerian, Basil Omiyi, asManaging Director during Obasanjosregime. Another Nigerian, Mutiu Sumonu, isnow MD.

The local content policy is not just aboutappointments, however. Nigerians andNigerian companies are now to be involvedin a broad range of activities, including oil andgas servicing, trading and finance. Detailed

engineering designs for all projects are to bedomiciled in Nigeria and project manage-ment teams and procurement centres for allprojects must also be located in the country.Fabrication and integration of all fixed plat-forms (both offshore and onshore) weighingup to 10,000 tonnes are to be carried out inNigeria. For the fixed platforms greater than10,000 tonnes, pressure vessels and integra-tion of the topside modules are to be carriedout in Nigeria. Fabrication of all piles, decks,anchors, buoys, jackets, pipe racks, bridges,flare booms and storage tanks including allgalvanising works for liquefied natural gasand process plants are to be done in the coun-try same as all flow-lines and risers.

Other directives are: assembling, testingand commissioning of all Subsea valves,Christmas Trees, wellheads and systemintegration tests are to be carried out inNigeria; all Floating Production, Storage andOffloading (FPSO) contract packages are to

be bid on the basis of carrying out topsideintegration in Nigeria; a minimum of 50 percent of the total tonnage of FPSO topsidemodules must be fabricated in Nigeria; andall low voltage earthing cables of 450/750 Vgrade and Control, Power, Lighting Cables of600/1000 V grade must be purchased fromNigerian cable manufacturers.

There are about 23 items on the list of direc-tives, including local insurance content and a

provision that all operators and serviceproviders must make provisions for targetedtraining and understudy programmes tomaximise utilisation of Nigerian personnel inall areas of their operations. All operatorsmust therefore submit detailed training plansfor each project and their operations.

The Obasanjo government added action toits words by adopting competitive biddingfor most of its projects. The countrys JV part-ners were also encouraged to share knowl-edge with their indigenous contractorsthrough enlightenment programmes. TheIOCs were asked to domesticate their reser-voir management and seismic processingprojects. They are encouraged to break theirmajor projects into small, manageable pack-ages so that Nigerian contractors can benefit.

The age-long habit of the foreign compa-nies taking the whole money out of the coun-try and leaving the local people high and dryis expected to be broken gradually as thesemeasures are applied to the sector. All thesemeasures mean a lot for the local economy actually billions and billions of naira will beploughed back through these backward link-ages. Radically, in 2005, the local content

vehicle concept was introduced into thelicensing round for oil and gas blocks. Thesevehicles are aimed at fast-tracking and con-cretising the Nigerianisation policy: Nigeriancompanies would participate more in engi-neering procurement, fabrication and otherservices; development of strategic plans forthe transfer of technology; and developmentof a legal framework to ensure complianceand progress monitoring, among others.

Journey of a thousand milesAre you seeing the doughnut or the hole?

The local content in the Nigerian oil industryis still low, with various estimates suggesting

between 3-9 per cent. Oil accounts for virtu-ally all of government revenues and foreignexchange, yet contributes just about 15 percent to the real Gross Domestic Product

(GDP) as most of the productive activitiestake place outside Nigeria. The country is justan end-user, a consumer, as it were. The localcontent policy, if it succeeds, will address thismajor deficit. Thousands of jobs will be creat-ed locally, directly and indirectly. The finan-cial sector will be a major beneficiary as com-panies seek local financing for billion nairaprojects.

Whats the progress report? Some goodnews. Engineering design, seismic, fabrica-tion and financing now have local contents,and in sizeable proportions, but still far tooinsignificant to be regarded as a victory.Although some local operators still complainabout the reluctance of the IOCs to fullyaccommodate them, any progress at allshould be treated as progress. After all, theprevious decades yielded virtually nothing.

Nigerian companies, for the first time,

Local Discontent

Dependence on foreign oil companies often under-develops indigenous capacity

and denies the local economy enormous benefits, but, thankfully, Nigeria is nowfighting the cause of local content.

IranThe National Iranian South Oil Company(NISOC), a subsidiary of the state-ownedNational Iranian Oil Company,accountsfor 80 per cent of local oil production.Private ownership of upstream activitiesis constitutionally prohibited,but thegovernment allows buyback contracts:IOCs can participate in exploration anddevelopment through an Iranian affili-

ate.

LibyaThe oil industry is run by the state-owned National Oil Corporation (NOC).Along with the subsidiaries, theyaccount for 50 per cent of the country'soil output.IOCs, such as Repsol YPF(Spain),Eni (Italy),OMV (Austria),andTotal (France),are also involved in explo-ration and production.

NorwayThe government of Norway holds the

major stake in the oil sector.It has 62.5per cent stake in StatoilHydro,whichcontrols over 60 per cent of Norways oiland gas production.The governmentdirectly owns part of the countrys oilproduction through the State DirectFinancial Interest (SDFI).The major IOCsare big players such as ConocoPhillips,ExxonMobil and BP are also in Norwaybut, by law, in partnership with

StatoilHydro.

VenezuelaPetroleos de Venezuela S.A.(PdVSA), thecountry's state-run oil and natural gascompany, took control of Venezuelas oilindustry in 1975 when the governmentnationalised the sector.In the 1990s, 22foreign oil companies were allowed in aspart of government reforms.Venezuelais trying to attract foreign national oilcompanies, including those from China,India,Iran, and Russia, to invest in thesector.

In Other Countries

Making money for foreign companies

CONTINUED NEXT PAGE

3%Various estimates of the local content of oil andgas industry in Nigeria

90%Local content in AlgeriaSource: Nigeria Sweet Crude


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NIGERIA AND OTHER OIL-PRODUCING COUNTRIES: A COMPARATIVE STUDY> LOCAL CONTENT THISDAY OIL REPORT 21

FACT: NIGERIA, the worlds seventh largestexporter of crude oil, survives on importedpetroleum products. The refineries are notworking and are grossly inadequate. Thefour refineries Warri, Kaduna and PortHarcourt I and II have a combined name-plate capacity of 438,750 barrels per day, butthis is purely on paper. Nobody reallyknows the output from these refineries atany point in time as they have become sub-

ject of political manipulations. At best, theyoperate at half-capacity. The country contin-ues to rely on product import. Incidentally,all the refineries are government owned.

Fact: Nigerias economy runs on genera-

tors as the country generates less than half ofits installed capacity of 3500 megawatts even though it currently needs close to10,000mw to achieve a semblance of stablesupply. Some estimates put the require-ments at double that figure. But for countrythat is talking about industrialisation, no fig-ure is too much to target. However, govern-ment owns almost all the generating plants,mainly because of ancient monopoly lawsand partly because foreign companies,which have the wherewithal, are not veryenthusiastic about getting involved.

For a country so rich in oil and gas, therefining and power generation statistics aredamning. The blames for the backward can

be distributed to a range of doorsteps. One:

the government has not been enthusiastic toopen up these critical areas of the energy sec-tor for private investment. Two: politiciansand their cronies feed fat on the inefficienciesthat are associated with public ownership ofpower plants and refineries. Three: thelabour unions get irritated anytime privati-sation is discussed because it has come torepresent downsizing. Four, and most rele-vant to this report: the International OilCompanies (IOCs) feel their business inter-ests are better served if they concentrate theirenergies on drilling crude oil it wouldappear they want minimum contact withNigeria and Nigerians as much as possible.Their philosophy, as it were, is: take the oiland run. Apart from Agips involvement inpower generation through its 450mw Kwale

plant, no IOC is active in this key sector.The immediate past administration of

Olusegun Obasanjo tried to tackle this prob-lem, although quite late, by emphasisingbackward integration. For ages, Nigeriaspremium oil blocks were given out to IOCswithout any strings attached. There was nodeliberate attempt by successive govern-ments to take full advantage of Nigeriasprized assets to encourage or even enforce investments in the country. But Obasanjocame up with a rule in 2005: if you want toget Nigerias oil blocks, you must also pro-vide a comprehensive proposal on theinvestment you would plough back into thedownstream sector. Top on the list werepower generation and refinery.

Deregulated excuseThe regular excuse for the lack of interest

of IOCs in the downstream sector is that it isgovernment regulated. Until the sector isfully deregulated and government no longerdetermines the prices of petroleum prod-ucts, no international company will build arefinery in Nigeria. This is also cited as thereason why investors who have acquiredlicences for refineries are reluctant to startwork. This argument, as convincing as itsounds, is actually not fool-proof. If any-thing, the oil companies can only enjoy pro-tection under the subsidy regime. Since the

Very Backward IntegrationWhy are IOCs deeply involved in downstream activities specifically power gen-

eration and refining in other countries but stick mainly to upstream in Nigeria?

were given the preferential position withthe licensing round of marginal fields in2005. The government awarded 24 suchfields to them. The fields are marginal andare not as lucrative as the ones handled byforeign companies, but it was no doubt astep forward in local content development.Over time, Nigerians are expected to devel-

op their technical and management skills inthese fields before moving on to highergrounds. The Niger Delta Company wasthe first to go into production; others soonfollowed suit.

Nigerian companies such as Oando Plc are now more involved in upstream activ-ities. Oando Energy Services Limited woncompetitive oilfield service contracts inexcess of $150 million in Nigeria in 2007. Itcommenced its $500 million five-yearinvestment plan with the acquisition of twooil drilling rigs for approximately $100 mil-lion for use in the Niger Delta. It has alsoacquired a third oil rig. Oando Explorationand Production is the operator of two oil

blocks OPL 278 and OPL 236. Oando isalso a Nigerian content partner with AgipOil on OPL 282 and has a 45 per cent inter-

est in a marginal field, OML 56. It recentlybought two offshore oil licences from Shellfor $625.7 million and is in talks with twoother foreign oil majors about buying threemore oil licences.

In the downstream sector, more Nigeriancompanies are gaining prominence. Zenon,AP Oando, Obat and Ascon are leadingindigenous players. It must be added, how-ever, that Nigeria relies heavily on importedproducts as the refineries continue to per-form epileptically. Many Nigerian compa-nies have been licensed to go into productrefining a critical area foreign companieshave shied away from for ages for one rea-son or the other.

Monitoring ProgressIn a 2007 essay entitled Inter-sectoral

Linkages and Local Content in ExtractiveIndustries and Beyond The Case of SoTom and Prncipe, Ulrich Klueh et al sug-gested policy considerations based onlessons drawn on the principles to fosterlocal content in the oil industry. They pro-posed: Accountability the creation of adedicated and independent governmentauthority responsible for monitoring localcontent in oil industry and securing thatlocal vendors are guaranteed the opportu-nity to apply and compete for contracts.International examples include the UKsOffshore Supplies Office (OSO) andNorways Goods and Service Office (GSO),with their qualified accounting personnelknowledgeable of industry practic

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