Nigeria has 37 billion barrels of crude oil reserve and
is Africa's largest oil producer. The country also boasts 187 trillion cubic feet
of proven natural gas reserves, the ninth-largest reserve in the world.
Nigeria has all the right geology for oil and gas. But
geology isn't everything.
The best geology in the world can still be a terrible
place to put your money if other risks threaten to steal all of a project's
profits and potential – and country risk can pose precisely that
Think about it this way. In considering any business
venture, you need to know several key parameters, such as how much it will
cost to establish the operation, how much you will produce, and what
percentage of your profits the government will take. In Nigeria, you cannot
calculate any of these metrics with confidence because the rules are so
complex and corrupt.
Now a new Petroleum Industry Bill (PIB), being debated
in Nigeria's parliament after some 15 years in the works, is supposed to
change all of that. The new PIB is intended to clarify, codify, and clean up
an industry where corruption and uncertainty are killing investment interest.
Unfortunately, the new PIB is just as bad as the 13
separate rules it is set to replace. It would solidify a structure that
operates on bribery and favors and it would take so much profit from
producers that the effort would no longer be worth the risk.
It would scare away the oil and gas investors that it
is supposed to attract, and in doing so would doom Nigeria's troubled energy
sector to continue on its current downhill trajectory.
I want to talk about Nigeria today not just to scare
investors away from one particular country, but to remind us all that country
risk can easily make or break a project. No matter how fantastic the geology
or how large the reserve, if the government of the day is corrupt, desperate
for income or popularity, straight-up greedy, or any combination thereof,
best just walk away with your money.
If you invest in a country with that kind of
government, you might as well have just handed your dollars to the government
on a golden platter. And if you don't know how much risk a country bears,
best to find out from an energy investment team that travels the world to
assess country risk firsthand.
Stage: Nigeria's Oil Nightmare
Nigeria officially produces 2.7 million barrels of oil
a day, but no one has any confidence in that number. Oil is stolen at a
shocking rate in the country, so figures from traders on Nigeria's saleable
oil show output well below that government figure.
More generally, information about Africa's biggest oil
industry is an opaque myriad of numbers, and no one knows which ones are
accurate. Experts say Nigeria could easily measure how much oil it produces
but it chooses not to… because if there were an authoritative figure,
the truly horrifying scope of corruption would be exposed.
Mismanagement, theft, and corruption cost the industry
billions of dollars a year. Heavy government subsidies for petrol add another
$16 billion to the annual tab. In addition the country's four refineries work
far below capacity, forcing Nigeria to import most of its fuel.
A new report, commissioned after the country erupted in
protests in January when the government tried to reduce fuel subsidies,
states oil-theft volumes have climbed to the astonishing level of 250,000
barrels a day, or 10% of production. Some months as much as 400,000 barrels
are stolen every day. Even more shocking: 40% of refined petroleum products
– either refined in Nigeria or imported – that are moved through
state-owned pipelines are lost to theft and sabotage.
Small-scale pilfering has been endemic in Nigeria since
the late 1990s, but now more sophisticated thieves are stealing directly from
export terminals, tank farms, refinery tanks, and ports. The stolen oil is
worth some $6 billion annually.
Of course, writing a sweeping new bill to regulate an
industry rife with corruption and vested interests is not easy. That's why
the PIB has been in the works for more than a decade. Five years ago the bill
made it to Nigeria's Parliament, but disagreements between the
administration, oil majors, and lawmakers stymied its passage.
With almost no regulatory or fiscal certainty on the
table, Nigeria has become a dangerous place for Big Oil to do business. While
they wait for that certainty, oil majors have held off on many billions of
dollars in investment – one expert estimates the industry lost $28
billion in investments in 2011 alone.
As a result, oil output is about the same as it was a
decade ago, and only three exploratory wells were drilling in 2011, down from
more than 20 in 2005. The government has not held a licensing round for five
Oil and Gas Bill
The Nigerian government says its main goals in
developing new regulations for its oil sector are to clean up a corrupt
industry, clarify a confusing sector, and encourage new investment.
Unfortunately, the PIB accomplishes none of those
I won't embark on a full dissection of the bill. What I
will do is point out the most glaring of problems – starting with the
fact that the PIB would give a few select politicians huge powers within the
Here's a good example: the president would have the
power to grant licenses and leases without a competitive process – or
any kind of process, for that matter. This leaves the door wide open for
everyone to continue practicing the political favoritism and corruption that
has crippled the industry in the past.
The president would also have the power to set special
tax rates for any projects he deems as strategic to the nation. Imagine if
Romney or Obama were given this power…
Alongside a president who can hand out licenses as he
pleases and siphon funds from any project he deems strategic, the Minister of
Petroleum is granted draconian powers to determine rentals and royalties.
There are two huge problems with this. First, giving immense powers to
individuals only encourages bribery and corruption. Second, companies
thinking of developing a new project have no certainty around their rental
and royalty payments if the minister creates her own arrangement for each
Well, that's a slight overstatement. Companies would
know the minimum level of government take from new projects – and it's
too high. Executives from a wide range of Big Oil companies, including Royal
Dutch Shell and Exxon Mobil, have said publicly that the tax terms outlined
in the PIB render offshore oil and gas projects unviable. Exxon is the
second-biggest offshore operator in the country, and it says it will not
invest any more in deepwater projects if the PIB is
Part of the problem is that oil companies demand better
fiscal terms to operate in places like Nigeria, to compensate for the extra
risks posed by piracy, kidnappings, theft, and corruption.
Instead of providing that kind of financial incentive,
the PIB absolves oil companies of any responsibility for environmental damage
caused by sabotage… which would mean that no one is accountable for
such damage. The environment will continue to be destroyed, and the sabotage
More than half of Nigeria's 160 million people earn
less than $2 a day. From that perspective, rampant pipeline sabotage and
bunkering in the Delta region are understandable: the Nigerians who commit
these acts are helping themselves to a portion of their country's resources.
The only way to ease this kind of activity is to truly
share profits with local communities. To that end, the PIB would create a
Petroleum Host Communities Fund. Producers would have to give 10% of their
after-tax profits to this fund – disbursements that would be credited
against other payments to the government to not increase overall government
take – and the funds thus generated from onshore and shallow water
offshore production would be distributed to affected communities.
It sounds great… but unfortunately, just like so
many other parts of the PIB, the Host Communities Fund is a great idea that
is structured so as to invite political interference. The PIB does not define
how the funds will be distributed, putting another lever in the hands of the
president and his ministers. Communities would be pitted against each other
in a race for favor with the government, and the president could easily use
this race for favor to achieve his own ends within the Delta.
Also left in the hands of government: a whole whack of
oil-related assets. International advisors had pushed for a PIB that
incorporated the Nigerian National Petroleum Corporation (NNPC) and then
partially privatized it, following the example of Brazil's Petrobras. Doing so would require the company to be
managed like any other international oil company, with minimal political
Instead, the PIB would break the NNPC into three
entities and privatize only two. The management company left in government
hands would contain major oil assets and revenue streams that would remain
subject to heavy political interference.
And I mean heavy. The NNPC currently controls every
aspect of Nigeria's oil and gas industry, from exploration and production to
refining and pipelines, and it will continue to do so if the PIB is passed.
But this is a company that is regularly listed as one of the most closed oil
companies in the world. In fact, a joint report from Transparency
International and the Revenue Watch Institute judged the NNPC to have the
worst record of 44 national and international companies examined. Audits and
examinations regularly produce descriptions like "accountable to no
one" and "a slush fund for the government."
The PIB is a failure on almost every front. Oil
companies considering Nigeria are looking at the PIB and walking away.
Nigeria – home to the eleventh-largest oil reserves and ninth-largest
gas reserves in the world – will continue to see its production pinched
between declining investment, greedy government take, and massive theft. The
decimated environment of the Niger Delta will see no savior, and the people
who live there will continue to live in grinding poverty while corruption and
theft steal billions every year.
It's a tragedy for Nigeria and a warning for oil
investors. The warning is one I repeat regularly: never underestimate country
risk. Greedy governments and corrupt politicians can and will take every cent
of profit from oil and gas projects in their lands, leaving companies
bankrupt and investors robbed.
Nigeria is by no means the only country pinching its
oil sector. Venezuela and Argentina are also robbing their energy producers
to buy popular affection, along with a raft of other nations.
However, there's a silver lining. Every time a country
screws up its oil sector, the Big Pinch tightens: there is a bit less oil available
to feed an oil-hungry world and a bit more pressure on exporters to earn even
more from each barrel that is available. The result? Oil prices that have
nowhere to go but up.
Anyone who understands the risks and makes the right investments
will be able to ride those prices to huge returns. However, country risk is
hard to assess from afar. That's why my ground team travels the world, from
Albania to Iraq, Africa to Asia, going wherever a prospective energy story
takes us to understand the situation firsthand and separate fact from
It would be impossible for every investor to assess
every prospective investment in person – which is why we do it for you.
If you are an interested and active energy investor, consider a subscription
to my flagship newsletter, Casey Energy Report, and travel with us on the
journey to find the best investments in the global energy sector.