With the reelection of Muhammadu Buhari to the Nigerian presidency, Africa’s leading oil exporter faces a challenge as old as Nigeria itself: political corruption. This scourge shortchanges ordinary Nigerians and undermines the country’s development.

Royal Dutch Shell (NYSE:RDS-A) and Italy’s Eni (NYSE:E) have been embroiled in a legal battle since 2011 over an alleged $1.1 billion paid in bribes to Nigerian government officials, related to the acquisition of new off-shore drilling rights. Nigeria is now counter-suing for $1.14 billion (868 million British pounds) in a London court, claiming that Shell and Eni assisted “corrupt Nigerian government officials to breach fiduciary duties” in the deal. This scandal comes after a leaked 2013 report, which details how Nigeria’s National Petroleum Corporation (NNPC) owed the government $20 billion in revenue due to its failure to report its earnings. It seems there is no shortage of legal quagmires for Africa’s most populous nation.

Indeed, one in five Africans reside here, yet only 23 power plants exist to keep the lights on. Recently re-elected President Buhari has expressed plans to modernize and industrialize his country through a state-directed strategy. But the matter does not simply demand massive construction projects to ease the country’s energy woes. Additionally, a rule of law overhaul, ensuring genuine accountability to Nigerian voters and consumers is needed as well. Without these mechanisms, Buhari can forget any chance of stewarding Nigeria toward becoming a modern and prosperous petrostate.

With a GDP of over $376 billion, Nigeria produces approximately 2.5 million barrels of crude per day. That accounts for 56% of state revenue and 95% of its foreign exchange earnings. However, its state-dominated oil industry is in decline due to corruption, waste, and mismanagement. Keeping in mind that Africa’s largest economy includes a fragile relationship between Christians and Muslims, along with the ongoing threats from Boko Haram, the Nigerian government cannot afford to ignore the reforms of its energy sector much longer.

This election finally appears to have made Buhari take privatization seriously. His announcement to sell 40% of Nigerian National Petroleum Corporation NNPC shares in domestic oil ventures leaves the government leaner. With oil prices recovering from $30 to $70 per barrel today since December 2018, Buhari is acting at an opportune moment. On April 12th, Lagos-based Seplat Petroleum Development Co. and Nigeria’s state oil company, NNPC, announced they will raise $700 million for a joint gas project scheduled to start production next year. The plant has an initial capacity of 300 million standard cubic feet (scf) per day, with hopes of further expansion.

Efforts to curb waste are already underway:interest rates have been cut from 14% to 13.5%, while GDP is expected to rise, from 1.9% to 3% growth this year. Public debt is at 17.5% of GDP and Nigeria remains at moderate risk of debt distress. But Buhari can, and should, go further.

Structural reforms are long overdue, but in terms of governance, Buhari must be careful. Given the poor investment reputation Nigeria has developed over past administrations, it would be wise to manage these contracts closely.

One such pressing matter is a $9 billion albatross inherited from the prior Goodluck Jonathan administration, which needs urgent attention. In 2010, Nigeria entered a deal with Process & Industrial Developments (P&ID) Ltd. to build a state of the art gas processing facility. Under the agreement, the plant would refine associated natural gas, into natural gas to power the Nigerian electric grid. Associated natural gas is a byproduct of oil extraction – currently it is typically dealt with through the wasteful and environmentally destructive process known as flaring (instead of using natural gas productively). Nigeria flares over 275 billion cubic feet of associated gas each year – at a great economic loss to itself, as well as causing damage to the environment.

To make the project economically feasible, the Nigerian government agreed to supply a critical 150 million scf of gas via pipeline – a pipeline that was never built. Without the promised gas, the P&ID project collapsed and the company entered arbitration in 2012. Nigeria was ruled liable for damages by a tribunal in London, but thus far has (unsuccessfully) fought the ruling.

P&ID will likely soon be allowed to seize Nigeria’s commercial assets in the UK, including the country’s bank accounts, in order to implement the tribunal award should the Nigerian government continue to refuse to pay the judgement.

Flaunting of the law has enormous consequences for Nigeria, as it undermines its credibility as an oil producer and its attractiveness as a major investment destination.

P&ID’s plant would have been Nigeria’s first large-scale downstream project in ten years, helping to produce much needed electrical power, and reduce methane and carbon emissions. Instead, the project will cost the people of Nigeria a $6.6 billion arbitration award plus interest owed, which has now risen to $2.7 billion – a total of $9.4 billion. This represents some 11% of the country’s foreign reserves. Not to mention the ongoing costs of flaring and the opportunity cost of other investments lost.

Over $1.1 billion per year and 3000MW of electricity are lost through the process of flaring. Instead of leaving free money on the table, the project would have supplied 85% of the non-associated natural gas for electrical generation, at no cost to the Nigerian government. The 20-year contract was to start supplying P&ID 150mcf of natural gas - rising to 400mcf by the end of its life span.

Nigeria shot itself in the foot by failing to support vital infrastructure opportunities such as P&ID, exposing itself as an unreliable investment partner. Currently, the government is able to subsidize these losses by taking on debt, but will the investment community continue to lend, if they see Nigeria refusing to respect the rule of law or contract, as in the P&ID case? The whole saga has undermined Nigeria’s credibility as a reliable borrower.

Each consecutive Nigerian administration has passed the buck: from its conception during President Obasanjo’s time, to now under Buhari’s re-elected administration. The country remains in a dangerous cycle that reduces revenue, stymies power generation, hinders economic development, and undermines international financial credibility.

At the end of the day, it is the Nigerian consumer the administration must keep in mind, only 45% of whom have access to electricity. Without a strong institutional framework and the political capital to enforce corporate responsibility, President Buhari can forget any sustainable reforms. If Nigeria is ever to become a modern and efficient petrostate, it must begin to act like one - starting with a commitment to the rule of law.

Ref:
https://www.forbes.com/sites/arielcohen/2019/04/15/nigerias-energy-future-challenged-by-weak-rule-of-law/#6b13ffc65508

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Nigeria should have been a failed state since 2008 under normal circumstances. The adhesive that holds this country together strong gaan.