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Opinion: Nigeria proposes reform of oil industry

President Yar'Adua puts forward new legislation but it looks unlikely to effectively reform the industry.

A Nigerian farmer walks past a gas flare at Utorogu flow station in Otujerenvwi, 31 miles from Warri in the oil-rich Niger delta region of Nigeria, on December 2, 2004. Nigerian President Umaru Yar'Adua has proposed legislation to reform the country's oil industry. (George Esiri/GlobalPost)

WASHINGTON — Nigerian President Umaru Yar’Adua’s efforts to reform the oil and gas industry have the potential to upset the fragile Nigerian internal political balance among the regions, ethnic and religious groups, and patronage networks.

Oil provides most of the Nigerian state’s formal revenue. Under current agreements, nearly all of Nigeria’s oil and gas is produced through joint ventures between the Nigerian National Petroleum Company (NNPC) and the major international oil companies. The federal government collects more than 90 percent of the profits from oil and natural gas and, in turn, redistributes about half of this revenue to state and local governments throughout the country by a complex allocation formula.

Especially at the lower levels of government, lack of transparency facilitates Nigeria’s notorious corruption. Competition for access to oil money is at the center of Nigeria’s patronage politics. In that sense, oil is the glue that holds Nigeria together, and changes in the petroleum regime have significant political ramifications, with winners and losers.

Minister of Petroleum Rilwanu Lukman’s Petroleum Industry Bill (PIB) would rationalize the complex relationship among the federal government, the national oil company and international investors to increase production and ensure maximum revenue for the state. He wants to transform the national petroleum corporation into a profit-driven national oil company such as those in Brazil, Saudi Arabia or Malaysia. However, the devil is in the details.

From the perspective of the international oil companies, the Yar’Adua administration is failing to consult with them sufficiently, and they find the resulting draft legislation to be badly flawed. The major oil companies are also opposing the PIB legislation because they say it would reduce their slim profit margins and alter to their disadvantage the process by which the federal government allocates to petroleum companies the blocks where exploration and production may occur. The oil companies argue that such changes would greatly reduce incentives for international investment in the petroleum industry, and the consequence likely would be a fall in production rather than an increase.

The proposed legislation illustrates the dilemma faced by reformers operating during a weak presidential administration. President Yar’Adua appears to lack the necessary energy to overcome the numerous interests opposed, overtly or by stealth, to reform. In fact, he has been mostly absent from the debate on the bill. An industry source claims that Yar’Adua has met with only one senior international petroleum company executive during the current debate.