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.

Need for reform of the industry, however, has been long recognized. Increases in production are constrained by the failure of the national oil company to provide its proportionate share of the required investment because it is dependent on erratic National Assembly appropriations and is denied access to capital markets.

The current ramshackle regulatory regime in Nigeria has elements dating back to colonial times and takes too little account of the emergence of huge off-shore fields. In part, because of the lack of capital investment, a large percentage of the natural gas is lost to flaring.

Intended to serve the domestic market, Nigeria’s refineries are unprofitable, under-capitalized and seldom function. As a result, most of the gas, oil and kerosene is imported, and the federal government subsidizes fuel for the benefit of the general population. Efforts to eliminate or reduce the subsidy as recommended by the international financial institutions have resulted in mobs in the streets.

In the Niger River delta, where oil is pumped, environmental degradation associated with the industry deprives many of their traditional livelihoods. There is a nearly universal perception in the region that it benefits too little from being Nigeria’s oil patch. This sense of grievance plays an important role in the local population’s acquiescence or support for anti-government militant groups that attack and sabotage oil facilities and kidnap expatriate workers. Increased revenue allocations to the delta called for by its governors and other regional political leaders would mean less for the other states, many already poorer than the delta.

While the PIB addresses reform of existing government institutions involved with the oil and gas industry, it avoids addressing directly the political hot buttons of government fuel subsidies and the formula for allocating oil and gas revenue among the states, reasons why the southern governors oppose the legislation. Nevertheless, the legislation would establish a context for addressing those issues, though not necessarily to the liking of the elites involved.

Even if the legislation were to pass, the caveat would be the government’s ability to implement it. The draft legislation establishes a timeline for the creation of new institutions and policies but not for their use or implementation. In the meantime, the debate on the PIB in the National Assembly introduces uncertainty about the future of the petroleum industry, which may cool international enthusiasm for the investment necessary to increase Nigeria’s production.

John Campbell is the Ralph Bunche senior fellow for Africa policy studies at the Council on Foreign Relations (CFR). He was ambassador to Nigeria in 2004 to 2007 during the civilian presidency of General Olusegun Obasanjo.

http://www.globalpost.com/dispatch/worldview/091110/nigeria-proposes-reform-oil-industry