Oil Industry Experiencing Obstacles to Growth in Nigeria

August 20, 2010

Nigeria is currently Africa’s top oil-producing nation, and with increasing output and rising crude prices, is experiencing a revitalized economy.  However, the oil industry that is investing in Nigeria is experiencing many obstacles to its growth.

Next month, the national assembly of Nigeria is predicted to approve legislation that many United States and European oil companies report could reduce investment in the most populated country of Africa.

In addition, it is feared that Nigeria’s presidential election in 2011 may cause more violence in the Niger Delta, which is Nigeria’s main oil region.  This news comes in the wake of Royal Dutch Shell’s announcement that their pipeline within the region was recently attacked by oil thieves who have their own illegal refineries.

Nigeria, with the world’s ninth-largest know oil reserves, produced nearly 2.2 million barrels of oil a day last month.  The current output is Nigeria’s highest average since November of 2007, and is attributed to a recent drop in overall violence in the Niger Delta oil region.  The government has assisted by recently offering amnesty to militants who had been bombing oil industry installations.

The relatively-peaceful environment has allowed Nigeria to produce more crude oil than the country of Angola, which is Africa’s second-largest oil producer.

Higher oil prices have also contributed to Nigeria’s increase in oil revenue.  Analysts estimate that Nigeria’s economy could become the fastest-growing in Africa, by nearly 7%, as average benchmark U.S. crude prices are expected to rise to $78 a barrel this year, up from $62 a year ago.

However, there are obstacles to this projected growth.  Foreign investment in Nigeria, mainly within the oil industry, dropped to $5.85 billion in 2009, from an impressive $13.96 billion in 2006.  One of the suggested reasons for this drop in capital is the Nigerian government’s lack of contribution to foreign companies’ projects.

Additionally, the pending Petroleum Industry Bill (PIB), which is expected to receive approval next year, would increase the Nigerian government’s share of offshore oil profits by 25%, up to a whopping 70%.

This seems like a poor decision due to Nigeria’s current focus on attracting companies from China and other non-western nations to supplement the European and United States businesses which have been the main investors in the oil industry for decades.

The Nigerian government maintains that they have large proven oil reserves, and thus the demand for their oil is increasing.  They also add that the new terms are competitive with those imposed by other oil-producing nations such as Iraq.

The upcoming presidential election in Nigeria adds another component to the equation. The current president, Goodluck Jonathan, who is a native of the Niger Delta, has still not announced his intention to run for re-election in next year’s election.

Many observers feel that much of the future violence hinges on whether Mr. Jonathan is re-elected.  If he decides to not run again, or loses the election, many fear that violence against the oil industry in the Niger Delta could again escalate, based upon the history of Nigeria’s past elections.