Nigeria’s oil reform faces steep hurdles

Niger Delta region oil and gas rigs map
The oil producing Niger Delta region brings about 90 percent of foreign exchange earnings and 80 percent of Nigeria’s federal government revenues (source: macpixxel for GIS)

With global oil prices low and corruption in Nigeria’s energy sector endemic, President Muhammadu Buhari has put reform of the industry at the top of his agenda. However, any meaningful change will threaten vested interests, challenge popular expectations and fundamentally alter the relationship between big business and politics in the country. The trajectory of oil prices, political will and external financial help – in the form of investment and aid – will be crucial for the reforms to succeed.

Nigeria, Africa’s largest economy and biggest oil producer, is facing a period of economic decline. Most analysts put this down to decades of pervasive corruption and inefficient policies, coupled with the sharp fall in global oil prices. Representing about 90 percent of foreign exchange earnings and 80 percent of federal government revenues, oil is the backbone of Nigeria’s economy. While other sectors drove the country’s growth in 2015, its economic performance still depends on the oil industry.

Six years ago, the U.S. was the main buyer of Nigerian oil, importing 983,000 barrels per day. However, as American shale oil production increased, imports from Nigeria dropped drastically

Hard knocks

Despite its competitive advantages – first-class quality, plenty of exploration potential and geographic convenience for Western markets – Nigerian crude has been hit by low prices on global markets. Oil revenues have fallen by a third since 2014. Last year the country’s budget deficit doubled to 3.3 percent of gross domestic product and exports decreased by 40 percent. According to estimates from PwC, a consulting firm, Nigeria lost about $18 billion in oil income in 2015.

The sector was hit particularly hard by the rise of shale oil extraction in the United States. Six years ago, the U.S. was the main buyer of Nigerian oil, importing 983,000 barrels per day. However, as American shale oil production increased, imports from Nigeria dropped drastically – to just 57,000 barrels per day in 2015, according to the U.S. Energy Information Administration.

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