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(IV). TRADE POLICIES ON MINING AND ENERGY
(1) INTRODUCTION
The petroleum and natural gas sector accounted for about 44% of GDP in 2003, contributed to over 95% and 70% of export earnings and total government revenue, respectively, but employed only around 5% of the labour force. All mineral resources are owned and controlled by the Federal Government and production is carried out under joint-venture agreements with multinational oil companies. During the period under review, new licences were offered for exploratory activities; the Government improved its financial contributions to the sector; full commercial status was granted to the Nigerian National Petroleum Corporation (NNPC); and measures were taken to improve transparency in the sector as well as the participation of Nigerian companies. These efforts have helped attract increased foreign direct investment in the sector, thereby increasing production and exports of crude oil. Measures to reduce flaring have also led to a rise in the production and exportation of natural gas. Prices of petroleum products continue to be fixed, and alignment of domestic prices on those of the world market remains a challenge. The tariff structure in the petroleum subsector is geared towards encouraging value added. Reforms envisaged in the subsector include the unbundling and privatization of NNPC; and the enacting of a new Gas Act to provide a more favourable environment for natural gas exploitation. Exploitation of solid minerals has also been revitalized through the revision of the mining law and through various investment incentives. The tariff structure seeks to enhance the exploitation of solid mineral deposits.
MINING AND ENERGY
(i) Petroleum and natural gas
(a) Upstream petroleum activities
In November 2004, estimates of Nigeria's proven oil reserve rose to some 31.5 billion barrels, equivalent to about 35 years of production at current exploitation levels. The majority of these reserves are located along the Niger River Delta; newer reserves have also been discovered in deeper waters offshore. The majority of the known reserves are in some 250 small fields; there are an additional 200 fields for unknown reserves. Nigeria's oil is of high quality, with low sulphur content and light gravity.
Under the Nigerian Constitution, all minerals, mineral oils, and natural gas within its territory are owned and controlled by the Federal Government, as prescribed by the National Assembly (Chapter II(1)). The Petroleum Act of 1969 provides that production licences may be granted only to Nigerian citizens. In practice, production is mainly under joint-venture agreements between the Nigerian National Petroleum Corporation (NNPC) and multinational companies, in the form of memoranda of understanding; under these agreements, all operating costs are financed jointly by a system of monthly cash-calls. The main multinational companies are Royal Dutch/Shell, Chevron, Mobil, AGIP, Elf, Texaco, and Pan Ocean. Profits are shared in proportion to ownership; on average, NNPC owns 57% in these joint-ventures. The Government has recently introduced a production sharing contract (PSC) arrangement, whereby oil companies can fund the cost of operations and the profits will be shared according to agreed arrangements, after the company has recouped its expenditure. The main multinational companies operate some 98% of the oil reserves and operating assets in Nigeria; the remainder is owned by private Nigerian firms that commenced operations a few years ago. In 2003, Nigeria's crude oil production averaged 2.33 million barrels per day (b/d), of which about 95% was produced jointly by NNPC and the multinational companies. Some 99% of the total daily production was exported in 2003, up from 79% in 2002, and the remainder was consumed domestically. Nigeria is a member of the Organization of the Petroleum Exporting Countries (OPEC); in March 2003, OPEC allocated a production quota of about 2 million b/d to Nigeria. Nigeria's location makes it well suited to supply the oil markets in North America and Europe; Asia is also becoming an important market. Nigeria is also the main supplier of crude oil to West African States.
[Table I]
Crude oil production and exports, 1998-02
('000 barrels)
| Year |
Productions |
Exports |
Domestic Consumption |
| 1998 |
776,190 |
687,390 |
88,620 |
| 1999 |
778,900 |
666,490 |
112,410 |
| 2000 |
797,880 |
688,080 |
1,098,00 |
| 2001 |
817,150 |
674,930 |
142,220 |
| 2002 |
685,773 |
521,973 |
163,800 |
Source: Central Bank of Nigeria online information. Available at: http://www.cenbank.org [23 September 2004].
A new policy direction was set in 1999 to address the considerable strain and stress due to lack of coordination and of funds for the Government's share of costs. The objectives set out for the 1999-03 period were to, inter alia, ensure adequate budget provision to cover the Government's share of agreed costs of operations under the joint-venture agreements; improve the workings of the joint-venture technical committees; increase the local content in oil production; and create an environment conducive for communities in the oil producing areas to become effective and more involved stake holders. Targets to be achieved by 2003 included: exploration to attain 30 billion barrels of oil reserves; and achieving three million b/d production and 40% local content (i.e. use of Nigerian goods and services and manning of professional cadre) in oil activities. With regard to exploratory activities, the Government offered up 22 new oil blocks for competitive bidding in March 2000; eleven were deepwater or ultra-deep water, seven were shallow water and the remainder were onshore. As a consequence, the number of oil wells drilled increased from 17 in 1999 to an unprecedented 76 new wells in 2002. The discoveries arising from these wells are said to have added some 5 billion barrels to Nigeria's oil reserves.
The Government has also taken steps to improve financing to the subsector: in 2001, the Government made available the largest budget allocation to the oil industry, some US$3.5 billion, in order for NNPC to meet its funding obligations under the joint-venture operations, and an additional US$300 million was released for cash-call payments. In 2002, Parliament approved US$3.1 billion also for cash-call payments. In May 2002, NNPC was granted full commercial status, thus enabling it, in principle, to be financially independent from the Government. Hence, the Central Bank now deducts the approved amounts of joint-venture cash calls and of NNPC priority projects from the proceeds of crude oil and gas, after which the balance is allocated to the Federation Account. Between July 2002 and December 2002, US$4.8 billion was earned from crude oil and gas sales, of which US$1.5 billion was disbursed as cash calls for joint-venture operations and US$3.3 billion was transferred to the Federation Account.
The Government has been exploring alternative means of financing to bridge the funding gap in the oil industry, including production-sharing contracts (PSCs) with multinational companies for the exploration and development of oil in the new blocks. In its bid to encourage Nigerian companies to participate of in the upstream oil industry, the Government offered 24 marginal fields for bidding; out of 398 applications received, 31 companies won their bids. The Government has also recently launched a licensing round for further 116 marginal fields located within the leaseholds of multinational companies in the Niger Delta. These fields are estimated to have a collective reserve of about 1.3 billion barrels, and have not been developed because they are considered uneconomical by the current lease holders. These efforts are also designed to meet the Government's local content target. Other measures affecting the upstream oil industry include the adherence to OPEC quotas allocated to Nigeria and the use of countertrade measures. NNPC exports crude oil on a countertrade basis with Venezuela and Brazil in exchange for heavy industrial products.
MFN tariffs applying to crude petroleum and natural gas average 21.7%. However, crude oils and oils obtained from bituminous minerals attract tariffs of 5%. The subsector also benefits from the reduced tariff rate of 2.5% on industrial machinery.
The Government's efforts in the upstream oil subsector have helped it achieve its target of proven reserves of 30 billion barrels and reach a production capacity of 3 million barrels per day. FDI inflows to the subsector have been on the rise since 1999, and as a result, production has increased, from 1.8 million b/d in 1999 to about 2.5 million b/d in 2003. Export earnings have also been rising despite fluctuations due to developments in the international oil market, and quota allocations by OPEC. In 2003, Nigeria was the sixth largest exporter of crude oil among OPEC members. Current targets for the upstream oil industry, as outlined under the NEEDS programme, include exploration to increase the reserve to 40 billion barrels by 2007; and significant increases in the local content in the oil industry, to 70% by 2007.
(b) Downstream petroleum activities
Downstream petroleum activities (i.e. the processing of crude oil to fuel) are controlled by NNPC, through its ownership of refineries, pipelines, and storage depots. However, the retailing of petroleum products is largely in the hands of the private sector. The Government allocates crude oil to NNPC for domestic refinery and consumption needs; the allocation increased from 300 kg. barrels per day (kb/d) in 2002 to 450 kb/d in 2003. There are currently four refineries in Nigeria: two in Port Harcourt, and one each in Warri and Kaduna. In total, they have a nominal refining capacity of 445 kb/d. Following the refining process, petroleum products are deposited in large storage depots at the refineries and then shipped through pipelines to 15 storage depots located strategically across the country. There is a distribution network of over 5,000 km of pipelines. The distribution and storage infrastructure is controlled by the Pipelines and Product Marketing Company (PPMC), a subsidiary of NNPC. About 60% of the retail end of the petroleum product market (i.e. transport of products between the strategic storage depots and filling stations) is controlled by the downstream arms of the multinational oil prospecting companies, and the remainder is in the hands of a large number of small independent indigenous oil companies. Large amounts of petroleum products are imported to supplement domestic production. Nigeria has five jetties for imports: two are located near Lagos, and one each in the Western Delta, Port Harcourt, and Calabar.
Until September 2003, the Government, through the Petroleum Product Pricing Marketing Committee (PPPMC), set wholesale and retail prices for petroleum products (margins for private retailers), to provide Nigerian consumers with cheap fuel at uniform prices. The low price set by the Government often failed to cover the refining and distribution costs, which discouraged investment in the subsector. Consequently, the subsector suffered from the lack of maintenance of infrastructure and low capacity utilization at all the refineries, which led to low domestic production of petroleum products and large amounts of imports to supplement the shortfall.26 However, the relatively low retail prices served as a disincentive for the private sector to import fuel, thus making NNPC the only wholesale supplier of petroleum products, both through its own refining activities and imports. To cover the difference between import costs and the low domestic prices, the Government used to allocate crude oil to NNPC at prices below the world market prices. This allocation was partly used by NNPC for domestic refining and the rest exported, with profits on exports subsidizing imports of petroleum products by NNPC.
The cost to Government of these arrangements was huge: in 2001 and 2002, the cost of charging fuel retail prices below import parity, and the revenue lost by the Government for charging NNPC below-export-equivalent crude oil prices, amounted to 8.4% and 5.3% of GDP respectively. Furthermore, the substantial differential between prices of petroleum products in Nigeria and those in neighbouring countries led to a thriving illegal trade in petroleum products. An OECD study estimates that 30-40% of fuel oil needs of some neighbouring countries were met by illegal imports from Nigeria. Other costs associated with the policies in the downstream industry included periodic fuel shortages and the concomitant disruption to socio-economic activities; vandalism; and fraudulent leakages of pipelines. Some 60% of businesses considered the poor supply of fuel and other petrochemicals to be a serious business constraint.
The Government has sought to revamp the downstream petroleum subsector to deal with these challenges. The policy thrust is to ensure regular supply and distribution of petroleum products through a liberalized and deregulated supply, distribution, and refining system. In June 2003, domestic retail prices for petroleum products were increased from N26 to N40 per litre to cover all costs; however, due to labour unrest, the price was lowered to N34 per litre. In September 2003, the Government announced the end of official retail pricing, and most retailers increased their prices to N40 per litre. The price liberalization led to the threat of a general strike, and following consultations with unions and downstream oil companies, a consultative retail price fixing body, the Petroleum Products Pricing Regulatory Agency (PPPRA), was established. Furthermore, since October 2003, government allocation of crude oil to NNPC has been at the equivalent world price.
The tariff on petroleum products, such as refined petroleum oils, petroleum coke, and petroleum jelly is 30%, while the tariff on crude petroleum oil is 5%; thus the tariff structure in the petroleum subsector is geared towards adding value in the industry. As with other sectors, the import tariff on industrial machinery is 2.5%.
The export of refined petroleum is exclusively to the NNPC or under permits issued by the NNPC. Currently, Nigeria's only contract for the supply of fuel is with Chad. Certain public or semi-public industrial establishments are permitted to export part of their production of oil products and petrochemicals, including condensates and benzene; this is an area of importance to Nigeria's trade strategy as it seeks to add value to exports of petroleum products.
Other reforms under way or envisaged in the subsector include unbundling of NNPC and privatization of its downstream subsidiaries; complete liberalization of downstream activities, including the distribution network; establishment of an independent regulatory commission for the subsector to assure private investors of competition on a level playing field; and the creation
of an appropriate regulatory framework for petroleum products. The Government has awarded preliminary licences to 18 private investors for the establishment of private refineries.
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