Immobile II
Still not about the Italian Footballer
Nigeria has had a complicated relationship with oil over the years. Its contribution to the nation’s GDP and government revenue has decreased recently, even though the country has been a major oil exporter for the last half-century. There is always discussion of how Nigeria could construct an economy beyond just oil — yet the price and output of crude still regularly feature in how analysts and public officials evaluate the economy.
So, it is not surprising that the Buhari government constantly lamented the collapse of oil output and price, and the Tinubu government has strongly signalled that it wants to boost oil production:
Nigeria does not have any market power to significantly affect oil prices, hence the major headache for government revenue is the problem of declining output (see the chart below). And the two widely acknowledged reasons for output decline are oil theft and the collapse of investment by the major oil companies. Feyi Fawehinmi has a terrific short piece on the investment problem, using Exxon Mobil as a case study (worth reading If you have not). As he concluded, the new president may work some alumni magic to get Exxon Mobil and other majors excited about Nigeria again. But much of it will hinge on how the insecurity problem will be solved.
The government is aware of this. And this is why the strange rant of ‘’former’’ militant warlord Asari Dokubo at the presidential villa which accused the military of complicity in oil theft, is an interesting tactic. It is a bold and risky move that may further alienate or demoralise the security forces. But it can also signal that the government is willing to consider unconventional measures to secure existing and new investments in oil exploration.
The Asari episode reminded me of a good paper I read some months ago by economist Jonah Rexer that I find relevant here. Using evidence from the Nigerian petroleum sector, Rexer looked at the dynamics of the relationships of the state with local investors and multinationals in a natural resource sector plagued by insecurity.
In a blog post explaining his research, he argued that:
‘’state protection is characterized by a fundamental commitment problem — a lucrative illegal sector gives law enforcement strong incentives to allow criminal activity, and firms cannot enforce corrupt bargains with the state. As a result, MNCs [multinational companies] are subject to state-sanctioned predation. Indigenous firms, however, may have a comparative advantage in corruption (Javorcik and Wei 2009), what I call “the local advantage.” By appointing political and military elites as shareholders and directors, local firms make state agents residual claimants on private resource income. In return, local firms obtain protection from criminal predation, allowing them to outperform their better-resourced multinational peers.’’
What is the outcome of this ‘’local advantage’’ after divestment by multinationals?
‘’Local firms seem to revitalize newly acquired assets — divestment leads to a 33% average annual increase in oil production, sustained for up to a decade after divestment. This increase occurs despite evidence that local firms are of lower quality. Divestment leads to an 18% average annual increase in oil spills due to operational failure, as well as increases in gas flaring (not pictured). I interpret this effect as evidence that local firms are less likely to maintain infrastructure, leading to greater rates of operational failure. The result implies that indigenization increases the environmental footprint of oil extraction.’’
Rexer also found that given that most of the firms in the sector have political connections, what seems to make a difference for some local firms is their military connections — because:
‘’these are precisely the types of connections that matter for law enforcement protection…. Only connections to the security forces are significantly associated with reduced theft, while all others are null. The results suggest that local firms’ superior connections to military elites drive the local advantage.’’
I am sure there are many thought-provoking implications of Rexer’s paper but I’ve had one nagging question since I read it. If this local advantage exists, then why has Nigeria’s oil production collapsed? Does local advantage wear off over time, and if so, how does it happen?
It was not long ago that Tony Elumelu, who is as big and local as an investor can be, was complaining about oil theft on Twitter. Do the gains from being claimants in local investments no longer enough to offset the gains from oil theft? Or the production increase from local investment cannot make up for the loss from the divestment by oil majors? I do not have the answers, but these are the questions that the new government must confront as it seeks to increase oil production.
As I wrote in my piece on petrol subsidies, the new government must be clear and strategic in crafting its vision and making policies. Bringing foreign investment back into the petroleum sector will not be easy, as many multinationals face political pressures (whatever we think about the hypocrisy of that) in their home market to stop investing in pollution.
We need to figure out how increasing oil production fits into an overall energy policy — and what the short-, medium-, and long-term goals are.
