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Nigerian chaos will impact the recovery

Most of its oil and gas wealth gets siphoned off by 1% of the population: World Bank

 By Vincent Lauerman, Financial Post August 6, 2009

 Nigeria, Africa's longtime biggest oil producer, is a nasty mess. That mess could contribute to substantially higher crude oil prices once the global economy rebounds in earnest.

Attacks on pipelines are the work of militant groups such as the Movement for the Emancipation of Niger Delta, which work to protect the environment and demand their fair share of oil and gas revenues.

The collapse in crude oil prices over the past year, along with the steady decline in production in the Niger Delta, the country's main producing region, has strained Nigeria's foreign and government accounts and caused it to lose pole position among African oil producers. Oil and gas revenues account for more than 95% of the country's export earnings and most of the government's revenue.

Based on International Energy Agency data, Nigeria's oil production slipped to 1.72 million barrels per day in June, almost 45% below its total capacity, compared to 1.8 million bpd for Angola. Nigeria's onshore production has fallen to levels not seen since the 1960s.

Since the end of 2005, militant groups under the umbrella of the Movement for the Emancipation of the Niger Delta (MEND) have conducted a campaign of kidnappings, oil thefts and attacks on oil infrastructure in the Niger Delta with the stated aims of protecting the environment and increasing the producing states' share of oil and gas revenues.

Under Nigeria's constitution, the nine oil-producing delta states receive 13% of annual disbursements from the federal government. Last year, a government- appointed committee recommended that the region's share be increased to 25%.

On the surface, the Nigerian government's recent carrot and stick approach to quell militant activity in the Niger Delta appears to be paying dividends. In May, the Joint Military Task Force, or JTF, launched the largest operation in at least a decade to squash a militant group associated with MEND in the Port Harcourt area.

At the same time, the government launched a new amnesty program calling for militants to abandon their fight in return for pardons for past crimes and cash payments.

Henry Okah, who was being held on charges of gunrunning and treason, was the first senior leader of MEND to accept the Nigerian government's amnesty proposal. On July 14, one day after his release from custody, MEND declared a 60-day ceasefire to allow for discussions between its representatives and the government.

However, the federal government has shown little inclination to be drawn into substantive discussions on issues underlying the crisis or to allocate a greater share of oil wealth to the states where it is produced. President Umaru Yar'Adua would risk angering some of his most powerful backers, in the north of the country if he agreed to bend to the militants' demands on oil revenues.

Nigeria has extreme ethnic divisions among its 140 million people. A product of colonialism, the country has about 250 ethnic groups. Although English is the official language, each ethnic group has its own language.

In addition, about one-half of the population, mostly in the north, are Muslim; another 40%, living in the south, are Christian; and the rest follow animist beliefs.

Even if President Yar'Adua agreed to transfer a greater share of oil and gas revenues to producing states, it is doubtful that it would lead to broad-based development among the Niger Delta's 20 million inhabitants. Nigeria suffers from rampant corruption. According to the World Bank, most of its oil and gas wealth gets siphoned off by 1% of the population. Between $300-and $400-billion of oil revenue has been stolen or misspent by corrupt federal and state government officials since independence in 1960.

As a result, the country's infrastructure is dilapidated and the majority of people in both the Muslim-dominated north and Christian-dominated south live in abject poverty -- less than US $1 a day.

Finally, not all the militant groups under the MEND umbrella are likely to agree to the terms of an amnesty, even if the Nigerian government was to accept MEND's core demand of fiscal federalism. Although some of the groups are sincere about the well-being of the Niger Delta people, others are no more than criminal gangs. According to The Economist, about onetenth of the oil produced in Nigeria is stolen from pipelines through industrial-scale theft operations.

On July 19, Jomo Gbomo (the pseudonym of MEND's main spokesperson) warned that groups associated with MEND would broaden targets from oil to civil infrastructure and extend attacks outside the Niger Delta if any of its groups are attacked by government forces following the amnesty's closing on October 4.

On the eve of the ceasefire, militants associated with MEND made their first strike outside the Niger Delta, setting ablaze a fuel-importing facility at the Atlas Cove jetty in Lagos, Nigeria's commercial capital and most populous city.

Recent disruptions to Nigeria's high-quality crude-oil exports have failed to spike oil prices due to large amounts of spare production and refining capacity at the present time. However, once the global economy rebounds, and the world oil market tightens, future disruptions to Nigeria's oil exports could contribute to substantially higher prices.

- Vincent Lauerman is president of the Calgary-based consultancy Geopolitics Central, and the former editor of the journal Geopolitics of Energy. He has been analyzing and commenting on geopolitical issues and the world oil market for more than 20 years.

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