Calling a murky business to account

Jeremy Weate

In Nigeria, the best of intentions underlie the effort to release data on the country’s key oil-producing sector, but the next major challenge will be to improve accountability in both the industry and the government 


“Oil kindles extraordinary emotions and hopes, since oil is above all a great temptation. It is the temptation of ease, wealth, strength, fortune, power. It is a filthy, foul-smelling liquid that squirts obligingly up into the air and falls back to earth as a rustling shower of money.” 

Ryszard Kapuscinski’s description of Iran’s relationship with oil under the Shah applies equally to contemporary Nigeria, where there is much hope amid much corruption and degradation. Despite an outdated governance framework – the Nigerian National Petroleum Corporation plays the role of both commercial company and government agency – and a Petroleum Industry Bill (PIB) designed to change the system but still stuck at the draft stage, Nigeria is at a key turning point. 

The most hopeful new factor is that the country has started to implement its home-grown Nigerian Extractive Industries Transparency Initiative (NEITI), which is supported by groundbreaking legislation. But the key question remains: can a stronger and better-defined framework and fiscal approach lead to developmental dividends, or is ‘business as usual’ going to win out? 

The stakes could not be higher for the Nigerian economy. As one of the world’s major hydrocarbons producers, Nigeria is heavily dependent on oil and gas for both foreign exchange earnings and tax revenues. Nigeria’s crude oil is highly valued, as the low sulphur content means it is easy and cheap to refine and convert into petroleum products. And yet, over the past few decades, the proceeds of this oil have not been used effectively either for infrastructure development or for improved public services in health and education. Instead, by default, Nigeria has taken the Russian approach and now has a number of oligarchs who are increasingly in control of the sector alongside the international oil companies (IOCs). Oil has been a bonanza for a tiny few and a curse for the vast majority. 

Recent estimates are that it will take 30 years and many billions of dollars just to clean up the oil spills in the Niger Delta. And estimates vary between 100,000 and 200,000 barrels per day – 5 to 10 percent of total daily production – of the Nigerian crude being illegally lifted (or ‘bunkered’) and sold on the spot markets in Europe (such as Rotterdam) as well as within the subregion (in Ghana, Ivory Coast and sometimes as far afield as South Africa). That’s a minimum of $10 million per day of what President Goodluck Jonathan has previously referred to as “blood oil”. At the same time, the IOCs are the grand viziers of tax avoidance, using their multinational structure of subsidiaries and the global network of tax havens to shift recorded profits to secretive jurisdictions, while offloading costs in the country of operation (so-called ‘transfer mispricing’).

If problems of such magnitude are to be overcome, NEITI clearly has a crucial role to play – but it still has to make itself effective. With the backing of the NEITI Law, the government agency has published three in-depth reports on earnings from the oil sector (for the periods 1999-2004, 2005 and 2006-08), but no one could say with any authority that there has been any reduction in corruption in the sector since NEITI started work. The country may be ‘compliant’ with the international standards set by the global EITI body, and yet NEITI’s work has not resulted in a single prosecution for malfeasance. It seems that greater transparency has not yet brought about greater accountability. 

How can NEITI better ensure that the transparency outputs it manages can lead to more accountability? The recommendations from its reports on how to improve governance of the sector highlight five remedial objectives, which were identified in the audits but have yet to be meaningfully addressed: implementing a multiagency management information system to oversee all payments and receipts; setting up a metering system to capture data from the wellhead, flow stations and export terminals; determining the typical industry costs in Nigeria; expanding infrastructure and capacity-building; and improving sector governance. 

The first of these might best be the responsibility of the newly reappointed Minister of Finance, Ngozi Okonjo-Iweala. At the same time, the last two objectives fall within the remit of the PIB, which when (and if) enacted, would create clear lines of separation between a national oil company, policy-making and regulation.

This would leave NEITI the opportunity to take responsibility for pushing for more effective monitoring of physical flows of crude oil as well as benchmarking operational costs for both offshore and onshore operations. These issues are highly charged and lie at the heart of the political economy of the hydrocarbon sector and so NEITI would require strong and unwavering support from the president and his economic team in order to challenge the status quo during his administration. 

If the ‘post-compliance’ NEITI wishes to go beyond producing reports that sit on shelves it will have to tackle the illegal bunkering and assess the massive tax avoidance at work in the sector. With the support of the NEITI Law, it has powers to analyse and investigate the so-called ‘application of resources’: in other words, to assess how the oil revenues are spent. NEITI can thus audit the Niger Delta Development Commission, the Excess Crude Account, the proposed Sovereign Wealth Fund and the transfers to and from the Federation Account. The law also empowers NEITI to assess and audit the mining sector. 

NEITI’s board, the National Stakeholders Working Group, has a mix of representatives from government, civil society and the private sector, chaired by the highly regarded Professor Humphrey Asobie (who also sits on the global EITI board). The NEITI Secretariat now has over 50 members of staff, paid according to a special salary scale. In other words, there is potentially the right blend of experience, commitment and capacity for NEITI to play a bigger role than previously, and to convert its transparency outputs into accountability pressures. To succeed with this agenda, it will need strong political support. 

About the author:

Jeremy Weate is a senior extractives adviser, currently advising NEITI on its post-compliance strategy


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