Rethinking Nigeria’s oil and gas governance for national development

BY OLISA AGBAKOBA AND COLLINS OKEKE

Nigeria stands at a critical juncture in its economic history. As the largest oil and gas producer in sub-Saharan Africa, with estimated reserves of 37 billion barrels of oil and 188 trillion cubic feet of gas, the country’s petroleum industry forms the backbone of its economy. It contributes approximately 90% of Nigeria’s foreign exchange earnings and about 60% of total income. Yet, this abundance of natural resources has not translated into broad-based economic development and improved living standards for the majority of Nigerians.

The country continues to grapple with what economists term the “resource curse” or the “paradox of plenty.” This phenomenon is characterized by countries rich in natural resources, particularly non-renewable resources like minerals and fuels, experiencing less economic growth, less democracy, and worse development outcomes compared to countries with fewer natural resources. In Nigeria, this is manifested in high poverty rates, inadequate infrastructure, and uneven economic development.

This article proposes a paradigm shift in the governance of Nigeria’s oil and gas sector. It advocates moving from a model focused on mere resource extraction and revenue sharing to one that leverages the industry as a powerful tool for comprehensive economic development.
Historical Context of Oil Governance in Nigeria

The governance of Nigeria’s oil and gas sector has undergone several transformations since the discovery of oil in commercial quantities in 1956. From the pre-independence era governed by the Petroleum Ordinance of 1889, which vested oil mineral rights in the British Crown, to the post-independence period where the Petroleum Act of 1969 transferred these rights to the Federal Government of Nigeria. The creation of the Nigerian National Petroleum Corporation (NNPC) in 1977 and the recent Petroleum Industry Act (PIA) of 2021 were further attempts to improve the sector’s governance. Despite these reforms, the industry remains plagued by poor governance, lack of transparency, and inefficient resource management.

A prevailing misconception has been that the shift from state-controlled to private-sector governance would inherently lead to improvements in the sector.

However, this transition has not yielded the expected results. The passage of the PIA has not had the anticipated positive impact on the oil and gas industry. Nigeria’s oil revenue has continued to decline, and the country struggles to meet its Organization of the Petroleum Exporting Countries (OPEC) quota. Issues of corruption, inefficiency, and lack of transparency persist. This suggests that the governance model alone is not the root cause of the sector’s challenges.

The core issue lies not in the inefficacy or corruption of state-owned oil companies but in the lack of a clear economic design that aligns the industry with national development goals – hence the need for another approach: Development Oil.

The Concept of “Development Oil”

“Development Oil” is an approach to oil and gas governance that views these resources not merely as commodities for export and revenue generation, but as strategic assets for driving comprehensive national development. It stands in stark contrast to the traditional “Contract Oil” approach that Nigeria has implemented over the years. Contract Oil, primarily implemented through Joint Ventures (JVs) and Production Sharing Contracts (PSCs), treats oil and gas primarily as commodities to be extracted, sold, and the profit shared between the government and International Oil Companies (IOCs). This model has resulted in a passive government role, IOC dominance, limited NNPC involvement, significant capital flight, and limited local content development. In contrast, Development Oil views oil and gas as strategic assets for driving comprehensive national development. It emphasizes active state participation, value addition within the country, local content development, revenue retention and reinvestment, and long-term sustainability. This approach adheres more closely to the constitutional mandate in Sections 16 and 44 (3) of the Nigerian Constitution of using natural resources for the welfare and security of Nigerian citizens and seeks to address the “resource curse” that has plagued Nigeria.

This concept is built on several key principles. At its core is strategic resource management, which treats oil and gas reserves as national assets to be managed for long-term development rather than short-term gain. It also emphasizes integrated economic planning, aligning oil and gas sector policies with broader national development goals.

Value addition is another crucial aspect of Development Oil, focusing on developing the entire value chain within the country, from extraction to refining and petrochemicals. This goes hand in hand with local content development, which aims to maximize the participation of local businesses and workforce in the oil and gas industry. The approach also prioritizes revenue retention and reinvestment, keeping a significant portion of oil revenues within the country and reinvesting them in critical sectors. Sustainable development is another key principle, balancing resource exploitation with environmental conservation and planning for a post-oil future.

The concept of “Development Oil” can be traced back to visionary leaders who saw oil not just as a revenue source, but as a tool for national advancement. One of the earliest manifestations of this thinking was the creation of the Organization of Petroleum Exporting Countries (OPEC) in 1960. Leaders like Muammar Gaddafi envisioned OPEC as a means to leverage oil resources for the development of member nations. Several countries have successfully implemented aspects of the Development Oil approach.

Norway is often cited as a prime example. The country established a sovereign wealth fund, now the world’s largest, to invest its oil revenues for future generations. Norway also developed a strong domestic oil industry and used its oil wealth to fund extensive social welfare programs. Saudi Arabia, while initially focused on oil exports, has in recent years pursued a Development Oil approach through its Vision 2030 plan. This includes using oil revenues to diversify the economy, develop non-oil sectors, and invest in education and infrastructure.

Malaysia, through its national oil company Petronas, has pursued a Development Oil strategy. Petronas has invested in developing local expertise, expanding into the entire oil and gas value chain, and using oil revenues to fund national development projects. The United Arab Emirates, particularly Abu Dhabi, has used its oil wealth to fund economic diversification, infrastructure development, and the creation of sovereign wealth funds for future generations.

Policy Recommendations

To reposition the oil and gas industry as a driver of economic diversification and sustainable development, it is essential to establish a clear national agenda. This should be accompanied by a comprehensive National Oil and Gas Development Plan that outlines specific goals, timelines, and key performance indicators for the sector’s contribution to national development.
Implementing de facto state ownership of the industry in accordance with Section 44 (3) of the Nigerian Constitution is crucial. The President’s constitutional mandate as outlined in Section 5 must be recognized and acted upon, acknowledging his role as the Chief Executive Officer of Nigeria with the responsibility to give effect to the entire constitution. It’s important to recognize that Nigeria’s natural resources are a sovereign inheritance, constitutionally guaranteed to provide welfare and prosperity for all Nigerians – a right that cannot be delegated to International Oil Companies (IOCs) by contract. Currently, management and control of Nigeria’s oil and gas is delegated to IOCs through JVs and PSCs, which is contrary to Section 44 (3) of the Constitution that mandates the government of the federation to manage and control all minerals including oil and gas.

Existing Joint Venture agreements and Production Sharing Contracts with International Oil Companies (IOCs) should be reviewed and potentially revised. Agreements with IOCs should be reframed as economic development agreements rather than simple contracts. These agreements should engage the capital and technology of foreign companies in undertakings designed to have a decisive positive impact on the country’s economy, while maintaining sovereign control over resources. New models for engagement with IOCs should prioritize technology transfer, local content development, and value addition within Nigeria.

A new governance framework centered on development should be created. This should include one strong and independent regulatory body to ensure transparency and efficiency, and a restructured national oil company focused on maximizing value for national development, similar to Saudi Arabia’s model.
Innovative funding mechanisms, such as a Sovereign Oil Fund guaranteed by oil reserves, should be explored to finance strategic investments in the sector and related industries. This approach would allow Nigeria to leverage its proven reserves as collateral for borrowing, enabling the country to fund its own oil and gas operations without relying on foreign companies. A transparent and accountable mechanism for managing the Sovereign Oil Fund should be established.

Collaboration between new Nigerian actors in the oil and gas sector and the federal government should be encouraged to build a new strategy for oil and gas exploration based on the concept of development oil. Investment in capacity building for Nigerian oil and gas companies should be prioritized to reduce dependence on IOCs. A significant portion of oil and gas revenue should be reinvested in diversifying the economy and developing non-oil sectors.
Local content policies should be strengthened to ensure greater participation of Nigerian businesses in the oil and gas value chain. Investment in developing petrochemical and manufacturing industries should be made to add value to raw oil and gas products. Special economic zones focused on oil and gas-related industries should be established to attract investment and create jobs.
Conclusion

Rethinking Nigeria’s oil and gas governance is crucial for transforming this vital sector from a mere source of revenue into a powerful engine for national development. By adopting a “Development Oil” approach, Nigeria can leverage its significant natural resources to drive sustainable economic growth, improve infrastructure, and enhance the well-being of its citizens.
This paradigm shift requires bold policy changes, including the securitization of oil reserves through a Sovereign Oil Fund, which would allow Nigeria to finance its own oil and gas operations. It also calls for a re-evaluation of existing agreements with IOCs that have effectively outsourced decision-making and control over Nigerian resources.

The current exit of IOCs presents both a challenge and an opportunity for new Nigerian actors in the oil and gas sector. In collaboration with the federal government, these actors must rise to the occasion and build a new strategy for oil and gas exploration based on development oil principles.
By aligning the oil and gas sector with broader national interests and constitutional obligations, Nigeria can create a more diversified, resilient, and prosperous economy that truly benefits all its citizens. This approach not only promises economic growth but also reaffirms Nigeria’s sovereignty over its natural resources, ensuring that they are managed for the welfare and security of all Nigerians, as mandated by the constitution.

Olisa Agbakoba is a senior advocate of Nigeria while Collins Okeke is an associate partner and head of government relations and public sector practice at Olisa Agbakoba Legal.