The issues of a “post-oil” period and economic diversification received considerable attention in Nigeria after the 2014 commodity price crash, again during the 2016 economic crisis, and more recently with the coronavirus pandemic influenced global crisis. Over the period, recognition of the dangers of Nigeria’s dependency on oil led to several initiatives aimed at securing changes in government policy to address the problem. Here we examine Nigeria’s oil dependency within the context of emerging global and national imperatives, to provide some initial recommendations to frame the Natural Resource Governance Institute’s (NRGI) newly constituted Nigeria programme, designed to focus on “Nigeria’s Oil Dependency: Imagining a Future Beyond Oil.”
Nigeria’s oil dependency through the years
Nigeria’s dependence on oil is deep-rooted. The country continues to suffer from the effects of the Dutch Disease, which began when oil was discovered in the 1960s, having focused its efforts predominantly on its oil resources, and the potential for greater returns from oil, making other sectors less attractive. But, decades later, little has changed in Nigeria. Although the oil sector continues to deliver returns, these have depreciated over the years, hindering the success of Nigeria’s development aspirations, such as Vision 20:20, and the Economic Recovery and Growth Plan (ERGP), which are often just out of reach as they continue to rely on the performance of the global oil market.
How dependent is Nigeria on oil?
Nigeria’s federal and state governments remain heavily dependent on oil revenues, relying on these to deliver public goods, to service debt and bolster the national currency. The oil sector, however, has not significantly improved the well-being of Nigerians. Non-oil sectors lead to vastly more employment opportunities than the oil sector and their economic activities contributed approximately 93 per cent of GDP in 2020.
At the federal level, Nigeria’s dependence on oil almost crippled her economy, catalysing a negative GDP growth of 1.8 per cent in 2020. The coronavirus pandemic highlighted the potential losses to the federation, due to the Federal Government’s more than 50 per cent revenue dependence on oil, as the shutdown of global economic activities at the onslaught of the pandemic and sharp declines in oil demand in 2020 left the government unable to meet its 2020 revenue projections. The Federal Government had to slash its budget by a more realistic 20 per cent, reducing its benchmark price and production projections from $57 per barrel to $30, and anticipated production volumes from 2.2 million barrels per day (mbpd) to 1.7 mbpd consecutively, to accommodate the new realities. Continued divestments by the international oil companies (the oil majors) and their refocus on cleaner energies, threaten Nigeria’s future ability to attain its revenue projections, if they remain pegged against oil productions. Nigeria’s debt stock in 2020 stood at 31 per cent of the GDP and continues to grow as it tries to bridge the shortfalls in oil revenues. Despite this stark reality, the 2022 Federal Government budget still reflects 31 per cent of expected Federal Government revenue generation from oil, even as oil exports continue to supply 90 per cent of Nigeria’s foreign exchange and half of the Federal Government’s revenues. Continued dependence on oil revenues threatens the lives and livelihoods of Nigerians and social cohesion in the country.
Nigeria currently is at a pivotal point in its history, in which decisions made now will weigh heavily on its economic survival. After previous financial crises — the halving of Nigeria’s Stock Exchange All Share Index in 2008 and the 70 per cent commodity price crash in 2014 — Nigeria’s economy eventually rebounded as oil demand and price recovered…. So, ahead of that eventuality, the government must make plans to replace the huge shares of government revenue and foreign exchange earnings for which it presently relies upon oil.
Meanwhile, almost all of Nigeria’s states depend on the oil income, channeled from the Federation Account and Allocation Committee (FAAC), for more than 50 per cent of their fiscal needs. The most dependent are the oil-producing States, with Bayelsa and Akwa Ibom averaging 85 per cent of their fiscal dependence on oil revenues. Only Ogun State and Lagos State draw less than half of their revenues from the FAAC consistently. Oil-producing states risk being fiscally unviable without oil. These states must urgently find alternative sources of revenue beyond FAAC to build their fiscal resilience before oil demand dips. Those residing in those States must ask for the diversification of their states’ revenues, with greater focus on revenues generated internally beyond oil.
Ending dependency and preparing for a future beyond oil
Nigeria currently is at a pivotal point in its history, in which decisions made now will weigh heavily on its economic survival. After previous financial crises — the halving of Nigeria’s Stock Exchange All Share Index in 2008 and the 70 per cent commodity price crash in 2014 — Nigeria’s economy eventually rebounded as oil demand and price recovered. But this will no longer be the case if the Organisation of the Petroleum Exporting Countries (OPEC), the International Energy Agency (IEA) and others are correct when suggesting that we will soon reach peak demand for oil. So, ahead of that eventuality, the government must make plans to replace the huge shares of government revenue and foreign exchange earnings for which it presently relies upon oil.
The federal and state governments must make critical and strategic decisions carefully to position their economies for a future without oil. Oil will lose its value, so Nigeria must build its resilience in anticipation of that future, and take advantage of all the opportunities available in the African corridor, the growing green economy, technology, and non-sectors that speak to its unique advantages.
Looking more closely at the federal government’s short-term plans to maximise its oil and gas endowments, there are obvious challenges. First, investments in frontier explorations, as provided for in the Petroleum Industry Act (PIA), may pose some risks in locking in revenue that may not yield the desired returns. Gas as a ‘transition fuel’ requires significant capital investments and as a fossil fuel, it is likely to eventually lose out on investments to greener alternatives. Gas takes a long time to bring profit and if Nigeria is to transit using gas to industrialise and energise before attaining its COP 26 carbon neutrality plans by 2060, a clear plan and pathway for how it intends to transition to other energy options, with trackable milestones is required. In addition, if natural gas exports are expected to supplement foreign exchange earnings from oil in the short-term, lower longer-term investments may mean that those gains won’t last. Buffers need to be put in place to account for that or the growing investments made in cleaner fuels may put natural gas projects at risk of becoming “stranded assets” — with revenues sunk before realising any value. It is critical that the Federal Government makes strategic spending decisions as oil’s role in meeting global energy demands continually declines over time.
The Federal Ministry of Finance, Budget and National Planning should devise a comprehensive and inclusive plan, with concrete and measurable milestones, in collaboration with relevant ministries, departments and agencies that speak to Nigeria’s context, and accounts for both risks and opportunities to reduce oil dependence. That plan must then be implemented collaboratively. The opinions of Nigerians must be sought on the best approach to wean the country off its dependency on oil.
The executive’s branch’s plan to dig deeper into fossil fuel investments by committing $1.5 billion to refurbishing historically unprofitable refineries, proposed investments in Dangote refinery, frontier exploration and sustaining fuel subsidies, may put Nigeria’s future at risk if the alternative costs are not appropriately assessed. Even then, crude oil production to meet the government’s ambition to ramp up production is threatened, as majors like Shell, ExxonMobil, Chevron and Total rebrand as “green” to reflect investor appetite and the global energy transition. These international oil companies have been selling Nigerian assets, which will likely continue as the energy transition accelerates. Importers of Nigeria’s petroleum products are also seeking greener options. The top five export destinations for Nigeria’s petroleum products (India, Spain, Netherlands, United States and China) have committed to achieving carbon neutrality between 2030 and 2050. This puts further strain on Nigeria’s short-to-medium term capacity to generate and sustain its foreign exchange earnings, as oil demand falls. Oil producing regions will also be further strained as legacy environmental pollution and oil dependence-induced economic and social challenges will remain if a ‘just transition’ is not prioritised.
Beyond oil, the Federal Government should accelerate revenue diversification through trade and domestic production, leveraging other sources of foreign exchange. Attracting foreign exchange earnings could be done by backing enablers that add greater value to local products, while offering greater support to the manufacturing sector, developing Nigeria’s critical minerals in the mining sector to leverage the green economy, and boosting regional trade through the African Continental Free Trade Agreement (AfCFTA) 2020 are other ways to improve and leverage domestic production diversification for more jobs and economic growth, which are key goals of the Nigerian government.
The Federal Ministry of Finance, Budget and National Planning should devise a comprehensive and inclusive plan, with concrete and measurable milestones, in collaboration with relevant ministries, departments and agencies that speak to Nigeria’s context, and accounts for both risks and opportunities to reduce oil dependence. That plan must then be implemented collaboratively. The opinions of Nigerians must be sought on the best approach to wean the country off its dependency on oil. They must agree on a timeline and pace of reform, and identify priority areas of focus. During the upcoming 2023 electoral campaigns, presidential and gubernatorial candidates, especially from oil producing states, must be required by citizens to outline plans to build fiscal resilience away from oil dependence. Civil society, accountability actors and the public must sustain dialogue and make economic diversification a major theme in the 2023 elections — on the campaign trail, in the commitments of candidates and on party platforms.
Nafi Chinery is the West Africa (Anglophone) regional manager at the Natural Resource Governance Institute (NRGI). Tengi George Ikoli is a senior governance officer with NRGI’s Nigeria program.