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Nigeria's a Mess -- But Don't Blame the Oil

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The Financial Times recently reported on the dismal state of oil sector performance in Nigeria:

"Nigeria is suffering the worst oil production disruptions in four years, with output falling to levels last seen before the government's amnesty program ended the militancy in the Niger delta.

Industrial scale oil theft, sabotage, and technical problems have caused crude output to drop to less than 1.9m barrels a day this summer, the lowest since mid-2009, when production briefly dipped to a 20-year low of 1.5m b/d. Any further fall would allow Angola to assume Nigeria's position as the continent's largest crude producer."

According to the FT, theft and sabotage are big problems there:

"More than 150,000 barrels of oil are reportedly stolen every day, with some feeding illegal refineries in the Niger delta and the bulk shipped to destinations as far away as Asia. The Nigeria Extractive Industries Transparency Initiative said in July that the country had lost $10.9bn in potential oil revenues to theft and sabotage from 2009 to 2011 -- before the problem reached its current scale. By last year, losses had increased to $1bn a month, according to the government."

This comes as little surprise: The Fraser Institute publishes an annual report based on a survey of executives in oil exploration and production, asking them to evaluate the jurisdictions in which they operate on a broad range of policy factors such as the area's tax policy, royalty regime, regulatory regime, labour availability, and much more. The goal of the study is to assess how the public policy environment in a given jurisdiction makes it more or less attractive to investment in the oil and gas sector.

Nigeria's performance in the 2012 Petroleum Survey was nothing short of dismal. Even among other African countries, Nigeria was rated second to last on the broadest of our policy indices, receiving particularly poor scores for political stability (130th out of 147 jurisdictions); security (143rd); legal system processes (135th); and corruption (144th).

Some people argue that Nigeria's natural resources are more a curse than a blessing. U.S. blogger Walter Russell Meade quotes a National Geographic article from 2007 that captures the thought:

"Oil fouls everything in southern Nigeria...It spills from the pipelines, poisoning soil and water. It stains the hands of politicians and generals, who siphon off its profits. It taints the ambitions of the young, who will try anything to scoop up a share of the liquid riches -- fire a gun, sabotage a pipeline, kidnap a foreigner."

But if the presence of the oil was the problem, we'd see what's happening in Nigeria happen more often. Fortunately, we don't. The tragedy in Nigeria is less about the oil itself than it is about failed governance. Without radical improvements in public policy, Nigeria will continue to be a poor destination for investment. As Meade points out, that's bad for everyone:

"Nigeria matters: falling output affects the global price of oil. Bad governance across the country has spawned numerous insurgencies and independence movements and created lawless areas where terrorists can live comfortably and recruit disaffected young men to join their ranks."

Nigeria is a sad tale of how to do things wrong when it comes to oil and gas production, but it has little to do with any resource curse. Countries like Canada, the United States, Australia, New Zealand, and others with safe, stable policy environments; that offer fair terms on royalties and taxes -- that maintain quality infrastructure, public safety, and sound legal structures -- rank attractively for investment in oil and gas production, and their populations benefit tremendously from the production of natural resources.

Don't blame the petroleum for the problems in Nigeria -- blame the public policy.

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