5 OIL WEALTH AND THE NIGER
Managing oil wealth
105. Nigeria is the world's 10th, and Africa's largest,
oil producer. Oil provides 85% of government revenue and over
95% of export earnings. In 2005, 75% of foreign direct investment
was in the oil sector. It is therefore a dominant factor in both
the economics and the politics of the country. DFID says that
management of oil resources is fundamental to Nigeria's economic,
social, political and environmental future.
Oil production is currently estimated to be 1.5 million barrels
per day (bpd) against a government target of 2.3 million.
The turbulence and insecurity in the oil-producing Delta region
has contributed to this decline in production (see below). It
is estimated that Nigeria has received oil revenues over the last
25 years of US$300 billion (excluding payments to oil companies)
yet half the population lives on less than a dollar a day and
90% are estimated to live on less than $2 a day.
106. Michael Peel has described Nigeria as an "oil-ruined
Whilst fully acknowledging that there was "huge poverty"
in Nigeria, he believed that the real challenge was the:
] marginal richness that oil brings; and
while that pot of money is there, and there is not much else going
on, the temptation is always to try and get yourself in a network
to benefit from those revenues as they flow down, rather than
particularly to be involved, say, in building up social services
in your area or small industries and so forth.
The impact of oil wealth on public attitudes to taxation
and economic diversification were made clear to us during our
visit. Many people see oil as a blessing which obviates the need
for them to seek other sources of economic activity or to contribute
to the provision of services through taxation. Lagos State is
exceptional in raising 50% of its revenue from non-oil sources.
Many Nigerian people quite reasonably question the point of paying
taxes when they have to pay for most services, including health
and education, separately. Businesses, too, often evade taxes:
they see little return in the provision of infrastructure or public
goods and therefore regard taxes simply as a way for Federal,
State and local authorities to extract money from them.
It was pointed out to us that a heavy burden is placed on people
registered to pay tax because squeezing them is easier for the
Government than bringing the many people in the informal sector
into the formal, tax-paying sector.
107. The Federal Government has carried out significant
reforms to end the shocks to the economy created by fluctuations
in oil prices and to remedy previous regimes' failure to manage
oil receipts prudently. In 2004, the Government broke the link
between government expenditure and oil price fluctuations by introducing
a budget system based on a conservative reference price for oil.
All income which the Government receives when oil sells at above
the reference price is now saved in an Excess Crude Account rather
than being spent. DFID says that "this mechanism has succeeded
in avoiding boom-bust cycles of spending that had plagued Nigeria
since the 1970s" and that it was central to the turnaround
in Nigeria's economic performance.
However, oil wealth continues to distort the economy and is a
major contributory factor in, and victim of, the corruption which
pervades the country. It also contributes to the view that government
should provide jobs, rather than a successful private sector.
Nigeria Extractive Industries
Transparency Initiative (NEITI)
108. The Extractive Industries Transparency Initiative
(EITI) is an international framework, initiated by the UK. It
has established a coalition of governments, companies and civil
society to promote transparency in oil, gas and mining. Its aims
are to "make natural resources benefit all" and it sets
a global standard for companies "to publish what they pay
and for governments to disclose what they receive".
Nigeria passed specific EITI legislation in 2007 which DFID says
"reinforced its position as a global leader in this initiative."
DFID has supported Nigeria's adoption of EITI with £3 million
over four years.
The DFID Minister told us that "We are probably the leading
partners supporting the establishment" of NEITI.
109. The NEITI board is appointed by the President
and comprises representatives from civil society, government,
extractive industry companies and the media. Day-to-day work is
carried out by the NEITI Secretariat, which works to deepen awareness
of NEITI-related issues and build the capacity of government and
civil society to understand and monitor extractive revenue transparency.
Under the 2007 legislation, NEITI has the authority to withdraw
licences from oil companies which do no co-operate with its work.
This has not been tested yet.
110. NEITI's first audit report covered the period
1999-2004 and was published in April 2006.
It put into the public domain financial data, information on volumes
of oil produced, refined and exported and the legal framework
of the petroleum sector. This encouraged tighter scrutiny of oil
revenue flows for 2004 and 2005 which enabled the Government of
Nigeria to recover additional revenues due to it from oil companies
of about £500 million.
The 2005 audit has been submitted to the Federal Government for
approval, before its public release.
The NEITI Chair told us that the process for producing audits
would now be speeded up and that those for 2006-2008 would be
published together. The DFID Minister welcomed this.
111. The NEITI Chairman told us that his organisation
could only be effective if it was part of an integrated government
reform programme but that there was no evidence that this was
taking place yet. Witnesses welcomed NEITI's work and believed
that DFID's contribution to it was important and should continue.
However, their view was that it was only a small part of a bigger
picture and that the Federal Government should put better systems
in place to trace oil from the well-head to the export point and
that the use of oil money needed to be closely tracked once it
reached the Treasury.
They agreed with the NEITI Chairman that improving transparency
in the oil sector could not be achieved until the interaction
between oil wealth and politics had been addressed. Sam Unom summed
it up: "oil lubricates politics".
DFID agreed that "oil wealth distribution is at the heart
of Nigerian politics" and that division of oil revenue still
dominated discussions about the federal system which should properly
be focused on the elements of a well-functioning country: accountability,
coordination and institutional capacity.
112. The Nigerian Extractive Industries Transparency
Initiative (NEITI) has brought a very welcome increase in transparency
and accountability to the country's oil sector. We commend DFID
for taking such a strong lead in supporting the initiative. However,
as its Chairman made clear to us, NEITI is an important, but at
the moment isolated, element in what needs to be a much broader,
integrated and government-led programme to reform both the oil
industry and its relationship with the country's economic and
political structures. While oil and politics remain inextricably
linked, corruption and mismanagement will prevail. We recommend
that DFID take every opportunity to apply pressure to the Nigerian
Government to prioritise oil industry reform measures, including
publication of data on the contribution which oil revenues make
to the public finances and on the programmes which oil revenues
fund, and the separation of oil wealth from politics. These measures
should also include provision of adequate resources to NEITI to
maintain and build upon its excellent work to date and full co-operation
with NEITI in the provision of data to ensure that publication
of the audits for 2006-08 can be expedited.
Conflict in the Niger Delta
113. In the last few years the oil-producing Niger
Delta region has seen a serious deterioration in its security
situation. There was a lull in the violence immediately after
the 2007 elections but kidnappings and violent attacks on communities
and oil installations soon restarted. A state of emergency was
declared in Rivers State late in 2007 and a military Joint Task
Force was sent in.
Michael Peel, the author of a recently published book on the oil
sector in Nigeria, believed that a military crack-down was not
the answer to the Delta's problems and that a bigger military
presence in the Delta would be "extremely dangerous".
114. A recent report from the UN Office on Drugs
and Crime (UNODC) highlighted the seriousness of the problems
in the Delta:
] the threat posed by oil seems to be
the greatest rule of law challenge confronting the [West Africa]
region. It directly destabilises the most powerful economy in
the region, with implications far beyond the Niger Delta. The
problem has been allowed to persist for so long that it will be
difficult to uproot [
UNODC says that the conflict in the Delta "is
rooted in grievances of residents who, despite the wealth beneath
their land, remain very poor" and who believe that environmental
damage related to the industry has undermined their traditional
livelihoods. UNODC estimates that 10% of total production is lost
through theft and smuggling (known as "bunkering").
This means that as much as a third of the oil income which makes
up 80% of Nigeria's national budget is lost, with the Nigerian
public being the "net loser".
President Yar'Adua has compared illegal oil bunkering to the trade
in "blood diamonds" that fuelled the conflicts in Sierra
Leone and Liberia and has called for international action to arrest
the flow of "blood oil".
Solving the problem of insecurity and criminality in the
Niger Delta is one of his key areas in his 7-Point Agenda. The
new Country Partnership Strategy highlights the need for "sustained
efforts to end militancy in the Delta."
115. UNODC argues that the violent political struggle
in the region "provides a convenient smokescreen for those
intent on personal enrichment. Militants and officials earning
good incomes off the conflict may be less than eager to come to
the negotiating table." The report highlights the intersection
between oil theft and corrupt election practices with young men
involved in stealing oil also being used to "get out the
vote" at election time.
Michael Peel similarly highlighted the cross-over between militants,
"gangsters" and young men armed and paid by politicians
"who needed to rig elections".
The Chair of the NEITI Board told us that the violence and lawlessness
in the Delta were part of a wider problem of how politics was
financed in Nigeria and that security in the Delta would not be
possible until the underlying causes were resolved. DFID asserts
that the problem in the region "is not one of resources".
 Its assessment
The situation in the Niger Delta is largely a
result of poor governance, particularly a failure on the part
of the governments of the region to use their substantial resources
for the benefit of their citizens. There are legitimate grievances
about the existence of poverty in the face of extreme wealth and
dissatisfaction with some of the ways in which the oil companies
116. Some steps are being taken to try to tackle
violence and instability in the Delta. The Governors of the six
Delta region states have held a summit meeting in which they resolved
to improve governance and build regional infrastructure.
The Federal Government established a Ministry of Niger Delta Affairs
in late 2008, but it is unclear how effective it will be. Sam
Unom described it as "gesture politics" and the sort
of "quick fix" which was unlikely to have an impact
and which itself was exposed to becoming another part of the "patronage
The International Crisis Group (ICG) says that the Ministry's
low budget, uncertain division of responsibilities and unclear
guiding principles have reduced its credibility.
Dr Mustapha agreed that the new Ministry's resources were "miniscule"
and believed that it was just "another thing to dazzle people".
117. DFID has funded a £2 million programme
to improve social cohesion and delivery of basic services by local
government in Rivers and Delta States (Supporting Transparency
and Accountability in the Niger Delta programme (STAND)).
However, DFID points out that it remains difficult for donors
to have an impact on the MDGs there until the State governments
show greater willingness "to improve governance, reduce corruption
and address the security situation."
The DFID Minister told us:
Where development donors [
] can begin to
make a difference, and we are certainly trying to, is in two ways:
one is in terms of the dialogue we have with ministers and politicians
in Nigeria; secondly, in the sort of pro transparency and voice
programme that we are funding in the Delta areas [
] to begin
the process of helping officials and politicians in the Delta
States be held accountable for progress, or lack of progress,
against the MDGs.
The conduct of oil companies
118. While donors have a clear role to play in trying
to bring stability to the Delta region, the oil companies who
are benefiting from exploitation of the natural resources of the
region have an equal, if not greater, responsibility. However,
some commentators believe they are part of the problem rather
than the solution.
119. Amnesty International has recently highlighted
violations of the rights of the local people in the Delta to an
adequate standard of living, and to work, food, water and health.
It believed that the UK Government should do more to:
] encourage the Nigeria Government to
ensure robust, independent and coordinated oversight of the oil
industry, including its impact on human rights. They must make
the assessment of the social and human rights impacts of all oil
and gas projects mandatory and ensure systematic clean-up of oil
The majority of evidence which Amnesty has collected
relates to the operations in the Niger Delta of Shell Petroleum
Development Company, which is a subsidiary of Royal Dutch Shell,
a company with a registered office in London. It believes that
the UK Government should require such companies to undertake and
report on human rights due diligence measures and that, where
human rights of people in overseas countries are harmed by a company's
operations, they should have access to effective remedy in the
UK if this is not available in their own country.
120. We put Amnesty's proposals to the DFID Minister.
He told us that he was:
] sceptical at this stage about whether
there is a magic bullet in terms of a piece of legislation that
might operate from the UK and lead to a dramatic transformation
of what is happening in the Delta. I think it is a much more
complex problem. Our job has got to be to help Nigeria improve
We agree with the Minister that the challenge is
to make Nigeria's own institutions effective, including ministries
and the National Assembly and to strengthen its structures and
mechanisms to tackle human rights abuses and to ensure that public
money is being spent in the way it is supposed to be.
The Minister said that the appropriate role for donors was to:
] strengthen the ability of the government
in Nigeria and the parliament and state legislatures to hold their
politicians and officials to account and, if they think it is
appropriate, to introduce the relevant legislation to bear down
further in terms of human rights abuses, poor environmental standards,
etc, and have the capacity to follow through and check whether
businesses and, indeed, other organisations operating in that
country are adhering to those laws and regulations.
121. Other witnesses agreed with Amnesty International
that the behaviour of oil companies was a significant factor contributing
to the instability in the Delta. Shell in particular was identified
as a company with complex relationships with local communities
in the areas where it operates. We were told that it provided
benefits such as clinics, boats and education scholarships to
what are described as "host" communities. However, there
were frequent disputes about what constituted a "host"
community and what share of any benefits neighbouring communities
should have when they also suffered the environmental and other
impacts of oil exploitation.
Sam Unom said that it was sometimes "difficult to reconcile
the value of what is on the ground with the value that is in Shell's
books" in terms of its huge community budget.
122. We invited Shell to respond to these claims
and also asked the company a series of questions about its co-operation
with the Nigeria Extractive Industries Transparency Initiative.
The DFID Minister said that he would be "very interested
to see the response".
We received a response from Shell as we were finalising our report.
Shell asserts that it "has met all the data and information
requests from NEITI and cooperated with the auditors in all respects."
It points out that Shell Petroleum Development Company (SPDC)
was the first company to disclose the revenues it pays to the
Nigeria government. It highlights a recent report from Transparency
International in which "Shell scored 'high' overall in revenue
transparency initiatives and 'very high' in transparency initiatives
In relation to the contribution it makes to the Nigerian economy
and local communities in oil-producing areas, Shell says that
it spent $25.2 million on community development projects (as part
of a $84 million SPDC joint venture), in addition to the $56.8
million it contributed in 2008 to the Niger Delta Development
Commission, the government development agency for the region.
Shell says that the problems in the Delta "can only be solved
with collaborative solutions" and that it wishes to see "coherent
action that addresses the root causes of the issues that affect
the people of the Niger Delta and brings positive change".
We have some queries about the responses we have received from
Shell to our questions on its co-operation with NEITI. The chairman
of the company offered to discuss these matters in more detail
with us but, as we received Shell's evidence so late in the inquiry,
we have not had an opportunity to do this. We do, however, intend
to pursue these issues in oral evidence with Shell at a later
123. Violence and instability in the Niger Delta
are having a serious impact on Nigeria's oil industry and therefore
on its economic situation. The people of the region suffer poverty
and live in fear, despite the wealth being generated in the region.
The causes are complex and reflect the interaction between oil,
politics, crime and corruption in Nigeria which have to be tackled
in a co-ordinated and integrated approach. We believe DFID must
do more to support the Nigerian authorities to meet their responsibility
to provide this response. This should include the adoption where
necessary of stronger legislation to compel oil companies to honour
the rights of local people and to conduct their business in a
way which enables Nigeria's oil wealth to be shared by its people,
with robust mechanisms in place to guarantee transparency and
accountability in the flows of money and oil.
201 Ev 64; GEMS Technical Annex, para 1.1 Back
Ev 91-92 Back
Oil-dependence and civil conflict
in Nigeria, Aderoju Oyefusi,
Department of Economics & Statistics, University of Benin,
2007, Section 2.2 Back
Ev 89 Back
Michael Peel, A swamp full of dollars: pipelines and paramilitaries
at Nigeria's oil frontier, (London, September 2009), prologue,
p xviii; see also Q 37 Back
Q 20 Back
GEMS Technical Annex, para 2.3 Back
Country Partnership Strategy 2009-13, paras 3-4; Ev 92 Back
See EITI website at www.eitransparency.org Back
Ev 64 Back
Q 157 Back
Nigeria Extractive Industries Transparency Initiative, Audit of
the period 1999-2004 Back
Q 167 Back
Q 167 Back
Q 167 Back
Qq 42-45 Back
Q 43 Back
Ev 92 Back
Ev 70 Back
Q 38; Michael Peel, A swamp full of dollars: pipelines and paramilitaries
at Nigeria's oil frontier, (London, September 2009) Back
Transnational Trafficking and the Rule of Law in West Africa:
a threat assessment, UN Office on Drugs and Crime, July 2009,
Executive Summary, p 8 Back
UNODC report, op cit, p 4 Back
UNODC report, op cit, p 72 Back
Country Partnership Strategy 2005-09, Executive Summary, para
UNODC report, op cit, p 4 Back
Qq 37-38 Back
Ev 87 Back
Ev 55 Back
Ev 55 Back
Q 39 Back
International Crisis Group Africa Briefing No. 60, "Nigeria:
seizing the moment in the Niger Delta", April 2009 Back
Q 39 Back
Ev 88 Back
Ev 87 Back
Q 168 Back
Ev 46; see also Amnesty International, Nigeria: Petroleum, Pollution
and Poverty in the Niger Delta, June 2009 Back
Ev 46 Back
Ev 46 Back
Q 172 Back
Q 170 Back
Q 172 Back
Q 47 Back
Q 47 Back
Q 173 Back
Ev 107-110 Back
Ev 108 Back
Ev 108 Back
Ev 108 Back