Soaring oil prices haven't meant profits for oil-producing countries like Nigeria, a vital OPEC nation, which is losing money importing refined petroleum.
Nigeria, the most populous country in OPEC, can produce up to 2.5 million barrels of oil per day, according to the state-owned Nigerian National Petroleum Corporation (NNPC). Though actual daily pumping is closer to 1.4 million barrels per day, with the 10th-largest proven oil reserves in the world, Nigeria is still the most important oil-producing country in Africa.
This should mean that Nigeria is positioned to profit from the skyrocketing oil prices inflated by Russia’s war against Ukraine and the subsequent sanctions taking Russian oil off the global market. But instead of profiting, Nigeria is in the red. And instead of enjoying cheap gas, the country is forced to spend billions on imported petroleum.
Thirty-five percent of Nigeria’s economy runs on oil. Yet more than 90 percent of the country’s raw crude must be exported to Belgium and the Netherlands to be refined. Nigeria is then forced to import the refined petroleum back. This is because since late 2020, despite an oil-heavy economy, the country has had no functioning oil refinery.
Though a new 650,000 barrel-per-day refinery is expected to come online later this year, a long-term fix for this conundrum is elusive. That new refinery is expected to cost $19 billion.
And the government has already spent more than that in failed attempts to repair the old refineries.
But any investment in an oil refinery risks failure over the next coming decades, as leading oil consumers like the United States and its rival, China, transition to renewable sources of energy and to electric vehicles.
In the meantime, Nigeria is caught in the middle, a victim of a resource curse made worse by a military invasion a continent away.
The Oil Conundrum
Since gaining independence from the United Kingdom on October 1, 1960, Nigeria has had four oil refineries. For years, they operated well below their full capacity because of improper maintenance. Now, all are shut down.
As Mele Kyari, group managing director of the NNPC, explained to Nigerian elected officials in 2020, the pipelines that connect Nigeria’s existing refineries to the country’s oil fields are inefficient — they are old, rusted, and they’re beset by vandals who steal between 80 and 95 percent of the flow, according to estimates. These problems also plague the pipes connecting oil sources to crude export terminals — but there are more of those pipes, and too few connecting Nigeria’s oil fields to its local refineries. Put simply, the country simply lacks the domestic pipeline capacity to keep the local refineries in business.
Because it has no operating refineries, Nigeria must pay the open market’s cutthroat prices for refined petroleum products and cannot effectively profit from rising crude oil prices.
In the first week of March, prices rose to $140 per barrel, the highest since 2008, according to the Nigerian Central Bank. Demand cooled somewhat by the middle of the month to $122 a barrel — but any benefit in rising crude-oil prices is offset by the high cost of refined petroleum.
In fact, oil puts Nigeria in a deep deficit. In 2020, for example, Nigeria spent $46.43 billion more on imported petroleum products than it gained in revenue on petroleum exports.
“You know that right now we are a net importer of petroleum products,” Timipre Sylva, Nigeria’s minister of state for petroleum resources, told the Nigeria International Energy Summit in February. “When the price of crude is up, it also affects the price of petroleum products [within Nigeria]. … This is not good.”
For consumers, a liter (0.26 gallon) of fuel, which used to be sold at 165 naira ($0.40), has currently increased to about 200 naira ($0.48). Trains have begun to stop mid-track for lack of fuel and airline operators have warned they have 72 hours worth of aviation fuel left to work.
Discontent over rising prices has been amplified by a scandal. On February 9, hundreds of angry Nigerian car owners parked their damaged vehicles at filling stations and threatened lawsuits. The cause was adulterated fuel that had rendered their vehicles inoperable.
Four of the largest private oil companies in Nigeria had put methanol-contaminated fuel on the open market where it was likely to be bought by the public at large. By February 10, politicians in Nigeria’s lower legislative chamber began demanding the suspension of the four firms deemed responsible, alleging corruption. “For this adulteration to happen, it means persons have been compromised,” declared Rep. Makki Abubakar Yalleman. “Heads must roll!”
None have yet. In the meantime, the government has spent $483 million purifying 170.25 million liters (almost 45 million gallons) of contaminated fuel.
Fuel distributing companies across Nigeria have been told to stop selling the contaminated fuel — imported from Belgium — while the government seeks an alternative. No one has yet decided who will fix the damaged vehicles.
According to one of the accused distributors, MRS Oil Nigeria Plc, the methanol-contaminated oil was supplied to them by a subsidiary of the NNPC called Duke Oil. NNPC is the sole importer of all “premium motor spirits,” or gasoline, in Nigeria.
Since NNPC holds the monopoly, no importers have been punished.
As if the fuel adulteration scandal hadn’t created enough problems for Nigerians buying gasoline and diesel at cutthroat prices, the interruption of the energy markets has highlighted a longstanding problem for Nigerian domestic oil consumers. Gas prices are artificially depressed thanks only to government subsidies that President Muhammadu Buhari has pledged to cut.
In Nigeria, despite overall government control of the energy sector, private sector companies are allowed to sell and distribute petroleum products including fuel, kerosene, and gasoline. As a way to minimize the impact of rising global oil prices on Nigerians, the federal government has kept consumer prices artificially low with subsidies since the early 1970s.
In November 2021, Buhari floated a plan to completely remove subsidies on petroleum products sold by private firms by mid-2022, claiming that the country had spent too much on subsidizing petroleum. That plan triggered an outcry from labor groups and workers across the country — and at least for now, the fuel -price crisis triggered by the Ukraine war has put those plans on hold.
Road to Ruin, Not Repair
The current scramble for oil will make matters considerably worse for Nigeria. For most producers with domestic refineries, rising oil prices are a good phenomenon. For Nigeria, it’s a different story. There is a cost to exporting crude oil to foreign countries for refining, and Nigeria spends almost as much to import the refined oil back.
Sylva says that Nigeria’s comfort zone sits at between $70 and $80 per barrel. After spiking to $139 a barrel in early March, prices have cooled somewhat to $116 a barrel, according to the Central Bank of Nigeria — still far, far outside the country’s declared comfort zone.
As some developed countries shift from fossil fuels to renewable energy sources including solar, wind turbines, as well as transitioning to electric cars, Nigeria will have to question the vitality of its economy, which currently depends heavily on oil.
With US President Joe Biden’s plan for 50 percent of vehicles in the US to be electric by 2030 and net-zero carbon emissions by 2050, Nigeria is sure to face a similar crisis in 10 years, when the world’s largest oil producers begin to reduce production. What good will new refineries do then? Nigeria is stuck in the middle, suffering from oil well to pump, with no easy exit.
