Indigenous oil companies in Nigeria: business is good, but is governance lacking?

Sixty years after Shell and BP first struck oil in the Niger Delta, multinational companies still produce more petroleum than local Nigerian companies do. But the long, fitful process of indigenizing the industry – a national priority since the 1970s – has finally, unmistakably, taken hold.

In Port Harcourt, the steamy Delta oil hub, I saw more filling stations with local brand names than international ones: shiny signs emblazoned with Conoil and Oando logos, to name just two. Local companies are more prevalent than before in the upstream as well: the most recent NEITI report includes information on 23 indigenous producers and nine international ones. It’s safe to say that indigenization is the biggest trend in the Nigerian oil sector today. Now, the oil governance movement must adapt to this new reality.

Many questions remain unanswered about how local companies handle environmental issues and security. There are also concerns about the transparency of the various licenses awarded in oil blocks where local companies are moving in as foreign companies divest.

Higher ‘local content’ has obvious benefits, from jobs and skills building to local reinvestment of revenues with multiplier effects in other areas of the economy – as well as the hard to define but essential sense of local ownership of a vital national resource. But in governance terms, what works (and doesn’t work) when dealing with multinational companies may not always apply to locally run firms. Foreign firms often have decades-old reputations to defend in international consumer markets; many are bound by membership in industry associations that assess compliance with international health, safety and environmental standards. Local companies are rarely subject to the same scrutiny.

One industry analyst I spoke to in Port Harcourt said that environmental protection in oil areas could become more challenging as more locally-operated fields come online. Nigeria has modern laws regulating industry environmental standards for local companies and foreign ones alike, but these laws tend to be weakly enforced. Perhaps the biggest incentive for companies to operate responsibly is the reputational risk of not doing so: for all the true stories about big international producers polluting the creeks and mangrove forests of the Delta, Shell itself is among the most proactive companies in reporting its own oil spills in Nigeria. Whether or not this is a cynical effort to play nice with the environmental lobby back home in the Netherlands and UK, the outcome, in the form of detailed reporting on the location and size of new oil spills, has been positive.

If the laws won’t enforce it, how can Nigerians get a collective commitment from local companies to adhere to global environmental best practice? One solution may be beefing up the national oil and gas associations to set environmental standards. The Nigerian Association of Petroleum Explorationists is more of a business club than a standard-setter; the Petroleum Technology Association of Nigeria is mainly a local content promoter. A robust system of checks and balances through an industry association with the remit of monitoring environmental compliance – I have to reference the Norwegians here – would go a long way towards environmental responsibility being something normal, not exceptional, about companies doing business in Nigeria.

This is not to pretend that international companies have all done a great job. In fact, their own environmental failures in Nigeria have contributed to the recent surge in indigenization. The militancy in the Niger Delta that peaked in 2007-8 – and which compelled some international firms to sell their assets to local firms – grew out of a marginalized population angry that local communities are deprived of the benefits of their oil, yet must cope with the mess. Local companies have moved in as international producers sell risky, attack-prone onshore assets and focus on safer offshore plays.

The question remains, though, how local operators deal with security issues in the Delta. The euphemism is that as locals they “know” the scene and can handle conflict better. But will that really matter if they add to the mess in the swamps? How exactly do they handle conflict? If the strategy is to fund counterinsurgent militias and thugs to intimidate fractious communities, as Shell has, it is no improvement.

Finally, the allocation of new contracts that come out of the indigenization process must be subject to the same transparency standards as the contracts they replace. A lot of oil acreage has come on the market in recent years, and as a rule, local companies have snatched it up. The new commercial opportunities have brought in a range of new players, and when put under the microscope not all of them look pretty.

Contracts called Strategic Alliance Agreements (SAAs) are one example. One of the biggest gaps in the reporting of the Nigeria Extractive Industries Transparency Initiative (NEITI), the local chapter of the international transparency benchmark, has been its non-inclusion of SAAs. The best known of these contracts are the ones entered into by Seven Energy and Atlantic Energy, who took on operator status for the the state-owned NPDC after the Shell Petroleum Development Company divested from several oil blocks between 2010 and 2012. Both firms were co-founded by Nigerian business tycoon Kola Aluko – Seven Energy as a local subsidiary of Septa Energy (UK), and Atlantic Energy as a local private company. The disclosures made by suspended central bank governor Sanusi Lamido Sanusi included concerns that the government may have been deprived of some $6 billion through these SAAs.

More transparent license allocation is needed in all aspects of the indigenization of the industry – not just the allocation of production licenses, which are already awarded based on competitive bidding, but also the allocation of SAAs and other contracts under newly open acreage. Who exactly is being awarded these contracts, and what are their technical qualifications? Is the success of new operators based more on their performance or their political or social connections? These questions must be asked as standard protocol for all new producer or operator agreements in the country.

Many Nigerians are proud of the accelerating indigenization of their industry, and rightly so. But without governance mechanisms in place that recognize the difference between local and foreign-run firms, the Nigerian oil sector as a whole risks repeating many of the failures of the past.

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