How Nigeria’s oil industry went local

By Matt Mossman

The ’biggest real-estate foreclosure in Manhattans history began with a Nigerian jet-fuel binge. Kola Aluko, now in hiding from the authorities of multiple countries, allegedly spent so much money on jet fuel that he could no longer pay the mortgage on his Midtown penthouse, which was consequently auctioned for $36 million in late 2017. Aluko is a central figure in criminal trials for money laundering and petro-business now underway in Houston, Lagos, and London. Media coverage has, understandably, focused on the juicy details of his spending. Along with the penthouse, he owned a yacht that Jay Z and Beyoncé once rented for her birthday party, but now, on orders of a Nigerian court, sits idle with other seized cars and jets.
A less-discussed byproduct of the alleged crimes committed by Aluko and his conspirators in the Nigerian government, however, is how they catalyzed what was possibly the largest ever transfer of energy assets from foreign companies to local ones. This is not meant to reframe Aluko as an improbable hero; it is to say, however, that domestic companies in Nigeria now control more of the country’s oil and gas resources than ever before, and they are poised to deliver economic gains that Nigeria has always wanted but never had. It is well worth examining how the of Aluko and others may have led to this outcome-and considering how it might be achieved without graft.
The relevant scheme involved Aluko allegedly brokering deals for Nigeria’s then Minister of Petroleum Resources, Diezani Alison-Madueke. Between 2010 and 2015, while Alison-Madueke held her post, several international energy companies decided to sell oil or gas fields in Nigeria. Some left the country, fed up with the chaos; others were retreating from conventional onshore fields to offshore ones, hoping that there they’d be safer from the militant groups in the Nigerian Delta.
Sales of such large oil blocks often require government approval. One of the charges against Alison-Madueke and Aluko is that the former used her government power to steer the sale of these fields to Nigerian interests that bribed her, while Aluko (and others) facilitated the graft. If true, the narrative conforms to a familiar script: local elites scalped their countrymen in a resource-rich developing nation.
But there is another outcome, as well-one with broader lessons for observers. As a result of the funneling of major oil blocks to local energy firms, a growing group of local Nigerian oil-and-gas entrepreneurs now controls 18.9 percent of oil production and 18.2 percent of gas output, according to state statistics, which the IMF and International Energy Agency, among others, use in their analysis.
This is unprecedented. In most countries, oil-and-gas production is the job of global giants such as Shell and Exxon, or state-owned entities such as Saudi Arabia’s Aramco and Brazil’s Petrobras. Small, local, private energy companies are so rare that finding data to make a precise comparison to the current prevalence of them in Nigeria may not be possible. Global groups such as the International Energy Agency don’t track production figures according to company type, and major energy consultancies and data providers either do not track-or are wary of sharing-this information. But according to David Kessler, a director at PLS Inc., an oil-and-gas advisory company in Houston, Nigeria is unique among the 20 countries producing over one million barrels a day, in that it has such a significant proportion of its output controlled by small, local companies.
This is worth emphasizing because, as is frequently noted, the shift to local control is an elusive goal in most cash-poor, resource-rich economies. Other such states have begun looking to Nigeria as an example. Ghana and Kenya, for example, put local-content quotas into their resource-sector laws. Brazil and Colombia copied another Nigerian solution: holding bidding rounds to transfer smaller, marginal fields to local companies. Nigeria’s circumstances are particular-few other countries produce as much oil, or have such a roster of foreign investors-and of course its is unworthy of emulation. But are there other lessons that other countries could learn from what it has done? It’s still early, but Nigeria’s experience suggests that there might be.
Local companies have no choice but to cope with ’Nigeria’s dysfunction, which means they are willing to invest to improve it. When militants bomb a pipeline, major producers can let it lie idle. But locals must scramble to find an alternative. “The local companies are innovative,” Amy Jadesimi, who founded a Nigerian energy logistics and services company called the Lagos Deep Offshore Logistics Base, told me. “If they can’t use pipelines or roads, they’ll try ships and trains.”
So what can be done to catalyze this investment-prone local control without resorting to corruption? Development economists recommend routes that are legal, but slower, such as establishing local content. However, progress at such a slow pace isn’t ideal. Politicians want results before the next election, and that leads them to take too many risks or resort to corruption. Tanzania threatened to nationalize gold mines after Acacia Mining Plc refused to build a smelter there, and Indonesia temporarily banned exports of some minerals to force local investment. In both cases, the foreign firm agreed to increase the state’s share of its profits and ownership, but these moves have yet to create opportunity for local entrepreneurs.
Although corruption may have factored into the speedy transfer of ownership under Alison-Madueke, there may be an honest way to achieve comparable success for leaders who are patient enough, or if the slow process of developing local capacity and access to finance can somehow be accelerated.
For now, Nigeria’s local startups have enough oil and gas under local control to keep building new infrastructure, led by Dangote’s company. It is building an oil refinery in Lagos that will be able to satisfy domestic and export demand. His company is also building fertilizer and petrochemicals plants, and is a minority investor in the development of offshore gas fields and a pipeline to take offshore gas to dry land. As with the refinery’s fuel output, the plan includes gas left over to sell after meeting Dangote’s needs, and that means more investment, training, and employment opportunities. With enough of these, the big foreign energy firms may finally be convinced that investing in Nigeria’s economy-instead of just extracting its resources-is worth the risk.

Mossman is an emerging markets political risk specialist based in Washington, D.C. This article was first published in the Foreign Affairs on November 29, 2017

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