October 15, 2013

Opportunities and Challenges in Nigeria

Introduction

Nigeria is one of sub-Saharan Africa’s most populous and wealthiest nations, but its prosperity has long been hampered by fractious internal political and security problems. Endemic oil theft, rampant piracy, the influx of illegal arms and an ongoing war against militant insurgency in the north west of the country pose particular threats to its stability.

Political Instability

Democratic since 1999, Nigerian elections continue to be fraught. The most recent Presidential election in 2011 was relatively free and fair, according to international observers, but there are widespread concerns about the economic and political impact of the next Presidential election, currently scheduled for 2015. Some commentators fear that politicians will appropriate public resources in order to win favour with key constituencies. Furthermore, a victory for President Goodluck Jonathan’s PDP party might ignite ethnic rivalries and regional tensions between the largely Muslim north and the predominantly Christian south.

Electoral volatility is distracting the country from desperately needed economic reforms. Parliamentary consideration of a proposed law to reform the oil industry, which accounts for 80% of the national revenue, might well now be delayed until after the 2015 election. Such reforms are vital if Nigeria is to realise the potential of its vast oil reserves. At present, the lack of domestic oil refining capability means that Nigeria can only process one quarter of the oil it produces. More of this wealth could be retained in country if sufficient investment were made into domestic refining infrastructure.

Security Threats

Further hamstringing growth is a recent rash of oil theft and piracy that have brought official crude oil output to a four year low. Piracy in Nigeria, mainly involving the targeting of oil tankers in the Niger Delta, has surpassed that of Somalia in 2013, with 28 reported incidents, and two hijackings, compared with 10 incidents and two hijackings in Somalia.[1] Such thefts are believed to have cost the Nigerian government around six billion US dollars a year in oil revenue.[2] The scale of the problem has led many commentators to speculate that government officials are complicit with the thieves.[3]

There are signs that Nigeria is looking to improve the capacity of its Armed Forces to deal with the ongoing piracy threat. Operation “African Winds”, a joint exercise with American, British and Spanish forces, was started in the beginning of October 2013 with the stated goal of training Nigerian forces to execute military operations in a maritime environment. Such operations are also indicative of the growing Western concerns about the stability of the region.

Internally, Nigerian forces remain unable to quell a substantial quasi-insurgency in its Muslim North West regions. The Boko Haram militants, whose stated goal is to oppose “Western” education, have carried out a number of violent attacks on schools and colleges. In total, they are believed to have killed more than 3,000 people since 2009. Governmental attempts to quell Boko Haram have, so far, proved ineffective.

Conclusion

Companies considering making investments into Nigeria should ensure that they take specialist advice on protecting their onshore, offshore and marine assets, particularly those connected with the oil sector. Investors should also check their current insurance policies to ensure they are sufficient to protect against the multitude of risks that property and in-country personnel face.

  1. https://icc-ccs.org/
  2. http://www.fin24.com/Economy/Nigeria-loses-6bn-to-illegal-oil-market-20130219
  3. http://www.fin24.com/Economy/Nigeria-loses-109bn-to-oil-theft-20130730

If you have any queries about opportunities and challenges in Nigeria, please contact Tony Baungartner at Clyde & Co LLP, or connect to him via LinkedIn.

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