Managing Oil And Gas Investments Amidst Political Instabilities In Developing Countries (Nigeria)

“This particular topic is very dear to me as it was a section of my dissertation research”

Conflicts and political instabilities are regularly occurring events in developing countries such as Nigeria, South Sudan, and Libya a phenomenon that has led to major peace unsettlement and unsustainable development in those countries. Political instabilities occur when government and the overall society fails to meet sufficient requirements that tackle the complaints of the population or a specific group among the population.

A developing country is also known as a third world country or a less-developed country is a nation with minimal advanced industrial base and a low Human Development Index (HDI) to other countries such as America or Great Britain. The majority of the countries in Africa are unfortunately classified as a ‘third world country’ however since the 1990’s developing countries have established superior growth rates than the developed countries.

The events of dispute and political instability will, unfortunately, remain and overrule political debates by both academics and non-academics. The second largest continent in the world, Africa has gone through and still enduring many unsettled phases of corruption and war. In several African countries, the characteristics of political authority in an association of gaining possession and preserving power are the main cause of conflict and political instability throughout the continent. In most cases, the political victory means a “winner-takes-all” form with respect to wealth and resources, patronage/prestige and prerogative of office (Arriola, 2009). After many research and studies on the subject of conflict and political instability in developing countries, it has been proven by business managers that Africa’s political instability is one of the main barrier blocking the growth of economic development. Nevertheless, many top oil companies still persist in investing in African countries such as Shell in Nigeria and China National Petroleum Corporation (CNPC) in South Sudan.

Nigeria started drilling for oil in the late 1950’s and during the oil boom in 1970, dissatisfaction led to an outbreak of civil war.  Until 1960, Britain ruled over Nigeria including their natural resources which limited the government participation in the oil industry and administration of fiscal policies. Around the same year, an announcement of the country’s independence was declared, however, Nigeria was not ready for independence. Six years after, the cultural and social friction between the North and the South exploded into a number of bloodsheds, creating a military coup that established the first successions of the military government. This terrible event resulted in a three-year civil war. Nigeria, however, joined OPEC after the civil war.

As a result of corruption and exploitation of power, the oil market has made a very small contribution to the social and structural development of Nigeria. The majority of the Nigerian population fall short to see the investment of the oil revenue back into their lives. Almost 95% of the oil produced in Nigeria is obtained through joint venture such as Shell, is the largest producing approximately 50% of the country’s oil. Shell is a multinational corporation that has been directly involved in the economy, politics and overall development of Nigeria.

Nigerian Oil Blocks.gif
The Republic Of Nigeria Oil Field Map

Political instability in Nigeria has been going on since the state declared independence and the local communities in north and south unfortunately clashed. Extensive conflict and militant rebellions in Nigeria has been the talk in international news media, with the not long past example being the ambush carried out by Islamist militant group Boko Haram on the citizens in Maiduguri, located in Northern Nigeria. The Boko Haram attack is one of the many examples of not long past interference of the peace, creating more and more instabilities in the country and controlling not only the civilians and the political leaders but also multinational corporations operating in Nigeria, such as Shell.

Quick transformation in Government policies has led to a major impact on multinational oil companies in the Nigerian petroleum industry including Shell, this is because when a government comes to power, planning established by the previous government gets terminated and new policies that may or may not favour MOC’s are then instituted. Due to political instability, a prolonged establishment has captivated the oil industry.

Oil spillage in Niger Delta

The main oil area in Nigeria is located in Niger Delta, the militants in that particular area have made Shell and other MOC’s operations very difficult for them to operate, affecting the production of oil all because of the disagreements and lack of connection between the local communities and the companies. This could be blamed on the previous deprivation of CSR from Shell in terms of oil spillage and several damages to the land caused by the company. The militants are not in any understanding of Shell’s activities, they believe Shell Nigeria does not have the right to be on their lands as there is no important development being contributed to their areas even though there is a great quantity of oil being drilled from Niger Delta communities every day. Therefore, to terminate and slow down Shell’s daily oil production, the militants confiscates oil wells, kidnap expatriates for a great sum of payment in return and even blow up oil wells. The problem here is, the citizens want a percentage of the oil revenues gained by Shell for their communities as nothing has been given to them or if it has it’s been mishandled by the top officials in the government which is another form of corruption in Nigeria.

Niger Delta  (Nigeria)

Major multinational oil companies that invest in developing countries such as Nigeria are very much aware of the political instabilities going on in the country. Some companies do prepare ahead before deciding to sign an agreement or invest in the country. However, matters of politics and conflicts are very unpredictable and could occur at any time during an operation. Political risk is enhanced by the transition of laws, unstable leadership and the rebellion of the population. The scale of impact given to any risk relies on the circumstance the investors agree on. Oil and gas companies usually favour countries with secure political systems and the past of awarding and implementing long-term leases. However, certain companies without a doubt just invest where there’s crude oil despite the political instabilities in the country. Several problems might surface including unplanned nationalisation. A significant procedure that oil companies conduct in mitigating risk is to critically analyse and build a sustainable connection with it’s International Oil and Gas partners if the company wishes to continue operating there.

Political risk analysis is highly recommended when a company wants to invest in a developing country. It identifies, assesses and addresses problems related to political risk. The aim of political risk analysis is to give knowledge on the characteristics and status of political risk for investors to make decisions about their investments and business operations, and to also handle any political issues in a manner that the contradictions won’t affect the business mitigated. Risk assessments help the investors in considering the opportunities of high returns against potential losses (Brink, 2004, pg. 148). Political risk analysis is very effective in problem-solving and decisions making a theory, “generally assumed to be a theory underlying rational decision making under uncertainty” (Brink, 2004, pg. 30). According to Venter (1999, pg. 1), the principle of reasoned and defensible decision making is that a “decision maker should foresee future events, summarise the measure of control to find out the possibilities for those events by making the right decisions for the best outcome”.

Thank you for reading

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