Spare the Rod or the Reward- Nigerian Petroleum Industry + M&Ms

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At dinner with a friend of mine this weekend, I was told about Levitt’s potty training thought experiment. I found it fascinating how a 3 year old for the reward of M&M’s would pee several times instead of peeing all in one go, to get what she rationalised was due to her. We discussed how we had to be intelligent parents and always be ahead of our kids with our individualised ‘reward’ systems. Levitt’s potty training experiment is a great example of how incentives can have unpredictable effects. Kids are able to understand the system and find loopholes and disobey rules, get the rewards, because they are ‘entitled’- BECAUSE they understand the system so well, that they can cut corners, and at this stage it is very cute. Now relating this analogy to a country, unless the systems are continually updated and upgraded, it makes it so easy for rewards to be ‘misplaced’. Similar to Levitt’s potty training conclusion, the reward system brings about ‘unintended’ consequences unless it is constantly modified and updated, and for a nation like Nigeria, the reality that the reward system is dependent on the future of many lives means a lot of hard work must go in now.

The Ribadu led task forces’ 6month report simply confirmed the conclusion that a lot of hard work is required in the petroleum sector. The report synthesised the ‘available’ facts and confirmed that the government had to tighten its belt, earn a lot more money from the resource, demand what it is due and reform the sector by upgrading the outdated legistlation that governs it. If you are anything like me you will save the report and use it as a reference, so that you can remember how the country should be earning revenues from petroleum. You will also use this as a reference point to review the long awaited Peteroleum Industry Bill (PIB), when it finally becomes enshrined in the Nigerian law books.

The Ribadu report has been in the press for the last two weeks, and the government will probably do anything to discredit it. Naming Oransaye and Oti (two members of Ribadu’s team) Board members of the NNPC during the task force process, is not only a conflict of interest, but undisciplined government behaviour with direct intent perhaps, to ensure that the hard work put into the report would be made redundant. Wisdom however dictates that we should deduce from the report what is essential to improve visibility in the sector. I was so glad when the numbers were deemed ‘falsifiable’, because firstly numbers are not my thing and secondly in the short time span for review, there was not enough time to independently verify data in the report and unbundle the data.

What falsifiable means is simply that the theory is up for scientific debate, even if the numbers are not fully correct this time, it is a template that can be worked on for facts to be proven in the future, so from a philosophical point of view this is a very worthwhile study/report. The reality is numbers are redundant in Nigeria because of the deliberate efforts by the government not to automate information; a 6month process cannot data mine 10 years worth of data without any comparative data source. This links in with an economist article last week, which comments on the fact that Nigeria as the largest oil producer in Africa should be able to calculate its daily oil production http://www.economist.com/news/middle-east-and-africa/21564906-goodluck-jonathan-says-he-wants-reform-oil-industry-really It is easy to criticise the Ribadu report, but apart from the KPMG, PWC, HSBC, DFID AND CBN numbers they got their hands on, how else can they verify the numbers provided in the report? Makes you realise that Nigerians to some extent do not like honesty, the Ribadu team provided a report with limitations clearly spelt out, surely this is the first STEP to visibility we are striving for.

What was the most interesting thing that Ribadu found out????

  • “Nigeria being the world’s only major oil producer that sells 100 percent of its crude to private commodities traders, rather than directly to refineries.”
  • Production could drop by 20percent by 20/20- Vision 20/20 takes on a whole new meaning
  • Why is the government reluctant to optimise revenue flow from petroleum industry to federal government? For example 15 August 2011, gas flaring increased from N10 to$3.50 – new rate is approx 500 naira why isn’t this enforced today?

We are in trouble because:

  • There is a low demand for Nigerian hydrocarbon products globally
  • There is low investment in the sector, and as a result exploration has reduced. The nation has not made the necessary investment ($3.7bn estimated by NNPC), to increase the proven oil reserves and to upgrade drilling equipment to maintain current levels of output in 2014.
  • The per barrel earning reduction due to outdated technology and drilling infrastructure and outdated reservoirs – the projection is that the government will learn LESS from onshore oil (Nigerian government has larger percentage share in onshore agreements) due to the growth in alternative finance mechanisms.

We have all gone past the stage of feeling entitled to own large oil reserves, the incentives the government gets for sitting on a minefield are long gone, and these have to have translatable rewards for the citizens. If the petroleum industry is having huge difficulty balancing the country’s revenues, it is evident that the Nigerian petroleum sector requires a lot of discipline, what system is required is the question? Corporal punishment, ‘spare the rod’ and spoil our flood of national resources, may be the required alternative to secure a future nation for our children. I agree with the Ribadu reports’ projections, the government needs to tighten its belt; the only way this can be done is through an automated, disciplined and visible process. Simply said, dear GEJ getting the PIB into law is simply not good enough anymore, understanding that it is a constant work in progress legislation is more pertinent. The Nigerian government needs to change its potty training approach, so that trickles of our resource do not get incentivised by M&M’s; we have to structure and police constantly changing legislation surrounding our coveted resource.

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One thought on “Spare the Rod or the Reward- Nigerian Petroleum Industry + M&Ms

  1. Pingback: Due Process: GEJ Get out of Jail Free Card | Amamuses

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