How Nigeria's Economy is Ruled by Petroleum

Relevance to this course (EOSC 311) and my major (International Economics)

Module three coined 'What’s the fuss about fossil fuels' is directly relevant to this project where I dive into the impact petroleum, a type of fossil fuel, has on Nigeria's economy. I will draw on the sub-module 'The formation of oil and gas' to help explain how this oil and gas became deposited in the first place. Additionally, I will be relying on the open-source textbooks used in class such as the BC open course Physical Geology for understanding geological processes involved in petroleum formation. I hope to solidify concepts learned in class throughout textbook readings and modules while also introducing new, more specialized geologic concepts.

Question to think about while reading: How does the Niger Delta Basin compare to the Intermontane Basin in Canada?’

Another goal of this project is to relate geology to my major International Economics. While it is probably obvious through the title of this project and the name of my major, I wanted to analyze the economy of a non-Canadian country (Nigeria) and show how it depends on natural resources (petroleum). This is particularly relevant to a course I took called ‘Understanding Globalization’ (ECON 255) which was all about other countries' economies and how countries interact through trade. Since petroleum exports are Nigeria’s primary export, the explorations and findings of this project will tie into this course well. This project broadened my world view on economies beyond North America which I believe will be helpful in my future economics courses. But even if you aren’t an economics student or geology major, I hope you find some value in this project and can find a takeaway applicable to your major.

The geology behind Nigeria's oil

Introduction to oil and background information on Nigeria:

Nigeria's location in context to the globe

The Niger Delta Basin and known oil deposits in the region (black dots)

Nigeria is a relatively large country in Africa with a total area of approximately 1 million km² which is very similar to the size of British Columbia. It is located very close to the equator in the middle, west of Africa with some of its border being on the coast.

Africa lies on the African tectonic plate which extends out to the ocean until the mid-Atlantic rift. Nigeria is situated in the middle of this plate (so has avoided much of the negative effects from plate interactions that occur at tectonic plate borders such as earthquakes). All the oil in Nigeria is found in the southwest, where Nigeria borders the water, and is coined the ‘Niger Delta Basin’. Here lies the heart of the petroleum industry which serves a similar role to Nigeria as Alberta does to Canada. Alberta produces so much oil that all of Canada is known for its oil production even when other regions have little oil and gas- and that’s the same for the Niger Delta Basin and Nigeria. While the Niger Delta Basin is relatively small the entire country relies on it for its resources to drive the economy. However since oil is created through subduction this country must have, at one point, been at the border of tectonic plates. We will go into why Nigeria got this oil later but first a recap on how oil and gas are created in the first place.

We have learned in module three how oil has been produced from the accumulation of small organic matter dominated by plankton. Over years these plants and animals sink to the bottom of the ocean at the end of their lifespan and become buried under more sediment or the ocean floor was anoxic which means it didn't have any oxygen. This didn't allow proper decomposition resulting in CO2 becoming trapped. Now, much of this carbon dioxide gets released however some of it stays trapped as more and more sediment accumulates on top. When this accumulation increases so does the pressure and temperature of the original layer with the plankton. This causes an initial shift in chemical composition from organic sediment to kerogen at 50 degrees centigrade (C) which looks like a waxy material. As it continues to get buried at 80-120 degrees C this material finally converts into oil, if it gets even hotter it will then turn into gas although once it goes beyond 260 degrees C it will turn into graphite. The sweet spot where oil and gas can be found is called the oil and gas window.

An example of a structural oil trap (anticline) that represents the types of traps found in Nigeria. Notice the layers of rock with the source, reservoir and cap rock as learned in class.

The key component here are traps, the oil and gas must be trapped in order to stay in place for us to extract to use as energy. Without traps once turned to oil it would rise (as it of a lower density) and escape from its home in the source rock into the ocean. Traps are geological structures usually consisting of faults or folds which capture large amounts of oil and gas. These traps are headed by cap rocks which are impermeable layers that keep the oil and gas inside the porous rocks below called reservoir rocks. A common source rock is shale, reservoir rock is sandstone, and cap rock is again shale. As we learned not everywhere that oil and gas have formed is a viable economic resource so traps must be researched and proven to have abundant reserves of oil and gas in order to start extracting. More on how Nigeria extracts its resources below but first why Nigeria boasts so much oil and what geological processes led to the abundance of this resource.

Why Nigeria has oil

After learning how oil formed you may be wondering how Nigeria has so much oil given it is in the middle of the African continental plate. This is because, as we know, tectonic plates are constantly moving. What are borders today between plates will one day migrate and become the middle of continental plates through the slow but steady process of accretion where oceanic crust is thrust up onto the continental plate it is colliding with. However, in Nigeria’s case, this oil actually formed from a three-plate rift in the southern Atlantic moving apart in the later Jurassic and Cretaceous periods. This ‘triple junction’ resulted in a failed arm which creates the perfect conditions for hydrocarbon deposition. The actual Niger Delta Basin didn't start developing and accumulating sediments until the Eocene period.

In this period there were significant depositions called the Agbada Formation. This rock become the source rock for the petroleum extracted today. While some oil and gas is also found in the marine cretaceous shale the Agbada Formation is the primary source. This oil is then housed in sandstone and trapped by shale in various tectonic structures. One such trap structure is the basin inversion where the basin was uplifted and compressed. This creates little ‘pockets’ where the cap rock froms a dome structure where oil and gas cannot escape called anticline traps (see photo).

To understand these traps experts will look into the lithology, which studies the physical characteristics of rocks, in this area. There are three major depobelts (distinct periods of deposition) that prove to have different characteristics and harbor different structures for potential oil traps. For example, the Northern Delta province has evenly spaced deep growth faults. Understanding the lithology is integral in determining how and where they should explore for oil and gas exploration.

How Nigeria's oil is found and extracted today

The oil and gas must first be discovered. While they know the general region where this resource resides the actual traps are unknown unless you use imaging and exploration techniques. The Nigerian Petroleum Corporation (NNPC) has advanced its techniques using new technologies where through integrated data services they produce 3-D configurations from field data. These images are then interpreted to determine the locations of potential economically viable oil traps.

Currently, most of the oil is extracted from structural traps. These traps are the result of changes in tectonic or compaction levels causing the sedimentary rock to deform allowing for oil and gas to travel upwards and potentially get stuck by forms such as anticlinal traps or fault traps. In the future. There are plans to explore deeper in the basin underwater where more of the traps are stratigraphic often from periods of unconformity. Once the location of the petroleum is found companies will then start drilling through the cap rocks into the reservoirs causing a release in pressure and since oil and gas want to rise it will naturally exit its underground position. This results in crude oil which is unrefined. While some countries will process this crude oil Nigeria finds it more economically advantageous to merely export this unprocessed oil to other countries where they can then do the refining. There are many types of crude oil but the type that Nigeria produces is light crude oil which is low in sulfur contents and can be used for many purposes such as gasoline and diesel.

Sustainability and the future of oil in Nigeria

This photo demonstrates the harmful effects of greenhouse gases such as carbon dioxide which are emitted by fossil fuels such as petroleum.

Oil and gas are nonrenewable resources meaning we have the potential to run out. Unlike wind or solar energy, oil and gas take millions of years to form. Since the rate of extraction far exceeds the rate of replenishment we cannot use this resource indefinitely. However, this isn’t the primary concern for Nigeria, at current consumption levels they have almost 250 years until they would run out. But that is taking into consideration current known reserves. Nigeria still has great potential to diversify into stratigraphic deposits out deeper in the basin to find new reserves which would be underwater. These deposits have been off-limits in the past because of technological restraints but as Nigeria becomes more advanced through organizations such as the NNPC they will soon be able to exploit these areas. So the natural restraints will not get in the way of this sector however environmental restrictions in the future may.

Visual representation of the ice-albedo effect which is one of the many positive feedback loops caused by increased carbon dioxide emissions.

We learned how oil and gas along with other fossil fuels are responsible for climate change. This occurs because greenhouse gases absorb infrared heat energy instead of reflecting it all back into space. The absorption makes particles vibrate at higher rates giving them more energy which in turn increases the temperature we experience. This is in aggregate an advantageous property- it’s a primary reason we have an atmosphere and life can form! However, when the quantity of greenhouse gases increases beyond a threshold many positive feedback loops are set in motion. For example, as icebergs melt with temperature increases they turn into water. Water absorbs more heat which then increases the temperature and melts more glaciers causing a repeating cycle termed the ice-albedo effect (see photo to the left).

In the Paris agreement, many countries promised to limit global warming to below two degrees. In order to achieve this countries would need to diversify to other energy sources like hydropower (which BC is incredibly reliant on but come with its own environmental concerns as learned in class). If all the known fossil fuel reserves were burned off today average temperatures would increase by approximately ten degrees C, and Arctic regions would increase by upwards of twenty degrees C. Obviously humans will stop using fossil fuels to the extent that we currently do before we naturally run out of reserves (and these statistics are for known reserves, there are many reserves still undiscovered). Therefore even though Nigeria has enough oil to rely on for hundreds and hundreds of years the environment would break down before the reserves ran out meaning hopefully countries will stop buying Nigerian oil in the quantities they do today. If Nigeria was unable to export in high quantities they would be forced to shut down many drilling sites and their economy would crash.

Nigeria's economy focusing on oil reliance

Nigeria’s economy on aggregate

Before we dive into petroleum and the economy, I first want to explain how Nigeria’s economy looks as a whole. I chose to focus on Nigeria because it has the highest GDP out of any country in Africa at 430 billion dollars (USD which all the figures following are quoted in as well). But this high figure is only the tip of the iceberg. When you get more into the data it becomes clear that this country isn’t as well-off as it may first appear. Diving into GDP per capita, which means the average amount each person gets in the economy, this figure is only $2,100 which puts Nigeria barely in the top twenty in Africa on this measurement. This means that even though the total production of the economy is high, the population is also very high so living standards will potentially be lower than in a country with a lower GDP. For reference, the Canadian GDP per capita is $42,000. GDP is further subdivided into sectors such as agriculture or services. The petroleum industry is one of these sectors and only contributes on average eight percent to the total GDP.

You may be calling into question my entire project, thinking why would Nigeria’s economy be ruled by petroleum when less than ten percent of its GDP per quarter is derived from this sector? The answer lies in the government budget and export shares.

Oil and gas only make up eight percent of GDP so what's the big deal?

A visual representation of exports from Nigeria: notice how much area crude petroleum takes up.

The government relies heavily on oil and gas to fund governmental activities; 70% of budget revenues are generated from this sector. While this is great in periods when the global prices are high it can cause downturns and even recessions when oil prices slump. Budgets are created from predictions on future oil and gas prices however these prices are extremely volatile and frequently deviate from expectations (think about the aggressive increase of oil prices in Vancouver due to Russian conflicts in 2022). Because of the unpredictability of this market the government is building itself upon a house of cards, that given the right moments of uncertainty and poor luck has the potential to destroy what little services and stability the government provides. More on the dangers of this reliance in the next section. But first, another way Nigeria’s economy relies on oil and gas is through exports.

Exports are the key to a country's economic success. Globalization is the trend of countries opening up and starting to specialize in what they are good at (comparative advantage) and it is the reason smaller countries can be so successful today. In order to continue advancing and reducing poverty African countries must lean into globalization through exporting and importing, building relationships with other countries. While Nigeria does export and doesn't have a closed economy its export revenue is made up of 86% crude petroleum exports. This lack of diversification is dangerous in a fast changing global world.

Why this reliance is dangerous

You can see here how much prices of oil fluctuate, in 2012 it was almost $110 then in 2016 it sunk to just over $40. This is a serious range when Nigeria relies on this price so heavily.

As mentioned above are world is rapidly changing with new technologies constantly being created. With the shift away from fossil fuels, we will someday no longer rely on these pollution-inducing agents to power our lives. However, if the world stopped needing oil this would be incredibly damaging to the Nigerian economy. It would quickly have next to no exporting revenue. But this problem is in the future. The reliance also presents current-day issues that are equally damaging.

As hinted above under the government budget section we learned that oil and gas prices can be volatile (meaning the price will have many fluctuations see photo to the left). Trends in global energy prices can be correlated to periods of GDP growth or contraction but even more concerning is it directly impacts the Nigerian currency (Naira). When oil prices plummet this makes the Naira decrease which in turn makes imports appear more expensive causing everyday prices such as food prices to increase for the average consumer. It was shown that this effect isn’t only restricted to actual trends in the prices and was seen from pure speculation in 2020 when Saudi Arabia and Russia were in a downward petroleum price war.

Another danger to the Nigerian economy pertains to the high regulation of oil and gas by the Organization of the Petroleum Exporting Countries (OPEC). This organization fully controls the amount of oil and gas Nigeria is allowed to bring to the market. So in periods of downturn Nigeria cannot merely make more oil to increase exporting revenue as they are bounded by contracts that restrict their production.

Both these dangers are completely out of Nigeria’s control so they can't solve them, the only solution is diversification away from oil which I will elaborate on in the final section on Nigeria’s Future.

Living conditions and the curse of natural resources

Non-economic determinates of a nations well-being

A visual map of HDI by African countries (darker colors represents lower development). While Nigeria certainly isn't the worst country it falls behind many countries with lower economic indicators.

It's clear that the Nigerian economy is in a dangerous position with its reliance on oil and gas however it is less clear that Nigeria is one of the poorest nations, with the worst living conditions on the planet. The raw numbers don't tell the whole story. In this section, I will introduce two other indicators for a countries living conditions and use the curse of resources to show how a lucky country in terms of resources often ends up being less developed.

The first and most popular method of measuring living conditions is the Human Development Index (HDI) as developed by the United Nations. This index ranks a country on key dimensions including life expectancy and average educational years. This provides a more subjective rating of countries while still being based on concrete data. Nigeria ranks in the lowest category of this index under ‘low human development’ and falls behind many other African countries.

Another way to measure living conditions is to look at how peaceful and safe a nation is. A well-researched metric for determining this is the Global Peace Index (GPI). Again Nigeria ranks very low in this measurment (39th in Africa). While it ranks higher than some other African nations such as Somalia it also gets seeded below many countries with lower economic indicators like GDP.

Why despite plenty of resources such as petroleum Nigeria is such an under developed nation

The curse of resources is an academic term referring to the correlation between countries that have more natural resources and lower levels of development. The term less developed in this context refers to lower levels of democracy, economic growth, and human development indicators such as the HDI or GPI. While the exact cause of this phenomenon is unknown it can be linked to poor management of resources (such as militias taking control of the resources) or ‘laziness’ in lack of diversification. This quickly got beyond the scope of this project diving more into the political science region. But below I will provide more information on how Nigeria can escape this trap of natural resources

The Future: How Nigeria can escape from its overreliance on oil and gas through Techonology

Overview of what has been covered

By now we have learned that the Nigerian economy is extremely reliant on the oil and gas sector. This reliance stemmed from luck of being under the correct tectonic plates millions of years ago that underwent geological processes allowing for fossil fuels to form. Since industrialization society has increased its ability and capacity to extract these resources and Nigeria has profited from its land. However, this gift may actually be a curse leading to poor development and living conditions. But all is not lost, I will outline what the future of Nigeria could look like and how they should prioritize resources to escape this trap of resources.

Technology sector in Nigeria

A group of technology focused individuals in Nigeria contributing to the emerging technology sector.

As hinted throughout this piece the key takeaway is Nigeria must diversify away from petroleum. But this is easier said than done. Diversification requires initial funding to invest in new companies and sectors beyond current money generators. Since Nigeria doesn’t have significant government funds to draw from this becomes more difficult to enact the initial catalyst to create change.

However, Nigeria already has a promising technology sector that has been building in the past few years and has the largest tech market in Africa. Already there are 90 tech hubs that have been identified which are areas having a high density of start-ups (like miniature versions of Silicon Valley). However, this sector is still in the very early days, while 400 startups valued at more than two billion may seem like a lot it pales in comparison to countries such as India which have around twenty ‘unicorn’ companies (companies valued at over one billion dollars). It has been recommended by researchers that the way forward is for Nigeria to implement strategies similar to India. The Indian technological growth model involves points such as reducing the cost of mobile data (it only costs $0.66 for a gigabyte of data on average in India compared to $6.00 in Canada), creating open-source applications (APIs), and promoting digital payments/currencies. In addition, they must leverage the young population by teaching technological literacy to young school-aged children such that more people have the ability to understand and create new technological innovations.

Building out the technology sector will also benefit existing sectors such as the mineral and other natural resources that we have learned about in class but haven’t focused on such as tungsten, nickel, manganese, gold, etc. These minerals are all found in Nigeria and are integral components in the creation of computers and phones (as we learned in the ‘what's in my cell phone' module). Additionally, investment in technology would help improve productivity in other sectors such as agriculture and services.

Brain drain harming development

While this all might seem like the perfect, simple, solution there is one key issue that arises that hasn’t been solved yet called ‘Brain Drain’. This is a phenomenon where the most intelligent people migrate away into more developed regions that are able to offer more support. For example, a large start-up in Nigeria would want to move to Silicon Valley where they can be closer to mentors and other resources for success. Or someone that just got a master's degree in computer science from a US institution may receive more attractive offers away from their home. A way to combat this issue has been researched in regards to ‘global skill partnerships’ and create governmental frameworks for individuals to travel abroad from schooling but be incentivized/mandated to return home.

Why we should still be hopeful for Nigeria's future

When brain drain is addressed in addition to support given to stimulate the technological sector it will become a self-perpetuating positive feedback loop (kind of like the feedback loops involved in climate change). As more technology companies become successful the Nigerian government will be able to tax them to generate governmental revenue. This revenue, unlike oil and gas revenue, will be much more resilient to external factors allowing for more accurate budget forecasting. In addition unlike oil and gas, this revenue has significant growth potential and isn’t capped on natural or OPEC-related restrictions. As this revenue increases the government can reinvest in the technology sector repeating this loop which will end in a more developed and safe region to live in. We have already seen technology change other countries' economies and living standards for the better. Nigeria can be next, they just need to generate the nudge starting the positive feedback loop of technological growth, finally diversifying away from an economy ruled by petroleum.