CHAPTER ONE

INTRODUCTION

1.0 YEARLY SALES OF PETROLEUM

The search for oil in Nigeria started as early as 1937, but its discovery was not made until 1956. The sale of petroleum products began in December 1957 and was managed by a consortium of Royal Dutch Shell and British Petroleum (BP), now known as Shell Petroleum Development Company (SPDC). G.A. Aga (1993) stated that Nigeria was the second oil-producing nation in Africa after Libya and the sixth in the world.

In May 1971, the Nigeria National Oil Company (NNOC) was established under the Companies and Allied Matters Act of 1958, as applicable at that time. The NNOC was the government agency mandated by law to engage in all phases of oil production and sales. In 1977, the NNOC was amalgamated into a full-fledged Ministry of Petroleum to form the Nigeria National Petroleum Corporation (NNPC), which operates in partnership with several oil companies from different countries operating in Nigeria. Before October 1965, Nigeria's crude oil was refined overseas, and all processed petroleum products required in the country were imported. The first refinery plant came into operation in 1965 and was located at Alesa Eleme near Port Harcourt. Later, the Warri and Kaduna petrochemical refineries were established in 1978 and 1980, respectively. Similarly, the Pipeline and Products Marketing Company Ltd (PPMC) Enugu Depot was commissioned on 25 August 1975 by the then Military Governor of the old Anambra State, Colonel D.S. Abubakar. The last was the second refinery in Port Harcourt. It is, however, worthy to note that NNPC has several subsidiary companies, including the Pipeline and Products Marketing Company (PPMC).

1.1 DISCOVERY OF CRUDE OIL IN NIGERIA

Oil was discovered in Nigeria in 1956 at Oloibiri in the Niger Delta after half a century of exploration. The discovery was made by Shell-BP, which at the time was the sole concessionaire. Nigeria joined the ranks of oil-producing countries in 1958 when its first oil field came on stream, producing 5,100 barrels per day (bpd). After 1960, exploration rights in onshore and offshore areas adjoining the Niger Delta were extended to other foreign companies. In 1965, the EA field was discovered by Shell in shallow water southeast of Warri.

In 1970, the end of the Biafran War coincided with the rise in world oil prices, enabling Nigeria to reap substantial financial benefits from its oil production. Nigeria joined the Organization of Petroleum Exporting Countries (OPEC) in 1971 and established the Nigerian National Petroleum Corporation (NNPC) in 1977. The NNPC was a state-owned and controlled company and became a major player in both the upstream and downstream sectors [Blair 1976, pp. 98–120]. Following the discovery of crude oil by Shell D'Arcy Petroleum, pioneer production began in 1958 from the company's oil field in Oloibiri in the Eastern Niger Delta. By the late 1960s and early 1970s, Nigeria had attained a production level of over 2 million barrels of crude oil per day. Although production figures dropped in the 1980s due to economic decline, 2004 witnessed a total rejuvenation of oil production to a record level of 2.5 million barrels per day. Current development strategies were aimed at increasing production to 4 million barrels per day by the year 2010. Petroleum production and export play a dominant role in Nigeria's economy and account for about 90% of its gross earnings.

This dominant role has pushed agriculture, which was the traditional mainstay of the Nigerian economy during the early 1950s and 1960s, into the background. While the discovery of oil in the eastern and mid-western regions of the Niger Delta pleased hopeful Nigerians and provided an early indication that economic development was within reach soon after independence, it also signaled a danger of grave consequence. Oil revenues fueled already existing ethnic and political tensions and actually "burned" the country. This tension reached its peak with the civil war that lasted from 1967 to 1970. As the war commenced, the literature reflected the hostility, impact, and fate of the oil industry. Nigeria survived the war and was able to recover mainly through the huge revenues generated from oil in the 1970s. For some three years, an oil boom followed, and the country was awash with money.

Indeed, there was money for virtually all the items contained in the country's developmental plan. The literature of the post-war years shifted to an analysis of the world oil boom and bust, collectively known as the "oil shock." Starting in 1973, the world experienced an oil shock that rippled through Nigeria until the mid-1980s. This oil shock was initially positive for the country, but with mismanagement and military rule, it eventually became an economic disaster. The larger middle class produced by the oil boom of the 1970s gradually became disenchanted in the 1980s and rebellious in the 1990s. The enormous impact of the oil shock could not escape scholarly attention. For almost twenty years, from the 1970s to the 1990s, there was a virtual obsession with analyzing the consequences of oil on Nigeria using different models and theories. A set of radical-oriented writers was concerned with the nationalization that took place during the oil shock, as well as the linkages between oil and an activist foreign policy.

Regarding the latter, emphasis was placed on OPEC, Nigeria's strategic alliance formation within Africa, the vigorous efforts to establish the Economic Community of West African States (ECOWAS), and the country's attempts to use oil as a political weapon, especially in the liberation of South Africa from apartheid. If many had hoped that oil would transform Nigeria into an industrial power and a prosperous country based on a large middle class, they were disappointed when a formally rich country became a debtor nation by the 1980s. The suddenness of the economic difficulties of the 1980s "bust years" had an adverse effect on class relations and oil workers who understood the dynamics of the industry. As if to capture the labor crisis, writings on oil workers during this period covered many interrelated issues, notably working conditions, strikes, and state labor relations. To be sure, labor issues were not new in the 1980s, since left-oriented scholars had already focused on labor relations during the colonial era. What was new after 1980 was the focus on oil workers, unions, and class conflict [OPEC Annual Report, 1983].

1.2 THE PERFORMANCE OF THE OIL SECTOR IN NIGERIA

The Nigerian oil sector can be categorized into three main sub-sectors, namely upstream, downstream, and gas. The most problematic over the years has been the downstream sector, which serves as the distribution arm and connects with final consumers of refined petroleum products in the domestic economy. The incessant crisis in the supply of products culminated in the decision by the government in 2003 to deregulate the downstream sub-sector. However, the manner of its implementation has been controversial because it ignores the economic realities in Nigeria.

Oil production by the joint venture (JV) companies accounts for about 95% of Nigeria's crude oil production. Shell, which operates the largest joint venture in Nigeria, with 55% government interest through the Nigerian National Petroleum Corporation (NNPC), produces about 50% of Nigeria's crude oil. ExxonMobil, Chevron Texaco, ENI/Agip, and TotalfinaElf operate the other JVs, in which the NNPC has a 60% stake. The over-dependence on oil has created vulnerability to the fluctuations of the international market. As observed in the preceding section, this dependence shows the contribution of oil to some macroeconomic variables. In particular, the place of oil in the mind of the average Nigerian has become more profound since the deregulation of the downstream segment of the Nigerian oil industry in 2003. The contradiction is more glaring now with the recent rise in crude oil prices in global markets, which means more external earnings for Nigeria but also an increased expense burden on imported refined petroleum products. It is such contradictions that sometimes make the Nigerian economy appear strange, as policies seem to ignore what appears obvious to do. As such, policies designed to address deficiencies and defects in the structure end up being poorly articulated and/or implemented because of regional, political, or rent-seeking selfish interests. Obviously, it is the same rent-seekers that continually sabotage the reinvigoration of domestic refineries, making Nigeria depend on the importation of refined products to meet domestic needs. At present, Nigeria has four refineries with a combined installed refining capacity of 445,000 barrels per day (bpd). These four refineries are:

1. The first Port Harcourt Refinery was commissioned in 1965 with an installed capacity of 35,000 bpd and later expanded to 60,000 bpd.

2. The Warri Refinery was commissioned in 1978 with an installed refining capacity of 100,000 bpd and was upgraded to 125,000 bpd in 1986.

3. The Kaduna Refinery was commissioned in 1980 with an installed refining capacity of 100,000 bpd and was upgraded to 110,000 bpd in 1986.

4. The second Port Harcourt Refinery was commissioned in 1989 with a processing capacity of 150,000 bpd and was designed to fulfill the dual role of supplying the domestic market and exporting its surplus.

The combined capacities of these refineries exceed the domestic consumption of refined products, chief of which is premium motor spirit (gasoline), whose demand is estimated at 33 million litres daily. The refineries are, however, operating far below their installed capacities, as they were more or less abandoned during the military era, with routine and mandatory turnaround maintenance being neglected. This contributed to product shortages and gave strength to the argument for deregulation of the downstream oil subsector in Nigeria. The monetization of oil revenue has been a major factor in liquidity management in Nigeria. Measuring liquidity using the narrow and broad money definitions of the CBN, the early 1990s saw increases that were dampened by 1995 until the civilian administration came on board in 1999. The new government maintained disciplined fiscal operations for about one year, after which the floodgates were opened. Since then, the CBN has been battling to keep liquidity in check to ensure that it does not create adverse effects on the three key macroeconomic prices, namely interest rate, exchange rate, and inflation rate.

The greatest challenge arises when Nigeria generates more revenue from crude oil sales than it budgeted. Such excess revenues have always been monetized, creating market distortions and inflationary pressure [Biodun Adedipe, 2004]. The same argument applies to deficit fiscal operations in comparison with GDP. The pattern of this ratio indicates the optimism that accompanies increases in oil revenue and makes the government engage in frivolous spending or unnecessary projects. Deficit spending invariably makes the government resort to borrowing from the Central Bank through the instrument of Ways and Means Advances, which later converts into short-term debt instruments that are quite expensive to service at market rates. At this point, there is sufficient ground to examine how economic policy formulation has been impacted or induced by petroleum oil in Nigeria. As much as possible, major economic policies since Nigeria gained political independence would be examined vis-à-vis the state of the oil sector. This should provide an adequate basis for making a few specific recommendations on how to reduce dependency. Importation notwithstanding, there have been persistent product shortages.

1.3 NIGERIAN NATIONAL PETROLEUM CORPORATION: ITS ROLE IN THE SALE OF PETROLEUM PRODUCTS

The NNPC's role in the oil industry is extensive, and it cannot handle all its responsibilities alone. This is the reason for the establishment of subsidiary companies such as the Pipeline and Products Marketing Company Ltd (PPMC). The Nigerian National Petroleum Corporation manages the affairs of the oil industry in Nigeria, while the PPMC under the corporation is in charge of the sale of petroleum products. Government policy on oil matters, such as the sale and pricing of petroleum products, is conveyed by the Petroleum Products Price Regulatory Agency (PPPRA), currently headed by Alhaji Gbalamosi. NNPC therefore works in conjunction with the PPPRA to implement government policies such as the pricing of petroleum products. The Nigerian National Petroleum Corporation carries out its functions in both local and international operations.

1.4.1 AIM AND OBJECTIVES OF THE STUDY

The aim of this project work is to forecast the sales of petroleum. The specific objectives are to test the stationarity of the data, fit the trend, fit an appropriate model to the data, and use the selected model for forecasting.

1.4.2 DESCRIPTION OF DATA

The data used in this project is secondary data collected from the sales department of Balewa Fuel Station, Oshogbo, Osun State. The data involved the amount entered per year from 1988 to 2011.

CONCLUSION OF CHAPTER ONE

This chapter discussed the yearly sales of petroleum in Oshogbo, the discovery of crude oil in Nigeria, the aim and objectives of the study, and the description of the data.