When last we visited the topic of Nigerian energy markets and happenings, the reason that Nigeria simultaneously is energy-rich and energy-poor was illustrated by the ongoing tug of war between the Nigerian government and Process and Industrial Developments Limited (P&ID). This was over a prior agreement for P&ID to build a state-of-the-art natural gas processing plant along the Nigerian coast. In a nutshell: The government was supposed to provide the land and build the pipeline to deliver the gas to the plant. It failed to do either. As a result, over 282 billion cubic feet of gas were wasted (flared) in 2018 alone. And the agreement was for 20 years, with the planned delivery of wet gas to the plant beginning at 150 million cubic feet per day, rising to 400 million over time.

Nigeria’s President Muhammadu Buhari leaves after attending Friday prayers in his hometown Daura in Katsina State, ahead of the country’s presidential election, Nigeria February 15, 2019. Reuters

This arrangement was win-win. The plant would process “wet” gas (natural gas combined with associated liquids) produced as a byproduct of offshore crude oil production, separating the dry gas from the liquids. The gas would be given to the government, to be used for electricity generation, while 85 percent of the liquids would belong to P&ID, which would be compensated for its capital investment and the operating costs of the plant by selling the liquids. The government would own 15 percent of the liquids, and thus bear little risk from fluctuating prices for gas or liquids.

The national need for fuel to increase power generation is obvious: Of total Nigerian fossil generating capacity of 10,100 megawatts (MW) (another 2,400 MW are hydroelectric), only about 4,000 MW actually produce power on a daily average, essentially because of constraints on natural gas supplies and a lack of infrastructure. One recent study reports that average daily power availability in Nigeria is only four hours, and that only 59 percent of the Nigerian population is connected to the grid, with higher and lower figures for the urban and rural populations, respectively. About 20 million Nigerian households lack any access to electric power.

These perverse realities are highlighted by the failure of the administration of President Muhammadu Buhari to have met its commitment to add 945 MW of generation capacity by the end of 2018, largely because of the noncompletion of a power project in the northwestern part of the country. The government failure to provide the land or build the pipeline for the P&ID project is thus part of a pattern.

How is it that a nation with over 37 billion barrels of proven oil reserves can find itself in a position of energy poverty? This question confronts us yet again with age-old lessons about the importance of property rights, the rule of law, and the often-perverse incentives of government officials. Merely contrast the Nigerian bungling of the P&ID contract with the recent evolution of the natural gas market in the U.S. U.S. gas production in 1990 was 17.8 trillion cubic feet; in 2018 it was 30.4 trillion cubic feet, an increase of about 71 percent. Natural gas prices over the same period increased from about $2.96 per thousand cubic feet to $4.21, or about 42 percent (in year 2018 dollars).

The easy explanation for this sharp increase in US production is the fracking/horizontal drilling revolution. That is correct as far as it goes, but it does not go far enough: That tremendous technological advance did not take place in a vacuum. It is the result of the US system of property rights — much of the modern increase in gas production has taken place on private land — combined with legally-enforceable contractual arrangements, investments in infrastructure that more-or-less are driven by market forces, and sharp constraints on the ability of government officials to interfere with private arrangements, except through processes constrained by the rule of law.

Those institutional conditions are very different in the Nigerian context. The Fraser Institute summary economic freedom index places Nigeria at number 118 out of 162 nation-states. The Corruption Perceptions Index published by Transparency International places Nigeria at number 148 (in a tie with Comoros and Guinea) out of 180 countries.

With the re-election of President Buhari earlier this year, it is possible that the harsh lessons of recent events can be heeded. But the ongoing litigation with P&ID, which Nigeria now is losing, provides substantial grounds for skepticism: The group managing director of the Nigerian National Petroleum Corporation notes explicitly that a failure to resolve legal and regulatory uncertainties will hinder the energy investment that Nigeria needs.

Notwithstanding the negative experience of P&ID, over twelve firms now are reported to be competing for a gas commercialization contract, which is expected to be concluded in 2019. It must be the case that they have learned from the P&ID experience, and perhaps the government has also. But it is not clear how the government will convince potential partners of any such newfound wisdom on its part. Instead, what is obvious is that the terms that the government will have to offer will be a good deal more advantageous to the contractors, yet another hidden adverse effect of the failure to live up to the terms of the P&ID deal. It is ordinary Nigerians rather than the elites who will suffer the effects, a lesson not limited to Nigeria.