Nigeria depends heavily on oil and gas, with hydrocarbon activities providing around 65 percent of total government revenue and 95 percent of export revenues. While Nigeria supplies some LNG to world markets and is starting to export a small amount of gas to Ghana via pipeline, the great majority of the country's hydrocarbon earnings come from oil. In 2008, Nigeria was the 5th largest oil exporter and 10th largest holder of proved oil reserves in the world according to the U.S. Energy Information Administration. The country's national oil company NNPC (Nigerian National Petroleum Corporation) sits at the nexus between the many interests in Nigeria that seek a stake in the country's oil riches, the government, and the private companies that actually operate the vast majority of oil and gas projects.
Through its many divisions and subsidiaries, NNPC serves as an oil sector regulator, a buyer and seller of oil and petroleum products, a technical operator of hydrocarbon activities on a limited basis, and a service provider to the Nigerian oil sector. With isolated exceptions, NNPC is not very effective at performing its various oil sector jobs. It is neither a competent oil company nor an efficient regulator for the sector. Managers of NNPC's constituent units, lacking the ability to reliably fund themselves, are robbed of business autonomy and the chance to develop capability. There are few incentives for NNPC employees to be entrepreneurial for the company's benefit and many incentives for private action and corruption. It is no accident that NNPC operations are disproportionately concentrated on oil marketing and downstream functions, which offer the best opportunities for private benefit. The few parts of NNPC that actually add value, like engineering design subsidiary NETCO, tend to be removed from large financial flows and the patronage opportunities they bring.
Although NNPC performs poorly as an instrument for maximizing long-term oil revenue for the state, it actually functions well as an instrument of patronage, which helps to explain its durability. Each additional transaction generated by its profuse bureaucracy provides an opportunity for well-connected individuals to profit by being the gatekeepers whose approval must be secured, especially in contracting processes. NNPC's role as distributor of licenses for export of crude oil and import of refined products also helps make it a locus for patronage activities. Corruption, bureaucracy, and non-market pricing regimes for oil sales all reinforce each other in a dysfunctional equilibrium that has proved difficult to dislodge despite repeated efforts at oil sector reform.