FOREIGN DIRECT INVESTMENT AND DEVELOPMENT OF THE PETROLEUM INDUSTRY IN NIGERIA: AN ASSESSMENT OF CHINESE INVESTMENTS IN NIGERIA’S OIL AND GAS SECTOR (2012 – 2022)

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Foreign Direct Investment (FDI) remains a feature of the global political economy and has become a metric for governance and economic success in nations. Every nation is constantly looking for methods to strengthen its economy, whether it be through internal corporate planning and reorganisation or foreign exploration (Ugwuanyi et al., 2020). FDI is not a new phenomenon, and its origins go back to the 19th-century Industrial Revolution and industrial capitalism that marked expanded interest in foreign direct investments in overseas territory (Aja Akpuru-Aja, 1998:197). Foreign investment occurs when the country seeks to expand its business, achieve economic emancipation, or improve its finances and economy beyond its borders (Kumar, 2007). FDI has been additionally depicted as the drawn-out speculation mirroring an enduring revenue and control by a foreign direct financial investor endeavour of an undertaking substance occupant in an economy other than that of the unfamiliar financial investor (Nwanko et al., 2013). To create a climate that is favourable to foreign or private investment, many African nations, including Nigeria, have changed their economic policies, investment laws, and banking systems (African Economic Outlook, 2006). For numerous reasons, including collaboration in technology and the interchange of scientific research, Sub-Saharan Africa as a region must rely substantially on FDI (Asiedu, 2001). The amount of foreign direct investment (FDI) has grown alarmingly during the past 20 years, making it the most desirable and widely recognised method of capital transfer between developed, developing, and less developed nations.

Koojaroenprasit (2012) asserts that FDI significantly contributes to economic growth via the transfer of technology. FDI inflows are also linked to a growth in capital and the value-added of human capital (Buckley et al., 2002). In Nigeria, FDI refers to any venture, commercial or development that wholly or partially leads to the importation of capital investment. FDI is viewed as a solution to close the resource gap that exists between local savings, government revenue, human capital skills, and the desired amount of resources required to fulfil growth and development goals (Tubo et al., 2018). FDI is defined as an investment made to obtain a long-term management interest (often at least 10% of the voting stock) and at least 10% of the equity stake in a business that operates in a nation other than the investor's home country (Mwilima, 2003). 

Foreign direct investment (FDI) is a type of investment where a foreign entity establishes or acquires a business in another country. FDI can have various benefits for both the host and the home country, such as creating jobs, transferring technology, enhancing productivity, increasing trade, and fostering economic growth (Cullen & Parboteeah, 2010).

Broadly, there are two main types of FDI: horizontal and vertical FDI. Horizontal FDI is the type of Foreign Direct Investment in which a business expands its domestic operations to a foreign country. In this case, the business conducts the same activities but in a foreign country. For example, a Nigerian company that produces cement may open a factory in Ghana to produce and sell cement there. In vertical Foreign Direct Investment, a business moves part of its production process to a foreign country. In this case, the business engages in different activities along the value chain in different countries. For example, a Nigerian company that produces cars may source some of its components from China or India to reduce costs and increase efficiency. 

FDI is very important for the Nigerian oil and gas sector, which is the largest recipient of FDI inflows in the country. The oil and gas sector accounts for about 10% of Nigeria’s GDP, 80% of its government revenue, and 90% of its export earnings (Agrawal, 2015). However, the sector faces many challenges, such as environmental pollution, security issues, regulatory uncertainty, infrastructure gaps, and low domestic refining capacity. Therefore, FDI can help the sector overcome some of these challenges by providing capital, technology, expertise, and access to global markets (Agrawal, 2015).

Equally, FDI can lead to an improvement in the exploration and production of oil and gas resources, as well as development of the downstream sector’s refining and distribution capacities in Nigeria by bringing in advanced technology and equipment that can increase efficiency and minimise the environmental impacts of oil and gas explorations. FDI can also help develop the downstream sector of the oil and gas industry in Nigeria by investing in refining, petrochemicals, and distribution facilities that can add value to the crude oil and gas produced in the country and create more jobs and income for Nigerians.

In addition, FDI can help diversify the Nigerian economy away from oil dependence by supporting other sectors that are linked to the oil and gas industry, such as construction, manufacturing, agriculture, services, and renewable energy. FDI can help improve the governance and transparency of the oil and gas sector in Nigeria by promoting compliance with international standards and best practices, such as environmental protection, human rights, corporate social responsibility, and anti-corruption measures.

Therefore, Nigeria needs to adopt a balanced and strategic political economy approach to attracting and managing FDI in its oil and gas sector that can maximize its benefits while minimizing its risks. This requires a conducive policy framework that can provide clarity, stability, fairness, and incentives for foreign investors while protecting the national interests and welfare of Nigerians. It also requires a strong institutional capacity that can enforce the rules and regulations governing FDI while ensuring the accountability and participation of all relevant stakeholders. There is no political or economic justification for a major oil-producing country to depend on imported refined petroleum products, thereby creating a balance of payments and forex scarcity problems.

Through spillovers and other externalities, FDI is thought to have addressed the gaps in management, entrepreneurship, and technology. Multinational enterprises (MNEs) or multinational corporations (MNCs) are typically the ones who engage in foreign direct investment (FDI), which occurs or takes place when a company invests directly in facilities that manufacture or market a product in a foreign nation (Hill, 2005). MNEs or MNCs are businesses that operate in multiple countries but are still under the management of a single corporate headquarters (Stonner, Freeman, & Gilbert, 2007). MNES or MNCS are thought to strengthen a country's foreign exchange position; nevertheless, in the long run, they may have the opposite effect, decreasing foreign exchange profits in the current and capital accounts of the balance of payments (BOP).   

 Even though many African nations continue to face substantial challenges due to political instability, internal strife, poor governance, and a lack of protection for people and their property, and corrupt practices, the market size of African nations continues to increase due to the region's large population and abundance of primary residues in crops and materials. The first quarter of 2016 saw a $20.83 million foreign capital influx into the oil and gas sector; the second quarter saw a $200.39 million inflow; the third and fourth quarters saw $171.63 million and $227.3 million inflows, respectively. Oil and gas, telecommunications and the NBS reported the most capital imports in the second quarter of 2017, whereas fishing, transportation, tanning, and weaving sectors did not import any capital during that period (NBS 2017). According to figures issued by the National Bureau of Statistics (NBS), foreign investment in Nigeria's oil and gas sector increased to $291.47 million in the first half of the year, between January and June 2017. Foreign investment inflow into the oil and gas sector increased by 31.76%, according to the NBS's Second Quarter 2017 Foreign Capital Importation Report, compared to an inflow of 21.21% reported in the first six months of 2016 (NBS 2017). Further, the Nigerian Bureau of Statistics (NBS) first quarter of 2023 “Nigerian Capital Importation Report” reveals that foreign investment inflow into the Nigerian oil and gas industry stood at $0.75 million in the first quarter of 2023, rising by 22.95 per cent from $0.61 million recorded in the same period in 2022.  However, the inflow in the first quarter of 2023 was 66.81 per cent lower than the $2.26 million recorded in the fourth quarter of 2022.  The NBS also disclosed that the oil and gas sector accounted for 0.07 per cent of the total capital imported into the country in the period under review.  According to the NBS total capital importation into Nigeria in the first quarter of 2023 stood at $1.133 billion, 27.97 per cent lower than the $1.573 billion recorded in the first quarter of 2022.  When compared to the preceding quarter, the statistics agency reported that capital importation rose by 6.78 per cent from $1.061 million recorded in the fourth quarter of 2022 (Chigozie Ikpo 2023). Corruption, which raises the cost of conducting enterprise in Nigeria deters investors from investing there, which may be to blame for some of Nigeria's sectoral poor performance in luring comparable FDI to the country. According to Ali and Isse's (2003) research, countries with weak economies have a propensity to have a high level of corruption, which slows down development even further. Odiaka (2006) noted that Nigeria's industrial sector continues to receive power in abhorrently irregular ways. According to Okafor (2008), the nation's ongoing energy scarcity is a significant barrier to the development of the industrial, technological, and economic sectors. It is one of several outstanding issues in Nigeria, that have critically hobbled and skewed development (Ayobolu, 2006). 

In addition, a lack of adequate macroeconomic framework has been identified as one of the challenges in attracting FDI to Nigeria. Speaking at the Lagos Business School (LBS) at a forum with business leaders in Lagos on Monday, September 18, 2023, the US Deputy Secretary of Treasury, Wally Adeyemo, pointed out that Nigeria lacks the macroeconomic framework to attract more dollar-denominated foreign direct investments into its economy.  Adeyemo noted that the government needs to develop a macroeconomic framework that demonstrates its commitment to the fundamentals, and this will in turn help attract foreign investors to the country and help the country’s economy thrive (Chike Olisah, 2023). Such feedback was instructive given that the United States is one of the largest foreign investors in Nigeria, with the country being the US’s second-largest African trading partner. 

Nonetheless, Nigeria has recorded massive FDIs, especially in its oil and gas sector which is its major source of foreign exchange earnings. With the recent deregulation of the downstream sector of the oil and gas sector receiving a major boost through The Petroleum Industry Act, 2021 (PIA), signed into law in August 2021, the oil and gas industry has received a major FDI boost. According to the Nigerian National Petroleum Company Limited (NNPC) PIA “aided the growth of inflow of Foreign Direct Investment (FDI) from a paltry $775 million in 2018 to $4 billion in 2022” (Addeh, 2023).  The NNPC identified the Joint Venture alternative financing upstream investments to include: The $1.2 billion multi-year drilling for 36 offshore/onshore oil wells under the NNPC/Chevron Nigeria Limited JV, codenamed project Cheetah and the NNPC/First E&P JV and Schlumberger’s tripartite $800 million alternative funding agreement for the development of the Anyalu and Madu fields in the Niger Delta. Others, the NNPC had stated are the recent agreements executed in London for the $1 billion NNPC/SPDC JV Project Santolina and the NNPC/Chevron $780 million Project Falcon, hitherto financed through JV Cash Call. It declared that the four major investments were capable of providing incremental revenue to the national treasury and also the economic growth of Nigeria by over $30 billion within the next 10 years. The NNPC further stated that the investments would serve as vehicles to fast-track the prevailing post-cash-call exit era. It noted that the arrangement would allow the NNPC to operate from the production revenue less the first line charge to the government which is the royalties and petroleum profit tax. The NNPC also disclosed that a consortium of Chinese banks had invested $250 million in the Nigerian petroleum industry. The NNPC investments were secured from the Chinese banks, which were staking their funds in the Nigerian petroleum industry for the first time, at the recent financing agreements signed in London. It added that the Chinese banks had made commitments to bring in as much money as might be needed to finance oil and gas investments in Nigeria (NBS,2017). Political, economic, and social instability are to blame for Nigeria's inability to draw the appropriate amount of FDI, as seen by pre- and post-election crises as well as disturbances in society in various regions of the nation. In the last decade, Chinese interests and investments in Nigeria’s oil and gas sector have significantly increased resulting in several key investments in the sector. In 2018, China announced it would increase its venture in the Nigerian oil and gas sector to about $17 billion. This announcement was made by Yuan Guangyu, Chief Executive Officer (CEO) of China National Offshore Oil Corporation (CNOOC), during a visit to the Nigerian National Petroleum Corporation (NNPC) in Abuja. Responding, Mele Kyari, the Managing Director of the Nigerian National Petroleum Corporation (or NNPC Limited - now a fully Limited Liability Company by the provisions of the Petroleum Industry Act, PIA), thanked the CNOOC, for its continued support of Nigeria's oil and gas sector, stating that Nigeria needs partners like China. It should be noted that China has three major national oil entities. CNOOC, one of the three big Chinese national oil entities, originally focused on offshore upstream exploration and production, while the China National Petroleum Corporation (CNPC) favours onshore upstream exploration and production. China Petroleum and Chemical Corporation Group, also known as SINOPEC, the third of the tripod focuses on refining and marketing (Kingsley Jeremiah, 2018). 

In general, this study focuses on the activities of these Chinese oil companies with particular reference to the activities of China Petroleum and Chemical Corporation Group, also known as SINOPEC, given its focus on the downstream sector of the oil and gas industry in Nigeria. Amongst its many investments in Nigeria, in October 2012, Sinopec purchased 20 oil wells belonging to TOTAL E&P in Nigeria in a huge deal worth around $2.45 billion, in addition to its takeover of Addax Petroleum assets (now divested and sold to NNPC in November 2022). Also, Sinopec is executing a major oil/gas project in Akwa Ibom State of Nigeria; a project that can produce about 10,000 barrels of oil per day. 

It is against this background, that this study seeks to examine the impact of FDI in Nigeria since 2012 and to understand how the PIA will help oil and gas investments drive economic development in Nigeria. The study will look at the economic impact of China Petroleum and Chemical Corporation (Sinopec Group) on the development of Nigeria’s downstream oil sector, how it affects the balance of the trade and exchange rate, and tax incomes among many other developmental-related factors like the company’s role in its corporate social responsibilities. While there are several literatures on the subject matter of oil and gas FDI in Nigeria mostly focused on older companies such as Shell, Total Energies, ExxonMobil and CHEVRON CORP, there is little literature on the evaluation of China Petroleum and Chemical Corporation (Sinopec Group) even though studies have looked at how foreign direct investment affected economic development in Nigeria. This backdrop serves as the foundation for the current choice of case study, which seeks to investigate China Petroleum and Chemical Corporation's impact on foreign direct investment and economic development in Nigeria. 

1.2 Statement of the Problem

Foreign Direct Investment (FDI) can play a significant role in the development of any nation, depending on how well such investments are structured and managed, taking into account the peculiarities of the nation. In Nigeria, there have been a steady flow of FDI, especially in the oil and gas sector of the economy (NBS Report, Nigeria Capital Importation Q2 2023). So, without doubt, FDI is important for the Nigerian oil and gas sector for capital formation as well as technology transfer for a more efficient oil and gas domestic refining and distribution capacity in the downstream sector, amongst other benefits. Prior studies have examined the determinants and impact of FDI on economic development in Nigeria, and few of these studies also looked at FDI in the oil and gas sector gas (for example, Mayor N. 2020; Dauda, 2009; and Anyanwu, 2012). However, little is known about the political economy of FDI and its Impact on the Downstream Sector Development of the Petroleum Industry in Nigeria. How has FDI improved oil and gas refining, marketing, transportation logistics, distribution and retailing? What is the impact of FDI on the currency exchange rate and vice versa and how does FDI affect the overall Balance of Trade in Nigeria? Overall, how has FDI impacted the political economy of the development of the Nigerian state vis-à-vis her strategic national development objectives?

Even though many African nations continue to face substantial challenges due to political instability, internal strife, poor governance, a lack of protection for people and their property, and corrupt practices, the market size of African nations continues to increase due to the region's large population and abundant natural resources. Nigeria's inability to draw the necessary amount of foreign direct investment (FDI) is due to corruption, and political, economic, and social instability, which are manifested in pre- and post-election crises as well as social unrest in various regions of the nation. Corruption, which raises the cost of conducting enterprise in Nigeria and deters investors from investing there, may be to blame for the manufacturing sector of Nigeria's poor performance in luring comparable FDI. According to Ali and Isse (2003), nations with weak economies tend to have high levels of corruption, which slows down development even further. Odiaka (2006) noted that Nigeria's industrial sector's electricity distribution remains appallingly and chronically paralysed. According to Okafor (2008), the nation's ongoing energy scarcity is a significant barrier to the development of the industrial, technological, and economic sectors. It is one of the numerous unresolved issues in Nigeria that, according to Ayobolu (2006), have seriously hampered and distorted growth.

     With the aid of numerous technologies, such as laws that would target foreign money and technology transfer, Nigeria has been promoting economic development. It is vital to investigate whether the country's increased FDI inflow in the oil and gas sector between 2012 and 2022 may have contributed to the development of the downstream sector of the oil and gas industry in Nigeria. Although there is a lot of FDI in Nigeria’s oil and gas sector, the oil industry is still trailing in terms of knowledge and technology transfers, especially in the downstream sector. There is no political or economic justification for a major oil-producing country to depend on imported refined petroleum products, thereby creating a balance of payments and forex scarcity problems. This makes describing the real direction of the link between foreign direct investment and the development of the downstream oil and gas sector in Nigeria particularly challenging. With particular reference to China Petroleum and Chemical Corporation (Sinopec), it is crucial to research to determine the causal relationship and interaction between foreign direct investment and the development of the downstream oil and gas sector in Nigeria, and this has led to the primary driving force behind this study. In other words, this research intends to find out if FDI has had any impact on Nigeria's downstream sector development of the petroleum industry in the past decade, from 2012 to 2020. 

1.3 Objectives of the Study

 The main objective of this study is to examine the impact of Foreign Direct Investment and Development of the Petroleum Industry in Nigeria: An Assessment of Chinese Investments in Nigeria’s Oil and Gas Sector (2012 – 2022). Other specific objectives of the study include;

1. To determine the impact of Foreign Direct Investment on Nigeria's downstream sector development of the petroleum industry 

2. To examine the  impact of Foreign Direct Investment on oil and gas production volume and efficiency in Nigeria

3. To determine the relationship between foreign direct investment and the development of local oil production and refining capacity in Nigeria

4. To ascertain the relationship between oreign direct investment and refined oil product availability in Nigeria.

1.4 Research Questions

        The following questions guided this study;

1. What is the impact of Foreign Direct Investment on Nigeria's downstream sector development of the petroleum industry?
2. What is the impact of Foreign Direct Investment on oil and gas production volume and efficiency in Nigeria?
3. Is there a relationship between foreign direct investment and the development of local oil production and refining capacity in Nigeria?
4. Is there a relationship between foreign direct investment and refined oil product availability in Nigeria?

1.5 Research Hypotheses

        The following were hypothesized:

Hypothesis One:

H0: Foreign Direct Investment in the Nigerian downstream sectordoes not significantly impact Nigeria's downstream sector development of the petroleum industry.

H1: Foreign Direct Investment in the Nigerian downstream sectorwill significantly impacts Nigeria's downstream sector development of the petroleum industry.

Hypothesis Two:

H0: Foreign Direct Investment does not significantly impact oil and gas production volume and efficiency in Nigeria.

H1: Foreign Direct Investment significantly impact on oil and gas production volume and efficiency in Nigeria.

Hypothesis Three:

H0: There is no significant relationshp between foreign direct investment and the development of local oil production and refining capacity in Nigeria.

H1: There is a significant relationshp between foreign direct investment and the development of local oil production and refining capacity in Nigeria.

Hypothesis Four:

H0: There is no significant relationship between foreign direct investment and refined oil product availability in Nigeria.

H1: There is a significant relationship between foreign direct investment and refined oil product availability in Nigeria.

1.6 Significance of the Study

This study will assist in demonstrating the critical importance of institutions. The results of this study will first be used to analyse how foreign direct investment affects the downstream sector development of the petroleum industry in Nigeria. This can help to evaluate the advantages of global trade, and determine whether China Petroleum and Chemical Corporation (Sinopec) has made a significant impact on the downstream sector development of the petroleum industry in Nigeriain particular, and economic development in Nigeria in general.

Additionally, this study will alert governments' efforts to the need for growth-enhancing measures in increasing foreign direct investment in Nigeria. 

Finally, the study will look at the effect of tech-driven institutions on economic growth, because technology is highly important to any economy as it serves to dictate the way of life of the nation's citizens and affects their capacity for advancement.

        Interested members of the public who come across the research would gain insight from the findings on the impact of FDI institutions and investing because trade liberalisation is influencing the expansion of the economy. As a result, it would serve to increase the attention of individuals on the academic platform looking to conduct additional research on related themes.

1.7 Scope of the Study 

This study is limited to an assessment of Foreign Direct Investment and downstream sector development of the petroleum industry in Nigeria using China Petroleum and Chemical Corporation as case study, and covering the period from 2012 – 2022. Data from this study was obtained from both primary and secondary sources specifically on the Nigerian oil downstream.

1.8 Operational Definition of Terms

Foreign Direct Investment: Foreign direct investment (FDI) is an investment from one country into a business or organisation in another country to build a long-term relationship. FDI can be horizontal (a business expands its domestic operations to a foreign country like a Nigerian cement company opening a factory in Ghana to produce and sell cement there) or vertical (a business moves part of its production process to a foreign country like a Nigerian car company sourcing some of its car-making components from China or India to reduce costs and increase efficiency). 

Economic development: Economic development is the transformation of primitive, low-income country economies into contemporary industrial economies. economic development). It is also defined in terms of increasing real income per head or increasing the potential to produce such income, as well as the sustainable increase in the quality of life of a people in terms of their ease of access to the basic needs of life.

Downstream Oil Sector: This is the aspect of the oil and gas industry that is involved in converting oil and gas into finished products. These include refining crude oil into gasoline, natural gas liquids, diesel, and a variety of other energy sources. There are three major sectors which the downstream market can be broken down into namely: Refining & Marketing; Transportation & logistics; and Distribution & retailing. 

1.9 Organisation of the Study

This research work contains five chapters. Chapter One begins with an Introduction that provides general information about the study, structure of the research work, objectives, Research Questions, Hypothesis, Significance of the Study and the definition of terms. Chapter Two presents the Literature review, including Theoretical and Conceptual Reviews. Chapter Three describes the Research Methodology and outlines the research design, data collection and Data analysis processes. Chapter Four focuses on Data Presentation and Analysis - showing the outcomes of the study using data analysis techniques to present the research results. The concluding Chapter 5 includes a Summary of Findings, Conclusion, Benefits of the Research and Recommendations.