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 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 economies, whether it be through internal corporate planning and reorganisation or foreign exploration (Ugwuanyi et al., 2020). Foreign investment occurs when a country seeks to expand its business, achieve economic emancipation, or improve its finances and economy beyond its borders (Kumar, 2007). Foreign Direct Investment (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). In order to create a climate that is favourable to 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. Foreign direct 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).

Typically, 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).

FDI can help improve the exploration and production of oil and gas resources in Nigeria by bringing in advanced technology and equipment that can increase efficiency and reduce environmental impacts.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 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, it is important for Nigeria to adopt a balanced and strategic 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 accountability and participation of all relevant stakeholders.

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, 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 populationand 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 the 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 into 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).

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 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 billon 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 vehicle 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 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 bringing 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.

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'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). 

Over the years, Nigeria has recorded massive FDIs, especially in its oil and gas sector which is its major source of foreign exchange earnings. With the 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 E. 2023). It is against this background that this study seeks to examine the impact of FDI in Nigeria since 2005 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 CNOOC on the development of the Nigeria oil sector,how its affects the balance of the trade and exchange rate, tax incomes among many other developmental related factors like the companies role in its corporates social responsibilities.

While there are several literatures on the subject matter of oil and gas FDI in Nigeria, mostly focused on the older companies such as Shell, Total Energies, ExxonMobil and CHEVRON CORP, there is little literature on the evaluation of China National Offshore Oil Corporation (CNOOC), 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's national offshore oil corporation's impact on foreign direct investment and economic development in Nigeria.

1.2 Statement of the Problem

        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. 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 between 2005 and 2022 may have contributed to its economic growth. Therefore, it is only natural to wonder whether the economic growth the country has been experiencing over the past few years is due to the inflow of foreign direct investment, or whether it was already at this stage of development before luring foreign direct investment. Although there is a lot of FDI  in the nation, the economy is still trailing in terms of knowledge transfer and technology. This makes describing the real direction of the link between foreign direct investment and economic growth in Nigeria particularly challenging. With particular reference to China National Offshore Oil Corporation, it is crucial to research to determine the causal relationship and interaction between foreign direct investment and economic development in Nigeria, and this has led to the primary driving force behind this study.That is to say that this research intends to find out if FDI has any impact on Nigeria economic development specific reference to Chinese Investments in Nigeria’s Oil and Gas Sector (2012 – 2022).

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 impactsNigeria's downstream sector development of the petroleum industry.

Hypothesis Two:

H0: Foreign Direct Investmentdoes 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 specific types of economic development in Nigeria. This can help to evaluate the advantages of global trade, determine whether the CNOOC has made significant impacton experienced discernible growth, determine whether some firms had been driven out of business as a result of global trade because they were unable to compete with the foreign goods on the local market, thereby reducing domestic output and growth, or determine whether global trade had contributed to an increase in overall output.

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

Finally, study will looked 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 public who come across the research would gain insight from the findings on the impact of FDI institutions and investing because of trade liberalisation are 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 the impact of  Foreign Direct Investment on downstream Economic Development in Nigeria: An Assessment of China National Offshore Oil Corporation from 2005 – 2022. Data  from this study was gotten from secondary source from CNOOC.