BRIEFING: The Niger Delta Avengers have destroyed oil wells and pipelines including ones owned by Chevron, which could take months or longer to repair. The militant group has refused to negotiate with the Nigerian government and even threatened to slash Nigeria’s oil production to zero, though it’s not clear it has the ability to do so. Nigeria had an energy crisis and gasoline shortage even before the recent spate of violence. Following decades of poor maintenance, mismanagement and corruption, Nigeria’s four state-owned refineries are operating at just 5% capacity. That means frequent power outages and long lines at gas stations and the outlook for the delta is poor; the days when money alone was enough to patch up the peace are almost certainly gone.

Background

Suffering already from a slump in export revenues, Nigeria has received an additional blow this year from a rise in attacks on the country’s oil industry, which have led to cuts in production, reducing export revenues further, and threatening future levels of investment, as well as delaying much-needed reforms to the country’s problem-hit and inefficient oil industry. Oil production has fallen to a 27-year low and refinery output has been cut, causing widespread shortages of fuel.

Many of the attacks have been on infrastructure, particularly pipelines, although some oil wells have also been hit. The damage has mainly been to oil installations, but some gas facilities have also been affected, affecting the production of natural gas liquids. Most of the violence appears to be politically motivated but some of it is concerned with the stealing of oil by organized crime syndicates. In late-June, the government announced that it was in talks with the main militant group; but the situation remains tense and unstable.

Upsurge in violence

The Nigerian oil industry has been the target of both militant political groups and gangs of criminals for a number of years. The politics center on the distribution of revenues from oil production and exports. Much of Nigeria’s oil is produced in the Niger Delta in the south-east of the country. The area suffers from widespread poverty and pollution from oil installations and many of the inhabitants say the revenues generated by the Delta region are siphoned off by the rich élites who live in other parts of the country.

Nigeria oil map
Nigeria oil map

The situation is made worse by the numerous instances of oil spills from pipelines that have affected many communities living there. Oil companies, such as Shell, have been accused of negligence in managing their infrastructure, although some of the spills are undoubtedly caused by attacks on pipelines by militant groups and oil thieves.

Attacks began on a systematic basis across the Delta region in 2006, following the foundation of a group known as the Movement for the Emancipation of the Niger Delta (MEND), which began a four-year series of attacks on oil facilities until October 2009, when the government agreed to an amnesty for its members.

There were sporadic acts of sabotage during 2010 by a break-away unit calling itself the Niger Delta People’s Liberation Front, but by 2011, MEND had for all intents and purposes ceased to exist. The underlying political grievances of the Delta region remained unresolved, however, and this year has seen a revival in violence directed against the government and the oil sector.

New groups threaten oil output

The group principally responsible for the latest phase of attacks is called the Niger Delta Avengers (NDA). Since the start of 2016, they have attacked pipelines, pumping stations, oil wells, and other oil installations belonging to Shell, Chevron, Eni, ExxonMobil, and the state-owned Nigerian National Petroleum Corporation (NNPC) across the Delta region. They have also extended their operations offshore, attacking and damaging both pipelines and oil platforms.

Exports have been badly hit, affecting several of the country’s main crude export streams, including Bonny Light, Brass River, Escravos, and Forcados. Bombings carried out on a pipeline carrying Escravos crude in May cut deliveries to NNPC’s refineries at Warri and Kaduna.

NDA has also threatened to attack oil tankers attempting to load crude oil from marine terminals, as well as issuing threats against oil workers. In late-June, it agreed a 30-day cessation of hostilities with the government, but not before Nigeria’s oil production had been reduced to about 1.1 mn bpd: half the total at the start of the year.

Output hit in Nigeria

In 2015, Nigeria produced 2.4 mn bpd, with net exports of 1.9 mn bpd. Even that level of production, however, is some way below the country’s actual capacity, which the government has put at 3.6 mn bpd. The volume shut-in this year has been even greater. In late-May, output was estimated by NNPC to be 1.1 mn bpd versus 2.2 mn bpd at the beginning of 2016. Following the truce with NDA, the government hopes to restore production to this latter level, although this could take some time. The Federal Ministry of Petroleum Resources originally planned for Nigeria to be producing 2.2 mn bpd during 2016 as a whole.

Nigeria oil exports
Nigeria oil exports

Falling exports

By June 2016, an estimated 0.8 mn bpd of exports were reported to have been lost as a result of attacks on oil installations both onshore and offshore. These losses come at a particularly unfortunate time for Nigeria which, until April, had been recovering some of the market share in the US it had lost in recent years as a result of rising US oil production.

The US used to be the main single market for Nigerian crude. In 2007, exports to the US reached a peak of 1.1 mn bpd, but began to fall thereafter as a result of rising US production of crude oil similar in type to the light, sweet grades exported by Nigeria and which were once in high demand amongst US refiners for their high gasoline yields. Refiners there often referred to them as “Cadillac crudes.”

Between 2007 and 2015, Nigeria’s exports to the US fell by 95%, to just 0.06 mn bpd. This year, however, saw a turn round in Nigerian fortunes as US production of light, sweet crudes fell, while the costs of shipping crude from West Africa to refineries on the US East Coast also declined.

Nigeria crude oil exports
Nigeria crude oil exports

The conditions for supplying the US East Coast with Nigerian crude remained favourable in the second quarter, with rising prices for US domestic crudes, compared to those like Nigeria’s that are priced off the UK’s Brent. At the same time, Atlantic Coast refiners had to pay higher freight charges for domestic crudes. A good deal of domestic crude has to be transported to the Atlantic coast by rail-tanker owing to the lack of suitable pipeline connections with the main US oilfields, and a shortage of rail tankers led to a rise in domestic rail freight rates, while the cost of shipping oil across the Atlantic from West Africa fell for much of April and May.

The loss of so much Nigerian production in the second quarter, however, prevented Nigeria from taking full advantage of the favourable economics of exporting to the US. It also had less oil to sell to its other main markets in Europe and Asia. The continuing loss of light, sweet crude exports from Libya caused by the civil war has in recent times provided Nigeria with the opportunity to export more to Europe [3], but it is in danger of losing some of these sales to other light crude exporters, for example from Algeria or the Caspian.

African Oil producers
African Oil producers

Production threatened

Falling exports means lower revenues: not only for the Nigerian government, but also for the companies that are producing oil there. The government wants to see an increase in production, but lower exports and the continuing threat to oil installations and workers from the NDA hardly provides an incentive for more upstream activity.

For more than a decade, Nigeria has wanted to increase production to 4 mn bpd and to raise the level of its proven reserves to 40 bn bbl. The original date for both these things to happen was 2010; but production only reached 2.5 mn bpd in that year. Proven reserves in that year were 37.2 bn bbl and have remained close to that figure ever since. The date for the new targets to be achieved was subsequently put back to 2020; but there is little likelihood of that being achieved then, either.

Companies unhappy

International oil companies operating in Nigeria have a number of problems in addition to those connected with the latest round of violence. Relations with the government are not of the best in a number of important areas, including taxation, the role of NNPC, and corruption across the oil sector. These problems have existed for more than a decade; but in all that time nothing has been done to solve them.

In 2008, the then government attempted to deal with the situation with a wide-ranging Petroleum Industry Bill (PIB). There was, however, widespread opposition to various aspects of the Bill and its opponents were successful in preventing it from becoming law. The PIB not only covers the upstream sector but also contains a highly controversial plan to privatise NNPC, which has met strong opposition from the main oil workers’ trade unions, Nupeng, and Pengassan, which have called a number of strikes in protest at the move.

Reforming NNPC

NNPC is in urgent need of reform. It both manages the government’s majority shareholding in production joint-ventures with foreign oil companies and owns and operates the country’s refining system. The company is heavily indebted and runs at a loss owing mainly to the heavy losses from its refineries, which operate at low levels – 14% of capacity in 2014, according to NNPC – and are frequently closed because of attacks and sabotage. All four plants need extensive modernisation as well as increasing in size since they do not have sufficient distillation capacity to meet Nigeria’s existing fuel needs of about 500,000 bpd. They have also been affected by the unrest in the oil-producing regions. At present, NNPC does not have the money to expand and upgrade its refining system. Nor is there any realistic prospect of its making any profits from refining as long as they continue to be engulfed by the violence in the Delta region and as long as NNPC remains obliged to sell its refined products domestically at below-market prices.

The result of all this is that Nigeria has to import large quantities of refined products to keep the domestic market supplied. The fuel is imported both by NNPC and a number of independent firms, which pay for it in dollars then sell it in naira at below-market prices. The government is supposed to make-up the difference by paying a subsidy to the companies, but it is frequently behind with its payments.

The whole subsidy system is unsustainable and threatens both the present refining sector as well as any plans to modernise and reform it. Also threatened are plans by private companies to build new refineries. There have been many such proposals, but only one survives at present and looks unlikely to meet its 2017 target for opening.

Producers break-even oil prices
Producers break-even oil prices

Poor prospects for Nigeria

Just as NNPC will have to be reorganised and put on a proper commercial footing before the downstream sector can be sorted out; the same must happen in the upstream sector. Because of the refining losses that have plunged NNPC into the red, the company is unable to meet its financial obligations to its upstream joint-venture partners. Added to this are the fall in returns from production caused by this year’s decline in production and low global oil prices, which have led to cuts in upstream spending by NNPC’s foreign partners.

At the same time, the cost of maintaining oil production at levels close to last year’s 2.4 mn bpd–let alone increasing it to the 4 mn bpd planned by the government–is steadily rising owing to the need to develop new fields in deep water offshore. Some planned deep-water fields will undoubtedly be postponed, if not cancelled altogether, especially if crude oil prices remain low. Foreign oil companies are likely to favour developing lower cost fields, either onshore or in shallow waters. NNPC meanwhile will have to rely on foreign loans–probably underwritten by its joint-venture partners–in order to remain as an active player in the upstream sector.

There are blueprints for the development of the Niger delta, including one produced by government earlier this year that synthesised past efforts. Like its predecessors, it is gathering dust. The document repeats the kind of hopeful language about accountability and governance that alone has rarely brought changes to either. Officially, some $37.5bn was transferred to the delta between 2010 and 2014, including the additional inflows from oil paid to the producing states. There is little to show for any of it.

Ultimately, Nigeria’s economy needs to be radically restructured. For more than half a century, the federal government has sucked its funding from one impoverished region and shared the spoils around the rest. The legacy is bitter. In future, all 36 states must leverage their assets to stimulate production that can be taxed.

In the meantime, the Niger delta needs a viable economic master plan with recognisable milestones. As the government has acknowledged, this must include a strategy to address the environmental disaster wrought over decades by oil production. It may be necessary for a third party broker to negotiate a deal and monitor implementation. The buy-in both of the oil companies and international development organisations will also help. The days when money alone was enough to patch up the peace are almost certainly gone.

References
  1. http://money.cnn.com/2016/06/13/investing/nigeria-sabotage-oil-wild-card/

I'd love to hear what your thoughts are...please feel free to leave a reply