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Militant threat looms ahead of Nigerian elections

The risks to the oil sector are far from over

President Muhammadu Buhari faces a difficult year, as he seeks to implement far-reaching reforms to the oil and gas sector against a background of intensifying campaigning ahead of presidential elections. To make matters more complex, militants are threatening another campaign of attacks in the Niger Delta, risking oil production levels that have only recently recovered after the last bout of unrest.

Nigerian crude output has been running at just below the 1.8m-barrel-a-day cap it informally agreed with Opec last November, while the country also produces a further 350,000 b/d or so of condensates (which aren't included in Opec quotas). While production is much higher than it was at the height of militant attacks in 2016, it is still well below the country's potential production, which analysts believe could top 3m b/d with more investment.

The lack of funding in recent years by both the state-controlled Nigerian National Petroleum Corporation (NNPC), and the international oil companies is something that the government hopes to put right with an overhaul of the industry's fiscal and legal framework. As part of this, NNPC is due to be broken up and oil and gas block licensing is intended to become more transparent.

But the threat of a flare-up of militant attacks in the Delta remains. There were signs of progress in the region last year, when vice president Yemi Osinbajo visited the Delta for talks with local community leaders and politicians several times to hear complaints, while Nigeria's president, Muhammadu Buhari, was receiving treatment for an unspecified illness in London. That contact seemed to reap dividends by damping down violence. It also contrasted with an apparent lack of engagement by Buhari, who had declined to visit the Delta during his presidency.

But with Buhari now back in the country and seemingly firmly at the helm, the Niger Delta Avengers (NDA), the most active militant group, posted renewed threats on its website in mid-January.

"This [fresh] round of attacks will be the most-deadly and will be targeting the deep-sea operations of the multinationals which include Bonga Platform, Agbami, EA Field, Britania-U Field, Akpo Field; amongst others littered across the deep waters of the Niger Delta region," the group said. "As for the Egina FPSO, we are advising the operators to let it stay wherever it is right now as we are tracking [its] movement."

All aboard the Egina FPSO

The Egina floating storage production and offloading facility is the only major investment in offshore Nigeria lined up for the foreseeable future, adding up to 200,000 b/d of capacity to Nigerian output. So, attacking it would represent a major coup for the militants.

Operator Total hopes to have the FPSO operational on the Egina field, more than 130km offshore, by the end of 2018. However, Gail Anderson, an analyst at Wood Mackenzie, said early 2019 may prove a more realistic start-up date.

"If the Avengers were to follow through with these threats it would be a big dent in production. You would be a fool to ignore [the threat], but it is very difficult to defend against," Anderson said. "Shell's Bonga facility was attacked," she noted, adding that, although Egina would be much further offshore, there was no guarantee that it would be out of the militants' reach.

'This round of attacks will target deep-sea operations'—Niger Delta Avengers

In fact, the FPSO—the world's largest—recently arrived in Nigeria from a South Korean dockyard and is currently not offshore, instead undergoing final preparations at a new 500-metre FPSO quay at SHI-MCI's shipyard on an island adjacent to Lagos. While there for several months, six locally fabricated topside modules will be added, providing a rare opportunity in recent years for local content skills to be developed on a major project.

Despite the FPSO's proximity to shore at present, a successful militant attack at such a distance from the Delta—and in what is certain to be a heavily guarded environment—seems unlikely.

Nevertheless, insurance premiums could be on the rise again due to the heightened risk outlook. Last year, "war risk" premiums were added to insurance for offshore infrastructure and vessels, which were subsequently removed, when relative calm returned. But the latest threats could lead to such premiums being established once again, analysts said.

Petropolitics

The extra crude from Egina, when it finally does materialise, may come at a point when Opec quotas are less onerous. So far, Nigeria has not been subject to Opec cuts, which has helped support higher crude and condensates output this year compared to last.

As prices become more conducive to the group relaxing production quotas, oil market investment will be buoyed. But the major markets that will be targeted for new projects are the US and Kurdistan, rather than Nigeria, according to Olivier Jakob, a consultant at Swiss-based analysis firm Petromatrix.

In terms of competition and stability, Nigeria still lags behind these less risky markets which do not have the threat of militant attacks to contend with.

Politics will also play a role in developing the Nigerian oil sector in the coming 12 months, as campaigning for next February's presidential and National Assembly elections is already underway.

Despite his medical problems last year, Buhari is still seen as the frontrunner, aided by support for the economy from the rise in oil prices and falling inflation. But Nigerian politics are fickle—indeed, the NDA may increase attacks on oil installations, if they think it might result in a new president who will be a more sympathetic negotiating partner than Buhari.

"It would be a disaster for Buhari if we had another flare-up from the Avengers," Anderson said.

To avoid that, Buhari is likely to make security of onshore infrastructure a major priority over the coming months, said Jubril Kareem, a gas and power analyst at Nigeria-based Ecobank. Political appetite for any sweeping changes in the domestic energy sector, such as a rise in rock-bottom domestic power tariffs or changes to gas legislation, would also be low, he added.

Legal progress

While legislation affecting the oil and gas sector has made more progress in parliament in recent months than at any time this century, the political climate in the run-up to the elections could provide a brake on the pace of reform.

Nigeria's Petroleum Industry Governance Bill (PIGB) was approved by the House of Representatives in January, having been approved by the country's senate in mid-2017. It now needs just a presidential signature to become law. The PIGB—the first of three major bills relating to the oil and gas sector—overhauls the way in which oil and gas licenses are allocated and is intended to reduce the scope for corruption by introducing more transparency to government processes.

The other two major bills are the Petroleum Host Community Bill (PHCB) and the Petroleum Industry Fiscal Bill (PIFB). The PHCB includes legislation intended to quell unrest in the Niger Delta region by providing support for local communities and beefing up environmental protection, while the Petroleum Industry Fiscal Bill (PIFB) covers the fiscal framework for the oil producers and will thus be closely watched by the international industry.

In January, Senate president Bukola Saraki said he expected both the PHCB and the PIFB to become law soon, but some observers aren't so sure.

"The PIGB doesn't directly impact on the IOCs in the same way that the fiscal terms proposal would, so it looks like this could actually become a law," said Wood Mackenzie's Anderson.

But it may yet prove that further legislation won't emerge before the elections, especially given the complexity and potentially controversial nature of the fiscal bill, which is likely to include a major revamp of the petroleum tax regime.

Indigenous Nigerian companies could experience an upswing in their fortunes in 2018, following a year in which the weaker oil price brought a spate of late payments, which, in some cases, led to court proceedings and arbitration. Lenders were reluctant to let these companies go bankrupt, so a lot of their debt was restructured to allow repayments over a longer period. Paying it back should be easier this year, as they benefit from the higher global oil prices and improved profit margins.

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