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Nigeria’s oil output still hampered

An exemption from Opec’s supply deal will mean nothing unless the unrest abates

Alongside Libya and Iran, Nigeria is to be exempt from Opec's proposed - though by no means finalised - supply cuts. It's the least the country's embattled oil and gas sector needs.

But it also implies that Nigeria's output can rise to reclaim the loftier levels of 2.2m barrels a day targeted by state company Nigeria National Petroleum Corporation (NNPC). For now, that looks a distant hope. Output remains hamstrung by unrest, at around 1.5m b/d.

Despite recent talks between the government and saboteurs in the Niger Delta, the violence continues. In response, so do president Muhammadu Buhari's pledges to crush the unrest.

Nonetheless, Nigeria continues to lose its grip on wholesale theft of oil and gas. Thousands of breaches have already occurred this year, of which the latest significant loss occurred in early August at a pipeline jointly owned by Nigeria Petroleum Development Corporation and Shoreline Resources when a new militant group cracked the Eriemu manifold in the troubled Niger Delta.

The group, calling itself Niger Delta Greenland Justice Mandate, warned that it would attack oil multinationals in the region and urged them to evacuate personnel. Any attempts to repair the breach would expose workers to further danger.

At the same time, it's taken Shell months to repair a pipeline feeding its Forcados terminal after it was blown up by the Niger Delta Avengers, the militant group that has led the upsurge in violence this year. The pipeline, which in normal times exports about 200,000 b/d, was expected to reopen in September but by 3 October remained shut (Shell is reported to have sold an initial cargo, though the lifting date is uncertain). Likewise, ExxonMobil had been expected to resume exports of its Qua Iboe stream, which has been under force majeure, with cargoes to ship in October. It normally ships up to 340,000 b/d, but has been shut since July. Its lifting schedule is also uncertain.

A top-level meeting of former group managing directors of state company NNPC in Abuja in early September effectively agreed oil and gas theft was spiralling out of control. "If the current situation remains unchecked, it could lead to the crippling of the corporation and the nation's oil and gas sector, the mainstay of the Nigerian economy," they said in a statement.

The meeting also expressed concern about the corporation's rising debt, suggesting "as a matter of urgency" that NNPC should "immediately decide on the most appropriate capitalisation model".

NNPC has plenty to worry about. According to the most recent official statistics, between January and May 2016, "pipeline vandals and oil thieves" stole 0.56m barrels of crude and 109m litres of petroleum products. In that period NNPC suffered a total 1,447 pipeline breaches of varying importance.

In terms of percentages, gas supply is even harder hit. Instead of the 1.4bn cubic feet a day for which the corporation had budgeted, it pumped less than 0.7bn cf between January and May.

The losses are playing havoc with NNPC's revenues and Nigeria's economy. Production is 0.7m b/d beneath the level needed for the government's budget for 2016. Unsurprisingly, the September meeting expressed alarm at the "continuing dwindling of NNPC revenue".

Of considerable concern to multinationals is Nigeria's failure to come to grips with these wholesale losses. Although the commandant general of the Nigeria Security and Civil Defence Corps, Abdullahi Gani Muhammadu, recently assured NNPC's new chief executive, Maikanti Baru, that his troops were "ready to bring pipeline vandalism to an end" and protect the country's energy infrastructure, little seems to have changed in the intervening months. The only glimmer of hope occurred in May when the corps announced it would arrest "black marketers and illegal oil dealers".

Promising reform, Baru arrived at the head of the NNPC in July with a 12-point agenda. The plan was pretty much identical to the wish list unveiled 11 months earlier by his predecessor and now petroleum minister, Emmanuel Kachikwu. Kachikwu had pledged to eliminate pipeline vandalism within eight months, a bold but unlikely ambition. He based his optimism on negotiations with local communities, "repairing and restoring" oil and gas pipelines, the involvement of the Nigerian navy, and the use of drones to monitor pipelines.

By patrolling the coastline and intercepting tankers carrying stolen crude, the navy was expected to put a stop to the most economically damaging losses occurring at terminals. But the theft "can only be carried out with the collusion of people working at the terminals", said a recent report from law firm Berwin Leighton Paisner. And none of the initiatives appears to have happened on a meaningful scale, if at all. NNPC did not respond to questions from Petroleum Economist.

Meantime, skirmishes between the defence forces and pipeline vandals, especially in the increasingly lawless Niger Delta region are frequent and sometimes fatal.

Although its cash flow has been hurt, NNPC is considering a hefty round of capital expenditure, probably with the involvement of foreign partners. The brains trust of former group general managers has proposed that refineries be "rejuvenated using original equipment manufacturers" and should be restructured as incorporated joint ventures along the same lines as Nigeria's liquefied natural gas business. This should be done with the assistance of "credible partners having requisite technical and financial capabilities".

It's hard to see investors getting involved until the oil and gas losses are dramatically reduced. As for the Opec exemption - allowing for a production recovery - for now it will remain a virtual entitlement, deliverable only when the Delta's politics prove more favourable.

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