Angola and Nigeria hurt by US tight oil production
Oil production in the US is hurting West Africa’s Opec members, even as their own output rises
West Africa’s Opec members, Nigeria and Angola, find themselves trapped between fracturing shale rocks and a hard economic place. They are faced with the prospect of trying to sell rising crude production into an increasingly well-supplied global market, following the collapse of their exports to the US, while potentially coming under pressure to cut exports, if Opec decides more support for a weak oil price is necessary.
With light, sweet crude of the type Nigeria mainly produces now readily available from US domestic producers, thanks to the shale and tight oil boom there, demand for its oil in North America has plummeted. Angola has also lost US buyers for its lighter crudes, though can still find a market in the US for the heavy and sour varieties it produces.
US imports from Angola and Nigeria combined totalled 1.5 million barrels a day (b/d) in April 2010. By July 2014, Angola was exporting just 141,000 b/d of crude to the US. Nigeria’s have dried up completely, having totalled some 1m b/d in 2010, according to the US Energy Information Administration. “All this has led to a build up of inventories in the Atlantic basin,” says Virendra Chauhan, an oil analyst at Energy Aspects, a London-based consultancy. “Both Nigeria and Angola rely heavily on oil revenues, so when they increase production at a time when demand for their exports has softened, it presents quite bearish fundamentals.”
Meanwhile, the two exporters must also contend with the impact of other factors that have hit global oil prices and triggered debate within Opec about what to do. In June, when news of the Islamist advance in Iraq reached markets, the oil price stood at around $115 a barrel. By early October, in a less jittery, better-supplied market prices dropped to around $90/b.
In other circumstances, the success of both countries in boosting production over recent months – albeit for differing reasons – might be a reason for celebration. In the prevailing market it is a mixed blessing, at best. Now they must sell into an over-supplied market in competition with players that have more clout, not least Saudi Arabia, which so far looks reluctant to rein in exports to shore up the price.
When Opec meets later this month to decide on whether to reduce its output target for the first half of next year, neither country will be eager to accept production cuts. But the prospect of either Angola or Nigeria leaving the group is highly unlikely, analysts say. Opec stalwart Nigeria, a member since 1971, and relative newcomer Angola, which joined in 2007, will not be keen to leave an organisation with the sort of global influence they do not possess as individual nations.
Indeed, Nigeria has been pushing to increase its influence within Opec. Last June it proposed that its energy minister, Diezani Alison-Madueke, succeed Abdalla El-Badri as the group’s secretary-general. The move was intended to provide an alternative to Iranian and Saudi candidates, whose opposing positions had created deadlock. In the end, an extension of El-Badri’s tenure until June 2015 provided a way out of the impasse.
Overall output in Angola has been raised by the start up in July 2014 of the Total-operated Clov deep offshore development on Block 17, which is now ramping up production towards capacity of 160,000 b/d from proven and probable reserves of over 500m barrels.
Angolan crude production in August 2014 averaged 1.75m b/d, an increase of some 1.7% from 1.72m b/d in the fourth quarter 2013 and a rise of 9.4% from the 1.6m b/d averaged in the first quarter 2014. Production fell in the first quarter due to the loss of output from the BP-operated Plutonio offshore field, where maintenance was undertaken. Planned maintenance in Total’s Girassol field may hold back production there in November, but the trend of Angolan production is set to remain upwards. Sonangol, the national energy company, forecasts that crude output will rise to around 2m b/d in 2015, as several new projects become operational.
In Nigeria, the picture is different. Crude output has risen recently, on the whole not because of fresh output from new projects, but because existing ones have been operating more smoothly than they have for some time. The number of sabotage attacks on and thefts from oil pipelines and vessels in and around the Niger Delta has fallen, as Nigeria has taken more stringent measures against illegal bunkering, oil theft and sea piracy. In turn, this has reduced the number of times oil producers have declared force majeure on shipments. Nigerian crude production in August 2014 averaged 2.01 million b/d, compared with an average of 1.87m b/d in the fourth quarter 2013 – a rise of around 7.5%. This marks a return to production levels last seen in 2012.
However, both the security and political situations in Nigeria remain unstable. While the unrest dogging Nigeria’s northern states, including the Boko Haram insurgency, does not directly affect major oil and gas facilities, the possibility of further disruption to supply in the Delta region remains. The approach of presidential elections next February could spark unrest, though recent state elections passed off peacefully. Meanwhile, a strike by workers at state-run Nigerian National Petroleum Corporation (NNPC) over pensions was narrowly averted in September.
Improvements in Delta security have not stopped Shell from proceeding with its plans to sell four of its onshore fields in Nigeria. The company said in August it had reached agreements to sell some but not all of the assets, without giving details. Nigerian companies are expected to be among buyers, reflecting the government’s desire to encourage domestic ownership of onshore fields while asking international oil companies (IOCs) to focus on more technically challenging offshore projects.
There has been some expansion of offshore production this year, notably from the first well at the Bonga North West deep-water development. This is expected to produce some 40,000 barrels of oil equivalent a day at peak output and will help maintain overall output from the wider Bonga development.
But, whatever the government’s hopes or the security situation, the oil industry is unlikely to plough more money into Nigeria until the country’s Petroleum Industry Bill (PIB) becomes law. The PIB is designed to improve overall operating and investment conditions, but has been held up in Nigeria’s legislature for years. Numerous revisions have also delayed it. Without a clearly defined framework, the IOCs on which Nigeria relies to produce most of its oil will invest elsewhere.
In search of new markets
Both Angola and Nigeria are already diversifying the markets for their crude, so the loss of US demand is a setback rather than a hammer blow. However, finding new takers for excess supply is a challenge.
Angola already has a ready-made market in China, largely due to the legacy of oil-for-infrastructure deals, which enabled the southwest African country’s battered infrastructure to be rebuilt after its 27-year civil war ended in 2002. As a result, only Saudi Arabia exports more oil to China than Angola, which sent 810,000 b/d to Asia’s largest economy in the first eight months of 2014. Meanwhile, some of Angola’s production can still find a home in US refineries, potentially including output from Clov, which produces the heavier grades US refineries still need to import.
Nigeria has also been sending more crude to Asia, notably to India, where burgeoning refining capacity is geared up to take heavy crudes from Latin America and the Middle East, as well as the light, sweet feedstock that Nigeria provides.
Europe remains a significant market for Nigeria, taking almost half of its output, according to NNPC. However, China, India, Japan and South Korea, Asia’s largest importers, took around 42% more crude from Nigeria in the first eight months of 2014, than they did in the same period of 2013, according to Platts, an industry pricing agency. India took just under 370,000 b/d from Nigeria in January-August, while China’s imports from Nigeria more than doubled to 41,000 b/d.