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Distress ahead in the Nigerian delta?

Far from hitting a 2.2m b/d output target this year, Nigeria’s entire onshore production is now at risk

VIOLENCE in the Niger delta, including attacks on pipelines and destruction of other infrastructure has cost Nigeria its place as Africa's largest oil producer and pushed output to a 20-year low just as the country needed income. It is losing a prime opportunity to capitalise on its significant resources.

Emmanuel Ibe Kachikwu, Nigeria's oil minister, told Petroleum Economist recently that he would use "consultation and negotiation to handle oil vandalism", rather than force. But the army could intervene, with the potential to make the problem worse.

"The long-term solution to the problems in the Niger delta is continuous engagement and detailed participation of individuals, including myself, and making sure we make the right social and infrastructural investment in those entities," Kachikwu said.

The government has talked of lifting oil output to 2.2m barrels a day by the end of the year. But this target, always ambitious, is now irrelevant. By the beginning of June, the violence had driven output down to just 1.6m b/d, the oil minister said. That could be an overestimate - some sources put it much lower, and the Niger delta Avengers, the group leading the new insurgency, say they want to shut down everything. In January, output was around 1.9m b/d. The worst-case outlook would see production restricted to relatively safe developments offshore, implying a drop to 0.75m b/d. By the first week of July, production had begun to recover - but was then threatened again after the Avengers struck at five more energy installations in the delta.

Four of Nigeria's crude grades - including the largest stream, Qua Iboe - have been periodically under force majeure recently. Even cargoes that could be loaded have been left without buyers, some of which are turning away from an unreliable supplier.

The militancy has been underway since earlier in the year. In February, the attack that has caused the largest disruption to output came when militant group the Avengers targeted a subsea section of the Forcados pipeline. Around 250,000 b/d of output was shut in and repair work is underway, but a timetable for its return is uncertain.

Kachikwu, who has been meeting with militants since the end of May, said Nigeria would "have less aggravated individuals" only when people saw improvements in the country's economy.

The government has talked of lifting oil output to 2.2m barrels a day by the end of the year. But this target, always ambitious, is now irrelevant

"So we need to enhance the amnesty programme that we have but more importantly enhance the long-term infrastructural development in those areas," Kachikwu said.

That was a reference to the scheme put in place by former president Goodluck Jonathan, which paid former militants from the Movement for the Emancipation of the Niger delta (Mend) - the group that led a 10-year-long uprising in the delta - to protect the infrastructure they had once attacked. Jonathan, from Nigeria's south, also oversaw plans to build new downstream infrastructure. Mohammadu Buhari, the man who replaced Jonathan as president in 2015, rolled back the initiatives - a move that spurred the latest upsurge in violence. Some in the south see Buhari's anti-corruption drive, which has targeted some members of the previous government, as a campaign against the south by a Northern Muslim leader.

Mountains to climb

Kachikwu thinks force majeure on the Forcados pipeline would be lifted by the end of August. But analysts are skeptical.

Disruptions are likely to continue for some time - the Avengers have said they will refuse to negotiate with the government, and terms it issued to Abuja to cease their attacks included the shutting down of all output. Other observers fear an escalation in the delta - led by further Nigerian military incursions, or aerial attacks - could widen the conflict, drawing other southern groups, or even Mend itself, to the Avengers. The Avengers say they will declare an independent delta state in October.

Poverty and ecological degradation are delta problems that won't be easy to solve, especially with a short-term crisis in Nigeria's economy. Its foreign exchange reserves have plummeted - to under $26bn in mid June; the economy contracted in the first quarter; and the naira is expected to fall sharply after the government abandoned a currency peg.

Worsening the oil crisis is that refiners from Asia to the US have been shying away from buying Nigerian grades, fearing further interruptions.

If the interruptions cease, Facts Global Energy, a consultancy, reckons output could recover to 1.8m b/d by the end of the year. But in the short term, says one of its analysts, Audrey Dubois-Herbert, output is likely to fall beneath 1.4m b/d, with a real chance of total collapse.

"While diplomacy would be a first step towards resolving this conflict, this would require Buhari to backtrack his decision to withdraw privileges, a programme the budget can no longer cover," Dubois-Hebert says. "It's a case of 'too little too late,' as a growing number of people now fail to trust their government."

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