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Nigeria's dilemma

The economy is struggling, investors are nervous and a ceasefire in the Delta seems to be over, threatening production

A ceasefire announced in August by militants in the Niger delta and higher oil prices have brought optimistic noises from Nigeria's government about raising oil output at the end of a disastrous year. Some progress is plain. But a full recovery is some way off, and threats are re-emerging.

Another outbreak of violence has brought an end to the ceasefire in the Delta. The economy in such a mess that the government has mooted selling off prized oil assets-while at the same time suing the international oil firms that might buy them. The oil industry is still far from solid ground.

Emmanuel Kachikwu, Nigeria's oil minister, insists output has been rising since militants from the Niger Delta Avengers (NDA) declared a ceasefire in August, following months of sabotage. But production had dipped beneath 1.4m barrels a day in July. And the modest increase since still leaves Nigerian production at least 400,000 b/d beneath its level a year ago. The International Energy Agency says output in September was 1.45m b/d in September, just 20,000 b/d more than in August.

Some progress is evident. Shipments from Shell's Forcados export terminal and ExxonMobil's Qua Iboe terminal have both resumed, though it is understood that both plants remain under force majeure. By early October, Qua Iboe was heading back up to full capacity-the facility averaged around 340,000 b/d last year-while Forcados was likely to ship around 150,000 b/d, around three-quarters of its usual capacity.

In September, Kachikwu was predicting Nigeria's output would reach 1.8m b/d in October and 2m b/d by December. With cargos from both terminals starting to be contracted again in recent weeks, regional observers say his October figure could be accurate. Reuters calculates from loading schedules that exports could hit 1.88m b/d in November. Some of this will be stored oil.

His claim is one reason the country was exempted from Opec's decision in Algeria to curb output. Alongside Libya and Iran, Nigeria will be allowed to keep adding output, to reach earlier production levels, while the rest of the group freezes or cuts supply.

Short game

But sustainable Nigerian output growth will rely on things running smoothly at the wellhead and on pipelines. A pipeline fire in the Delta in August and an attack on another one, claimed by the NDA, have curtailed supply to Shell's 0.6m-b/d Bonny export facility. About 180,000 b/d of its export capacity have been knocked out.

The end-year 2m-b/d target looks especially vulnerable. Amrita Sen, Chief Oil analyst at consultancy Energy Aspects, says that while an uptick in production in October may have been possible, the longer term outlook is much shakier.

"The sustainability of this is still very much open to question, given what's happened to Bonny. We are expecting more attacks," she says. "I don't know how anyone can come up with an estimate for year end, because the situation has just been so volatile."

Prospects for new capacity additions-as opposed to resumptions of shut supply-remain dim. Operators have been deterred from investing in the upstream by the lack of fresh legislation to clarify the oil sector's business framework and Nigeria's wider economic uncertainties.

As a result, only the Total-operated Engina field is scheduled to add significantly to production in the next one or two years. The project, including a $3bn-plus floating production storage and offloading vessel, is expected to start pumping in early 2018, producing 200,000 b/d at full capacity.

Luring back other investors is the bigger task. They have been waiting for the government of President Mohammed Buhari, elected last year, to follow through on its promise to revitalise the business environment. After a positive start, when state energy firm the Nigerian National Petroleum Corporation (NNPC) was restructured and efforts to stamp out corruption in the oil industry were instigated, the reform push has lost momentum.

Kachikwu's appointment to the government's energy file was encouraging-the former ExxonMobil executive was appointed chief executive of a restructured NNPC last year too, and remains chairman of the corporation. His relinquishment of day-to-day running of NNPC was seen as necessary to avoid a conflict of interest with his new ministerial role.

But new legislation governing how NNPC operates, investment in the industry, the award of new acreage and production-sharing agreements seems as far away as ever-the Petroleum Industry Bill (PIB), in one form or another, has been tossed around between legislators for almost a decade without ever becoming law.

Buhari and Kachikwu know some legislation is necessary if investment is to perk up. Plans have been drawn up to split the NNPC in two and perhaps open it up to private investment, as well as to divide the original PIB legislation into two less cumbersome bills to help get at least some of it enacted. For now, the economy and the violence in the Delta, among other problems, have relegated such reforms.

Much will depend on whether Buhari can quell the fresh unrest in the Delta-and make any cessation of violence stick for longer than a few weeks.

The NDA, which sprang to prominence in early 2016 following a series of attacks on oil installations, announced a ceasefire on 20 August. It said it wanted talks between the government and representatives of Delta groups to secure a better deal for the population of the oil-rich region. But then NDA claimed responsibility for an attack on the Bonny crude export pipeline in late September.

After the attack, the NDA said in a statement it was still "in favour of the dialogue and negotiations", but then blamed the authorities, saying it would "resist all actions undermining the ceasefire from [the] side of the government and [its] security agents/agencies".

The militants claim recent army-led security operations in the Delta show the government is not serious about talks. For his part, President Buhari has said his administration "will not allow these mindless groups to hold the country to ransom".

Muddying the waters, new militant groups are emerging in the Delta, including the Niger Delta Greenland Justice Mandate (GJM), which claims to have blown up pipelines operated by NNPC over recent weeks. The appearance of these new groups show how difficult a negotiated settlement will be. Grievances vary between communities and interest groups and have been re-ignited by Buhari's attempts to stop funding arrangements put in place by a previous government as part of an amnesty and ceasefire agreement in 2009.

That amnesty deal dampened the violence for several years, but also cost the government more than $0.5bn a year in payments to ex-militants at one stage, according to some estimates. It also stuck in the craw of Buhari, who was elected on a promise to clamp down on rampant corruption. While the money was intended to provide re-training for ex-militants and basic support for Delta communities, much of it is believed to have ended up funding lavish lifestyles for a few.

Problems in the coffers

The government has plenty of other problems on its plate too, not least an ailing economy. In October, the IMF said it expected the Nigerian economy to contract by around 1.7% this year, before expanding by just 0.6% in 2017-a downward revision to its previous forecast for next year's growth of 1.1%.

In September, S&P downgraded Nigeria's rating by a notch from B+ to B, several levels below investment grade. The credit-ratings agency said the shrinking economy was attributable to disrupted oil production, restrictive foreign exchange policy-the naira was been allowed to float in June, and since then has lost about 10% of its value-and a failure to implement fiscal stimuli fast enough. The naira's weakness has hurt Nigerian importers' ability to pay for gasoline imports, which are vital given the country's lack of functioning refining capacity.

The S&P downgrade was badly timed for Nigeria's borrowing plans, adding to downward pressure on yields on existing bonds, just as the government was attempting to put in place plans to issue a $1bn Eurobond before the end of the year. The issue is part of a $4.5bn Federal Government Medium Term Note Programme for the 2016-18 period.

The economic crisis has led officials to talk of a further sale of government-owned oil assets. Udoma Udo Udoma, Nigeria's budget minister, said in September that the government was devising a plan-yet to be fleshed out-to raise funds through privatisations, advance payment for licence rounds and infrastructure concessioning.

But the government will probably want deep-pocketed foreign firms to buy some of these assets, and luring them back will be tricky. In September the government announced that-as part of its drive to recover billions of dollars of oil revenues that went missing under previous administrations-it had filed a lawsuit against several international oil companies over claims they were involved in under-declaring exports of Nigerian crude to the US between 2011 and 2014, resulting in $12.7bn of lost income for the country. Nigeria has a right to that money-but it also needs some of these companies to stick around and spend more cash.

Companies cited include the Nigerian subsidiaries of Chevron, Shell, Eni, Total and Petrobras. Those that have commented say they have done nothing wrong.

The Nigerian lower house of parliament is also investigating missing fuel exports, which it says could total 58m barrels of oil and 0.727m tonnes of liquefied natural gas, worth up $17bn. This includes exports to China, Norway and the US.

"Nigeria is interested in oil-asset sales, while at the same time, they are suing foreign oil companies. I don't know how you reconcile the two," says Energy Aspects' Sen.

The clash of objectives reflects the Herculean task faced by Buhari's government as it tries to reform an entire economy wrecked by years of neglect and corruption. The oil industry is just part that needs attention. Trying to keeping the peace in the more violent Muslim north of the country might be an even larger political priority. On 12 October, clashes between police and Shia marchers in the north left many dead.

Under threat: Nigeria's embattled oil and gas network (Source: Petroleum Economist)
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