Nigerian output recovery still distant
As export routes remain blocked, local producers get creative
Nigeria's government, committed to a crack-down on corruption in the oil and gas industry, is still struggling to find a long-term solution to unrest in the Niger Delta and restore production to former levels. It is forcing producers to seek alternative routes to get their oil to market.
The government talks an expansive game for the future. Petroleum minister Ibe Kachikwu says the target is to eliminate militancy on the Niger Delta by mid-2017 and lift production to 3m barrels a day. Yet despite its exemption from the Opec cuts, that seems a long way off. Nigeria isn't even nearing its notional maximum output capacity of around 2.2m b/d-a level the government has repeatedly said is attainable in weeks, only to miss that target by a country mile.
Based on secondary sources, Opec pegged Nigerian oil production in December at little more than 1.5m, only around 100,000 b/d more than it produced during the trough of mid-2016.
The reality is that key oil and gas infrastructure damaged by militants in the Niger Delta in the past year is still under repair. Efforts to negotiate a ceasefire, while continuing, have yet to yield concrete results.
The chances of output rising sharply in the first half of 2017 look slim. The Shell-operated Forcados terminal, which used to handle around 250,000 b/d of exports, was shut down by attacks in February and November 2016. It remained closed in February 2017. Exports from other terminals remain severely curtailed due to damage to pipelines and other infrastructure.
Meanwhile, talks with militants, such as those in the Niger Delta Avengers umbrella group, have been moving slowly, producing sporadic ceasefires but nothing lasting so far. One avenue the government is pursuing is an amnesty agreement, under which militants would put down their weapons in exchange for cash. A similar deal in 2009 produced several years of relative calm in the Delta.
Opec producers nervous that Nigeria could ruin their efforts by sharply boosting supply have little to worry about
For now, Opec producers nervous that Nigeria, not given a quota in the November 2016 supply deal, could ruin their efforts by sharply boosting supply have little to worry about.
But Nigeria's oil producers are not twiddling their thumbs waiting for something to turn up. While they can't do much to solve the Delta's political problems, they can seek to diversify the routes to get their oil to market, so that a militant attack on one pipeline or terminal doesn't decimate oil sales.
Austin Avuru, chief executive of home-grown oil and gas producer Seplat Petroleum, says he expects his company's oil output to be back to normal in the second half of 2017, having been badly affected by the militant attacks, notably on Forcados.
"This depends on us developing multiple channels of evacuation-we are not just sitting back helplessly," he told Petroleum Economist in a recent interview in Florence.
For Seplat, that involves re-routing deliveries to alternative terminals. A pipeline to the functioning Chevron-operated Escravos terminal is under consideration, and Seplat is already sending crude from the adjacent 4, 38 and 41 onshore licences in Delta and Edo States, which it operates, to storage at the nearby Warri refinery via a 100,000-b/d pipeline. It is then being sold from there on a free-on-board basis. Seplat is also studying the use of barges to shift crude out of the region.
The need for action is acute: Seplat's average liquids production fell 61% year-on-year in the first nine months of last year to 10,701 b/d, though the company's expanding gas production helped mitigate the effect of the oil decline.
Oil firms have been generally supportive of President Muhammadu Buhari's efforts to tackle the Niger Delta problem, long-delayed restructuring of the industry and the sector's endemic corruption.
A $5bn settlement announced in November to recompense international oil companies (IOCs), including ExxonMobil, Shell, Chevron, Total and Eni, for operating costs they said had not been paid, indicates a fresh approach to relations with the IOCs.
In a related move, the government has also said it would end so-called cash calls on the state-run Nigerian National Petroleum Corporation (NNPC), whose revenues plummeted as oil prices tumbled and exports stuttered, triggering a crisis across the Nigerian economy. NNPC was supposedly obliged to finance its share of joint-venture projects, but in practice it often ended up either in arrears to its partners, or cancelling projects-a situation that put off investors.
Plans are also afoot to break up NNPC into more manageable chunks and to privatise some of it. Finally, long-awaited legislation to establish a comprehensive new structure for the industry is edging closer to realisation, though it is unlikely to emerge soon.
The drive to clean up the industry cuts both ways. At the end of January, a Nigerian court ordered Shell's and Eni's local subsidiaries to temporarily give up one of the country's largest prospective oil finds, while an investigation into potential bribery and money laundering took place.
The IOCs acquired the OPL245 prospecting license in a deal worth more than $1bn, since then allegations have swirled over alleged irregular payments to the previous owners and the prior Nigerian government's role in facilitating them, triggering investigations in the two companies' home jurisdictions of the Netherlands and Italy. (Eni boss Claudio Descalzi, his predecessor Paolo Scaroni and several other executives have been charged in Italy.) Both companies say they did nothing wrong. OPL245 could hold around 9bn barrels of reserves.
Seplat's Avuru says he thinks the government's reform plans are heading in the right direction, even if the pace could be faster. "They are continuing to tackle corruption and that's a big plus. But we need a bit more speed, because we are in an emergency situation," he says. "If they pass the reform and fiscal bills that would essentially put the governance structure in place."