Oil production in Africa’s biggest oil producer, Nigeria, has now fallen to 1.88m b/d, 600,000 b/d lower than predicted and perhaps 1m lower than national production capacity. There seem to be two main causes for this poor performance: renewed oil theft in the Niger Delta and the lack of progress on passing the Petroleum Industry Bill (PIB). The big oil companies that dominate the Nigerian oil industry have repeatedly delayed investment decisions over the past two years now, as the wait for the PIB to be concluded.
Estimates on the volume of oil stolen in Nigeria vary widely but average about 150,000 b/d. This oil is then sold on elsewhere in the region, to customers around the world and perhaps even sometimes re-imported into Nigeria after being mixed with licit crude.
However, oil theft has a much greater impact on production levels than the volume stolen. Illegal oil gangs interfere with oil transmission infrastructure in order to access production. They fit spur pipelines to main lines and sometimes blow things up. Oil companies must therefore take oil wells out for production for days or even many weeks while they carry out the required repairs.
The government militant amnesty, which was introduced in October 2009, persuaded thousands of militants to hand in their weapons. As a result, the rate of kidnappings and bomb attacks in the Niger Delta fell dramatically but the theft of oil continued.
Illegal bunkering operations move from one area to another and the volume of oil stolen varies from month to month and year to year, as arrests are made and naval units moved around in order to deter collusion, but there is no indication that the average volumes involved are lower as a result of the amnesty.
No arrests have been made of those at the head of the oil gangs, merely the foot soldiers of organised crime. Finance minister Ngozi Okonjo-Iweala says that the total lost production from illegal bunkering is as much as 400,000 b/d. Shell alone lost 100,000 b/d from Nigeria during the second quarter of this year. A recent report by the UK’s Chatham House, called Criminal Crude, concluded: “Nigerian crude oil is being stolen on an industrial scale. Proceeds are laundered through world financial centres and used to buy assets in and outside Nigeria.”
Rolake Akinkugbe, the head of oil and gas research at Ecobank, said: “Oil theft is now a much more significant issue than it has been in the past. At the same time, new investment in the industry has almost ground to a halt.” He added: “Output has been less than 2m barrels a day for several months. It’s a reflection of the headwinds facing oil companies in Nigeria.”
The PIB was designed to iron out many of the industry’s main problems. A combination of greater transparency, more commercial gas prices and an improved government tax take was designed to give something to everyone, although the oil companies complained that the proposed legislation was too harsh on them.
However, despite promises of its passage into law on several occasions over the past two years, the PIB has become stuck in parliamentary process and so upstream operators have delayed investment decisions until any amendments have been finalised. The oil majors have sold some of their onshore and shallow water blocks to independent oil firms because of their frustration with the situation. ConocoPhillips, for instance, is in the process of selling assets to Nigeria’s growing oil and gas company, Oando.
Sapetro opts for upstream
While Nigeria LNG (NLNG) is one of the world’s biggest liquefied gas projects, progress on developing other LNG schemes has been painfully slow. Almost a dozen other projects have been planned but none have yet been constructed, partly because of the uncertain investment environment.
Federal government ministers have repeatedly stated that they would like to see domestic gas needs prioritised over export plans, but this will require the introduction of a more attractive commercial rate for gas. President Goodluck Jonathan has promised to deregulate domestic gas prices but needs the PIB to pass into law before they can be offered.
US firm ConocoPhillips is to pull out of the Brass River LNG scheme in Bayelsa state. In September, it agreed to sell its 17% stake to Oando for almost $105m. The remaining partners in the project, which is designed to have production capacity of 10m tonnes a year, are Nigerian National Petroleum Corporation (NNPC), Total and Eni, which are still keen to pursue the venture. In a statement, Total argued: “Brass LNG will help to monetise the country’s gas reserves while also contributing to economic development in an impoverished region of the Niger Delta.”
Oando has adopted a twin strategy of upstream acquisitions and developing gas grids in some of Nigeria’s biggest cities. By contrast, another Nigerian firm – South Atlantic Petroleum Company (Sapetro) – is firmly focused on the upstream end of the equation. It has stakes in OML 130 and OPL 246, which include the Akpo Field, as well as the Egina deepwater project, which is scheduled to come on stream in 2017 with production of at least 150,000 b/d.
Production will be via a floating production storage and offloading vessel (FPSO) with storage capacity of 2.3m barrels. The Egina consortium comprises Total (24%), NNPC (10%), CNOOC (45%), Petrobras (16%) and Sapetro (5%).
In addition, production on the Usan offshore field, which came on stream on OPL 222 last year, is to be ramped up to 180,000 b/d. It has been developed by operator Total (20%), plus partners Chevron (30%), Esso Exploration and Production Nigeria (30%) and Nexen Petroleum Nigeria (20%).
Together with other deepwater projects, Egina and Usan will add about 500,000 b/d to national production capacity over the period 2017–18. Located in deepwater areas, these schemes should be relatively sheltered from onshore security and political difficulties and will help to boost national output.
Sapetro is also one of the first Nigerian oil companies to invest in other parts of the continent, although this may be because of the attractions of East Africa rather than merely the lack of opportunities in its home market.
Sapetro chief executive Martin Trachsel said: “This region was definitely underexplored in the last decade. Most companies were exploring in West Africa. It’s part of a general trend of people looking for more oil. New technology has also contributed to the string of new discoveries. The industry is innovative. It always finds new plays and new ways of finding oil and gas.”
The impact of oil theft and delays to the PIB should not be seen as separate factors. Shell and other companies are keen to upgrade trunk pipelines in the Delta that have been damaged by militant attacks but are reluctant to do so until they see the final form of the PIB.
If Nigerian production remains at current levels, Angola could overtake the country as Africa’s biggest oil producer, a position that it has only briefly held once before, during the height of the Niger Delta crisis of 2009. This is despite the fact that Angola has barely a third of Nigeria’s oil reserves of 37.2bn barrels.
Lower production is having local and global implications. The loss of 600,000 b/d of Nigerian output has helped to drive international oil prices above $110 a barrel, while the Nigerian government is also losing about $1bn a month in much needed revenue. It had based its budget on oil production of 2.5m b/d and so has been forced to use its Excess Crude Account to make up the difference. Razia Khan, the head of Africa research at Standard Chartered Bank, told journalists: “Nigeria still has a comfortable current account surplus, but it is declining, as is the Excess Crude Account. Unless we see a turnaround in oil revenues, investors are going to start to get concerned.”