Nigeria is suffering the worst oil production disruptions in four years, with output falling to levels last seen before the government’s amnesty programme ended the militancy in the Niger delta. Industrial scale oil theft, sabotage and technical problems have caused crude output to drop to less than 1.9m barrels a day this summer, the lowest since mid-2009, when production briefly dipped to a 20-year low of 1.5m b/d. Any further fall would allow Angola to assume Nigeria’s position as the continent’s largest crude producer.
“Output has been less than 2m barrels a day for several months,” said Rolake Akinkugbe, head of energy research at Ecobank. “It’s a reflection of the headwinds facing oil companies in Nigeria.” The country’s production difficulties have helped push global crude prices to a five-month high of $111 a barrel. They have also damaged the financial outlook in Africa’s second-biggest economy, where oil and gas account for nearly 80 per cent of fiscal revenues. Nigeria budgeted for oil sales of 2.5m b/d in 2013, which combined with the high petroleum prices should have allowed for substantial savings in the Excess Crude Account, the government’s rainy-day fund. But instead of increasing, the fund has been run down from $9bn in December to $5.1bn in July.
Razia Khan, head of Africa research at Standard Chartered Bank, said falling oil revenues should be a worry for the Nigerian government, especially with a presidential election scheduled for early 2015. Previous polls have been preceded by a sharp increase in spending and leakages in revenue collection as politicians try to buy their way to power. “Nigeria still has a comfortable current account surplus, but it is declining, as is the Excess Crude Account,” said Mrs Khan. “Unless we see a turnaround in oil revenues, investors are going to start to get concerned.”
Nigeria drastically reduced the number of oil worker kidnappings and pipeline bomb attacks in 2009 by persuading more than 26,000 militants to disarm in exchange for monthly cash payments, which are ongoing. While the violence has not returned, the theft of oil has grown into a vast and lucrative enterprise involving well-connected officials and security personnel. More than 150,000 barrels of oil are reportedly stolen every day, with some feeding illegal refineries in the Niger delta and the bulk shipped to destinations as far away as Asia. The Nigeria Extractive Industries Transparency Initiative said in July that the country had lost $10.9bn in potential oil revenues to theft and sabotage from 2009 to 2011 – before the problem reached its current scale. By last year, losses had increased to $1bn a month, according to the government.
Oil majors have at times had to stop pumping from onshore oilfields because of thieves tapping into their pipelines, with Shell and ENI declaring force majeure this year. Inadequate maintenance procedures and ageing infrastructure, especially the 6,000km pipeline network, has added to the companies’ production woes. The disruptions caused oil output to slip below 2m b/d in April, reaching a floor of 1.88m b/d in June, before increasing slightly to 1.92m b/d in July, according to the International Energy Agency. In 2011 and 2012, the country’s average production was 2.2m b/d and 2.1m b/d respectively. Angola, which briefly overtook Nigeria as the continent’s biggest producer in 2009, exports about 1.8m b/d, and hopes to hit 2m b/d by 2015.
Besides the domestic factors, shifting international dynamics are also working against Nigeria. The US has long been the biggest buyer of its crude, but the growth of the American shale industry is changing that. In February, US imports from Nigeria dropped to 194,000 b/d, an 18-year low, forcing Nigeria to find new buyers. Meanwhile, new oil and gas discoveries elsewhere in Africa – from Ghana to Mozambique – mean that petroleum companies have much greater choice than a few years ago over where to invest. With 37.2bn barrels of provable oil reserves – more than three times that of Angola – Nigeria has much scope to increase oil production, and the government has talked for years about output of 4m b/d. But uncertainly over the petroleum industry bill, which is meant to transform the domestic industry – and increase the government’s fiscal take – has caused oil majors to delay approving new projects. The mounting security problems and costs onshore have caused the likes of Shell and Chevron to sell off some assets to local players, and concentrate more on deepwater blocks.