Bloomberg News

Nigerian Delta Unrest Cuts Oil Output by 1 Million Barrels

March 05, 2012

Oil production in Nigeria, Africa’s biggest producer, is down by about 1 million barrels a day because of violence and theft in the Niger River delta, according to the state oil company.

Output is yet to be restored at 40 onshore oil fields mostly operated by Hague-based Royal Dutch Shell Plc (RDSA), San Ramon, California-based Chevron Corp. (CVX) and smaller producers more than two years after a government amnesty led to the disarming of thousands of militants and a decline in attacks on oil companies, according to data obtained from the Nigerian National Petroleum Corp.

The “underlying tensions that mark the region were decades in the making and have yet to be resolved,” Antony Goldman, head of PM Consulting, a London-based risk advisory specializing in West Africa, said today in an e-mailed response to questions. “The concern among oil companies is that there is a risk of a slide back to violence if stakeholders do not seize the opportunity presented by the current relative calm to begin to build a better and fairer future for the Niger delta.”

NNPC, as the state oil company is known, operates joint ventures with Shell, Chevron, Total SA (FP) of France, Irving, Texas- based Exxon Mobil Corp. (XOM) and Italy’s Eni SpA (ENI) that pump more than 90 percent of Nigeria’s oil. Central government control of oil revenue is resented by communities in the region and this has spawned unrest including armed attacks on oil facilities and theft from pipelines.

Organized Oil Theft

“We have been able to bring production back but it is still below pre-militancy levels,” Ian Craig, Shell’s vice president for exploration and production in sub-Saharan Africa, said Feb. 21 at an oil conference in Abuja, the capital. “The greatest challenge, however, is the massive organized oil theft business and the criminality and corruption which it fosters.”

At least 150,000 barrels a day of oil is lost to theft, resulting in increased production costs, reduced revenue and “major environmental impacts,” Craig said. Shell on Feb.6 said rising crude theft along its Nembe Creek trunkline threatens daily exports of 140,000 barrels. The company has recorded over 250 incidents of theft and sabotage in its onshore operations since January 2010.

Nigeria is currently producing 2.68 million barrels a day, short of a capacity of 3.7 million barrels, according to the NNPC. Sub-Saharan Africa’s second-biggest economy depends on oil exports for more than 95 percent of export income and 80 percent of all government revenue.

President Goodluck Jonathan’s administration plans to borrow 794 billion naira to finance deficit spending in 2012. The country is losing at least $3.6 billion a year from still unrestored output that could’ve helped government finances, Bismarck Rewane, chief executive officer of Financial Derivatives Co., said in a phone interview on March 2. He said “there’s no way Nigeria can actually do 3.7 million barrels a day” any time soon.

Attacks, Disruptions

Nigeria’s naira has weakened 2.3 percent against the dollar over the last year and traded at 157.80 to the dollar as of 16:04 p.m. in Lagos, the commercial capital. The oil industry is the second-biggest supplier of foreign currency to the local interbank market after the central bank, which sells dollars earned from oil exports at twice weekly auctions.

Output from Shell’s onshore fields in the West African nation currently stands at about 600,000 barrels a day, half the volume in 2005 before armed attacks and disruptions worsened, Mutiu Sunmonu, chairman of Shell’s Nigerian unit, said on Feb. 22 at a conference in Abuja, the capital.

Chevron pumped an average of 236,000 barrels a day last year, Kurt Glaubitz, a company spokesman in Houston, said in an e-mailed response to questions on Feb. 27, without giving further details. That compares with 376,000 barrels a day the company pumped in Nigeria in 2008, with at least 140,000 barrels a day yet to be restored in swamp operations including the Olero Creek, Abiteye and Dibi fields.

Offshore Fields

Production from Nigeria’s onshore fields and shallow waters currently stands at about 1.34 million barrels of oil a day, down from total production of about 2.5 million barrels before armed hostilities against producers began early in 2006, according to NNPC data. The rest of current production comes from offshore fields.

Total output fell to as low as 1 million barrels a day when armed attacks peaked in July 2009. At the end of 2005 deep offshore contributed less than 10 percent of Nigeria’s oil, compared with about a third currently. OPEC estimates Nigeria’s capacity at about 2.5 million barrels a day.

Nigeria’s main militant group in the delta, the Movement for the Emancipation of the Niger Delta, or MEND, on Feb. 6 said it was resuming attacks against producers after it damaged a pipeline operated by a unit of Eni on Feb. 4.

Shell, which has the biggest onshore operations in Nigeria, has sought to reduce its exposure by selling some assets. The company sold three oil leases in the western part of the delta with a capacity of 50,000 barrels a day in 2010 to Seplat Petroleum Ltd., a local producer.

Rising Costs

It disposed of another license in November to the Neconde Energy Ltd. group and is in talks to sell interests in three other oil leases.

Insecurity in the region has also helped to drive up costs. Due to the activities of pirates and armed groups in the coastal oil region, marine insurers last year included Nigerian waters in a war-risk zone for which underwriters can charge additional premiums, Lloyd’s Market Association Senior Executive John Gurtenne said on Aug. 4.

The prevailing situation has resulted in a “reduced appetite for exploration” and in “Nigeria’s reserves probably being materially understated,” said Shell’s Craig.

To contact the reporter on this story: Elisha Bala-Gbogbo in Abuja at ebalagbogbo@bloomberg.net

To contact the editor responsible for this story: Antony Sguazzin at asguazzin@bloomberg.net


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