Reality of Nigeria’s dwindling crude oil fortunes

Oil-revenue-Copy vandal-CopyIn over four decades now, crude oil has been the major source of revenue, energy and foreign exchange for the Nigerian economy. However, the nation’s income generating sector has been under severe attack from plummeting crude oil prices, pipeline vandalism/theft, declining production and inability to get buyers for the essential commodity. In this report, Roseline Okere examines challenges before the nation’s petroleum sector and the ways forward

Declining crude oil revenue
Nigeria’s crude oil revenue has continued to suffer from continuous decline since 2012. According to Organisation of Petroleum Exporting Countries (OPEC) 2014 Statistical Bulletin, the country’s crude oil earnings dropped from $94.6 million it recorded in 2012 to $89.3 million in 2013 and $76.9 million in 2014. Already, the country’s monthly crude oil earnings for 2015 have also been on the decline.

Specifically, at N286.24 billion, oil receipts, which constitutes 38.9 per cent of Nigeria’s total revenue, was lower than the receipts in the preceding month and the corresponding period of 2014, by 21.5 and 54.0 per cent respectively, the Central Bank of Nigeria data in its April 2015 Economic report disclosed. The bank stated that the fall in oil receipts relative to the level in the preceding month was attributed to the decline in revenue from crude oil and gas exports, occasioned by the drop in the prices of crude oil in the international market.

The decline in revenue has already affected the country’s federally collected revenue in April this year.

The CBN said that at N735.07 billion, estimated federally collected revenue in April 2015 was lower than the monthly budget estimate by 9.8 per cent. It added that the decline in estimated federally collected revenue relative to the monthly budget estimate was attributable, largely, to the shortfall in receipts from oil revenue during the month of April.

Speaking on the country’s declining crude oil fortunes, Chairperson of Oil Producers Trade Section (OPTS), Elisabeth Proust, estimated that Nigeria’s revenue from oil and gas sales could be cut by about $10 billion or 30 per cent this year.

The OPTS chairperson who is also the Managing Director of Total Upstream Companies in Nigeria, said that low crude oil prices have significantly reduced the level of investible funds at a time when competition for investments is sharpening.

“There is no doubt that the low crude oil prices that we are experiencing today are having a severe adverse impact on the revenues of both producers and host governments globally,” Proust said. “Unfortunately, Nigeria is not immune to this revenue squeeze. We estimate that if crude oil prices average $53 per barrel in 2015, compared to $77.5 in 2014, the federal government’s oil and gas revenue will decline by $10 billion this year, or a gut-wrenching 30 per cent.”

Crude oil theft and pipeline vandalisation
Estimates of how much oil Nigeria loses to thieves vary widely. Fundamentally, different pictures of the trade emerge depending on which figures one accepts. The best available data suggest that an average of 250,000 barrels per day vanished from facilities on land in swamps and in shallow water. This number does not include what may happen at export points.

NNPC said that at an average price of $97.59 per barrel, Nigeria lost $3.9 billion (N858 billion) between January 2013 to April 2015 to the activities of pipeline vandals and crude oil theft. According to NNPC in its second edition of yearly statistical bulletin released recently, pipeline vandalism increased by 4.54 per cent in 2014 over the previous year.

It added that a total of 3,732 line breaks was reported on NNPC pipelines out of which 3,700 was as a result of vandalism, while 32 cases were due to system deterioration resulting in a loss of 355.69 thousand metric tons of petroleum products worth about N44.75 billion. Also 1.08 million barrels of crude oil worth about N14,846.71 million was lost in the same period. There were 32 cases of fire incidents during the year under review.

Besides, the instability in the Niger Delta has resulted in significant amounts of shut-in production at onshore and shallow offshore fields, forcing companies to frequently declare force majeure on oil shipments.

“Since the mid-2000s, Nigeria has experienced increased pipeline vandalism, kidnappings and militant takeovers of oil facilities in the Niger Delta”, the Energy Information Administration (EIA), said in its 2015 data analysis on Nigeria’s petroleum industry.

EIA said that Nigeria’s oil theft and trade business is based on a complex system of networks comprised of domestic, regional, and international actors, involving various people – local youth and communities, professionals such as corrupt bank managers, and high-level elites such as government officials and security force personnel.

It stated: “Oil is stolen at various stages of the production process from upstream to downstream operations—wellheads, manifolds, pipelines, and storage tanks at export terminals. Most oil theft operations typically involve tapping or siphoning oil from a pipeline by a hose and pumping the oil onto barges or small tankers.

“Some stolen crude oil is taken to illegal refineries along the Niger Delta’s swampy bush areas and the refined products are then sold domestically and regionally. However, the bulk of the crude oil makes its way to international markets. Most of that oil is sold to world markets directly from Nigeria’s export terminals, which is known as white-collar theft. White-collar theft entails filling tankers (or topping them off) with stolen oil at export terminals or stealing crude from storage tanks and loading it onto trucks. A portion of the global illegally traded oil also involves the transfer of crude oil from small tankers to larger tankers waiting further offshore, also known as ship-to-ship transfers,” it said.

The Energy agency said that estimates of stolen crude oil vary and can reach as high as 400,000 bpd, but some believe that estimate is too high and may include the volume lost in oil spills.

It added that it is difficult to measure the volume of stolen crude oil because metering systems are usually at export terminals and, therefore, oil stolen between the wellhead and pipelines is not easily detected.

Chairman, Society of Petroleum Engineers (SPE) Nigeria Council, Mr. Emeka Ene, declared that the problem of crude oil theft and illegal refining in the Niger Delta calls for a state of national emergency, regretting that the earnings generated through these illicit activities far surpass the national legitimate income average.

According to him, worst hit by vandalism and crude theft are those linked to onshore joint venture facilities operated by Shell, Agip, Chevron and Total. Regrettably, the four foreign companies, through systematic divestments, are transferring the assets, associated liabilities and losses to indigenous companies that acquired the assets at a high cost, Ene disclosed.

He noted, “After staking over $12 billion in a series of acquisitions, the indigenous companies are now grappling with huge production losses, protracted downtime, frequent facility vandalism and rising mainte­nance cost.

Official figures have it that the industry suffers production losses as high as 250,000 barrels per day, a figure former Venezuelan Petroleum Minister, Dr. Alirio Para, said was equivalent to full capacity production from two world-class deep-water fields anywhere in the world.

Managing Director of Seplat Petroleum Company Limited, Mr. Austin Avuru, said there has been no respite for companies channeling crude production output to export terminals, especially through the notorious Trans-Forcados Pipeline since 2014. The pipeline is one of the export pipelines that have become the target of attacks by thieving syndicates that thrive on crude oil theft.

“Recall that in our first quarter report for 2014, we stated that our operations were heavily impacted for the most part of the period. For 36 days out of the 90 days, we couldn’t produce because the Trans-Forcados Pipeline was down. Even when we produce through the Trans-Forcados pipeline, we suffer a lot of losses during reconciliation.”

On its 2015 half year re­port, he reiterated that the company was confronted with the Trans-Forcados problem between November 2014 and April 2015.
“It was a huge problem,” he said. “We experienced 40 per cent outage for the first half of the year, meaning that out of 180 days, we did not produce for 77 days. It was that bad. You are referring to a situation where it doesn’t matter where you find oil and you want to produce 200 barrels per day. You should be able to hook up to a pipeline and get to some export pipeline.

“Part of the solution to the Niger Delta question is to take away infrastructure for oil and gas as a separate business. Government’s role is merely to facilitate a separate business that guarantees ease of access to all players, big and small. We have passed the stage where infrastructure development in Nigeria is done at the whim and caprice of individual producers. It now has to be a national infrastructure network for safe, easy and efficient delivery of natural gas and crude oil to their destina­tions. So it has to be done ur­gently,” he stressed.

Declining crude oil production
Nigeria’s crude oil production has been on the decline since 2000. Between 2000 and 2014, the country’s daily crude oil production dropped from 2.05 million barrel per day to 1.8 million barrel per day. June edition 2015 of OPEC monthly oil market report, the country’s crude oil production for the month declined to 1.846 million barrel bpd from 1.880 million bpd recorded in April translating to 1.8 per cent or 34, 000 bpd.

With this development, the country may have lost over $69.4 million in May due to reduction in its production output during the period as the report also revealed that the price of Nigeria’s Bonny Light rose to $65.31 per barrel during the month.

Consequently, the total amount the country would have generated from the daily loss of 34,300 bpd attributed to cut in production for the month stood at $69.444 million. Specifically, only Shell Petroleum Development Company (SPDC) and Addax carried out exploration/drilling activities during the month of March, according to available data from NNPC’s monthly report.

The country has been recording low production activities since November last year, as several oil and gas firms began scaling down production due to the uncertainties surrounding the Petroleum Industry Bill (PIB) and the declining crude oil prices.

Many oil and gas firms have also been recording losses, which made them resort to cancelling or deferring projects. According to OPEC in its monthly oil market report, among member countries, Nigeria recorded the second sharpest drop in rig counts in March with production of 1.69 mbpd in the month compare to the 2.21 mbpd recorded in the corresponding month of 2014.

The slump in exploration, development, and production activities has been tied to rising insecurity in producing areas such as oil theft, pipeline sabotage and more importantly, NNPC’s funding cuts on JV projects.

Dwindling crude oil reserves
The country’s crude oil reserves have declined from the 37.2 billion barrels it recorded in 2011 to 31.81 billion barrels as at December 2014. The nation’s oil reserves slumped from 38.5 billion barrels in 2008 to 37.5 billion barrels in 2010. In 2011, the reserves further dropped to 37.2 billion barrels.

Confirming the declining state of the country’s crude oil reserves, Nigerian Association of Petroleum Explorationists (NAPE), stated: “The country’s reserves are showing a sign of decline as exploration drilling has hit the lowest level ever experienced. The reports of new discoveries are few and the reserves are getting smaller. Ironically, the operating landscape is experiencing a lot of challenges as the industry witnesses the largest number of divestment and acquisition activities that bring new players as operators to the risk business of oil and gas exploration and production.

“The country’s reserves are showing a sign of decline as exploration drilling has hit the lowest level ever experienced. The reports of new discoveries are few and the reserves are getting smaller. Ironically, the operating landscape is experiencing a lot of challenges as the industry witnesses the largest number of divestment and acquisition activities that bring new players as operators to the risk business of oil and gas exploration and production”.

The nation’s 40 billion barrels reserves target, the association said, is possible if explorationists drill deeper and deploy technology. “These and many more could be made possible if there is a boost in investments for exploration,” it added.

Giving possible reasons for the decline, EIA said the majority of reserves are found along the country’s Niger River Delta and offshore in the Bight of Benin, the Gulf of Guinea, and the Bight of Bonny.

It stated: “Current exploration activities are mostly focused in the deep and ultra-deep offshore. NNPC had undertaken onshore exploration activities in northeast Nigeria, within the Chad basin, but the lack of discoveries and the presence of the militant group Boko Haram put exploration at a standstill. Exploration activities in the onshore Niger Delta have decreased because of the rising security problems related to oil theft and pipeline sabotage.

“Several major IOCs have divested from their onshore assets, which has created opportunity for local Nigerian companies to step in. The investment uncertainties surrounding the long-delayed PIB have also contributed to delayed investment in deep-water projects, and the start dates for these projects have continuously been pushed back”.

Struggling for buyers as crude prices plummet
The shale boom that’s reduced U.S. dependence on Nigeria’s crude oil has made the country to embark on search for new buyers and cutting the prices of its light sweet crude to Qua Iboe to 10-year low.

NNPC said in a statement recently that it was selling July supplies of its Bonny Light crude at 23 cents more than Dated Brent. The fortunes of August and September deliveries remained uncertain, even as oil prices continue to hover between $38 and $58.51 a barrel.

Already, NNPC has cut its July official selling price formulae for Bonny Light and Qua Iboe to 10-year low. OPEC said that an overhang of around 15 unsold July cargoes emerged a week after the August programme.

Nigeria has been struggling to find buyers for its crude oil for some years now without success. For instance, in 2012, China became the alternative market for Nigeria’s crude oil, following dwindling imports by the United States, which was the major buyer of Nigeria’s crude oil. But China has also abandoned Nigeria’s crude oil as their demand for light sweet crude oil is very sparse.

Also, India was the largest buyer of Nigerian crude, which has been one of the positives for the country in the last few years. But demand from India for Nigerian crudes is slightly on the wane as its demand for Latin American crudes is growing sharply.

The United States’ Energy Information Administration (EIA) stated in its recent report that “China is the second largest consumer of crude oil, and when it does not figure at all as one of your regular buyers, you know you have a problem. And Nigerian crude is suffering because of this.

“China likes crude oil that is heavy and sweet, as it fits the appetite of its refineries that produce a lot of fuel oil to keep its industrial and manufacturing economy running.”

Need for economic diversification
The possible way forward for the nation’s economy is diversification from crude oil resources. The President of Lagos Chamber of Commerce and Industry (LCCI), Remi Bello said the divestment by the major oil companies and sluggish investment ­­­­in exploration as a result of policy uncertainties and security concerns is a source of concern. He added that the present economic situation has again underlined the critical imperative of economic diversification.

He said, “An economy that is diversified has a better capacity to withstand shocks. At every turn in our advocacy activities, we have canvassed the need for the creation of an enabling environment to enhance the productivity of enterprises and consequently ensure economic diversification”.

The LCCI president pointed out that the prevailing economic conditions call for review of processes and priorities in both the public and private sectors of the economy to ensure sustainability.

Chairman of International Energy Services Limited, Dr. Diran Fawibe, said: “The message I have for the administration is to diversify the nation’s oil-dependent economy as soon as possible. Crude oil and natural gas have been depended upon to generate the foreign exchange for too long at great risk. In fact, since the 1970s, petroleum has become a major source of foreign exchange. We celebrate when prices rise. We also mourn when prices crash. It is too risky to place our existence on petroleum. President Buhari should work towards boosting investment in the oil and gas industry through the instrumentality of Petroleum Industry Bill (PIB). He should seek to establish proper linkage between the petroleum industry and other sectors of the nation’s economy. For instance, the administration should ensure adequate gas is produced and supplied to generate power. Other sources of energy resources should also be developed, especially as these would go a long way to boosting electricity supply in many parts of the nation”.

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