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Shadow Governance Intel

Shadow Governance Intel

Shadow Governance Intel (www.shadowgovintel.com), the analytical arm of West Sands Advisory Limited, conducts in-depth research on power players and power plays that challenge the transparency…

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Nigeria’s Oil Theft Epidemic

Oil Guns

Although crude oil theft has long been the subject of intense media attention in Nigeria, the downstream theft of hydrocarbons has remained under the radar. Despite this, downstream hydrocarbon theft is big business in Nigeria, Africa’s largest oil producer. In 2015, the petroleum sector accounted for approximately 51 percent of the federal government’s income and more than 90 percent of export earnings. According U.S. Department of Commerce data published in February 2017, it also accounted for between 10-12 percent of Nigeria’s GDP.

As global oil prices rose above $100 a barrel in the early 2000s, the theft of oil became a very lucrative business. Furthermore, due to a conspicuous lack of youth employment in the region, many of the Niger Delta indigenes (particularly young men) have turned to the illicit hydrocarbon trade (i.e. small-scale tapping of crude oil, petroleum theft / smuggling and artisanal refining) as a source of income.

Additionally, resentment towards foreign oil companies – which have accrued billions in profits from oil production in the Niger Delta – and extensive environmental damage caused by oil spills has created a symbiotic relationship between oil thieves and local communities, which has only served to proliferate the issue.

This 2-part series of reports on downstream oil theft in Nigeria is based on findings originating from in-depth research conducted by Shadow Governance analysts in the Spring and Summer of 2016; and ongoing monitoring.

Key Trends

Nigerian hydrocarbon theft has traditionally fallen into five main categories: small-scale theft and illegal local refining; large-scale illegal bunkering in the field; theft at export terminals; theft from fuel trucks; and, piracy and oil tanker hijackings.

Although the former category is pervasive, it almost exclusively involves low-level criminal elements and accounts for a minor percentage of the overall problem. The latter categories, however, are significant issues and involve more technical sophistication and sophisticated networks comprised of facilitators, local elites, militant groups, oil company workers, as well as military and political officials.

According to a Chatham House report published in September 2013 – and still relevant - the three key types of hydrocarbons theft are not mutually exclusive: as cooperation on the ground evolves, the lines between domestic and international oil rings grow increasingly blurred.

Large-Scale Bunkering & Tapping (Industrial Level)

The most frequently utilised method of hydrocarbon theft has been the tapping of oil pipelines or wellheads. Referred to as ‘hot tapping’ or ‘pressure tapping’, this method of theft involves accessing a high-pressure operational pipeline and diverting a percentage of the flow of oil. Accordingly, the flow is largely uninterrupted and the pipeline remains fully functional, meaning that the theft goes undetected.

Oil infrastructure located onshore, or in the Niger Delta’s swamps and shallow waters – where oil pipelines crisscross the region in a grid-like pattern linking the region’s 22 petroleum storage depots and 4 refineries – is most frequently targeted in these tapping operations. This type of activity was originally identified by academics in 2008, and discussed in an African Security Review article. As a percentage of this hot tapping takes place underwater, it is largely hidden from company inspectors.

Once the tap is secured, the product (oil or premium motor spirit) is pumped onto waiting barges and boats (a process known as ‘bunkering’) in return for money, guns and narcotics. Some 75 percent of stolen oil is then transported to coastal tankers or ‘international mother ships’ at night to export the product regionally or globally While the remaining 25 percent is refined in one of the myriad of artisanal refineries scattered across the region’s network of rivers, streams, canals and creeks – spread over 70,000 square kilometres.

While the term ‘bunkering’ describes the process of loading oil onto a ship, it has become synonymous with oil theft. Most illegal bunkering occurs in Bayelsa, Rivers and Delta States, where international oil companies operate and run onshore export terminals.

Given the complexity of hot tapping, detailed technical advice is sought from company insiders or former employees who can also provide critical information on security patrols and inspection schedules. Oil worker complicity in hydrocarbons theft reportedly reached its peak during the height of Niger Delta militancy in the mid-2000s. Former IOC employees who joined the ranks of illicit networks operating in the Delta have actively provided detailed knowledge of vulnerable pipelines and possess the expertise needed to lay taps effectively.

It is also alleged that oil workers with positions in pipeline control rooms are paid to lower the pressure in pipelines so that they will not explode when taps are placed. According to local sources, control room operators are paid approximately $4,500 for reducing pipeline pressure or informing illicit networks when pressure will be reduced for routine maintenance operations.

‘Cold tapping’ is also a frequently employed mechanism by illicit networks to pilfer crude oil. In this instance, the illicit actors will blow up a section of pipeline, putting it out of commission for several weeks. During this time, an illegal underground tap will be installed, which will divert a continuous supply of oil to the criminals’ own storage facilities. As the supply is constant, when the pipeline is fixed the oil company will not detect any fluctuation in pressure in the main pipeline, and the flow will be able to continue unabated.

Related: Can Canadian Crude Compete In Asia?

Small-Scale Bunkering & Tapping

In this instance, local networks with limited expertise and technical ability tap into pipelines and other onshore oil infrastructure (i.e. wellheads and manifolds). A large majority of the stolen oil is crudely refined in local refineries (‘firewood distilleries’) located in mangrove areas using relatively basic processes. It is estimated that this form of oil theft amounts for no more than 30,000 bpd.

As noted in the 2013 Chatham House report, this refined product can then be sold on the streets as fuel, or blended with other refined products such as petrol and diesel (i.e. ‘bush diesel’). While security personnel destroy hundreds of these firewood distilleries annually, the set-up costs are so low and returns are so high that illegal refiners are able to rebuild their facilities in a matter of weeks. Local youth gangs also steal refined products intended for domestic use or for sale in local market. In some instances, they will smuggle these products into neighbouring states (i.e. Cameroon and Benin) in small containers for quick resale.

Theft at Export Terminals (Refinery Onward)

Aside from tapping, there have also been numerous allegations of oil and premium motor spirit (petrol) disappearing from the country’s onshore export terminals, tank farms, and refinery storage tanks – many of which are operated by IOCs.

In this ‘white collar’ oil theft scenario, excess oil products are transferred into tankers beyond the licenced amount via the manipulation of meters and the forging of bills of lading and other corporate documents.

However, the extent to which oil is stolen at export terminals has been subject to some debate. Some observers claim that controls and security around the terminals are too tight to allow for significant losses, as tankers are reportedly subject to checks from at least seven separate government agencies before they are permitted to load oil. Measurement and vessel-clearance practices at terminals also appear similarly vigorous.

Conversely, others believe that the magnitude of the problem may be understated. For several years, oil companies have based their total production figures on unconfirmed volume estimates, using dipsticks to make volume calculations. This method of calculation is easily susceptible to manipulation (e.g. illegal bunkering). Furthermore, some oil workers claim that companies have been reluctant to adopt more precise methods, such as metering, due to the very fact that the old system can be manipulated. Oil companies, in collusion with top government officials and politicians, are therefore free to engage in unauthorised lifting or lifting in excess of approved quantities of crude oil and petroleum products from the nation’s export terminals.

Theft from Transport Vehicles

Another method in which refined fuel is stolen, is by simply targeting the vehicles in which the fuel is being transported across the country.

There are two main methods by which fuel can be diverted from trucks. Firstly, tanker drivers can divert a proportion of their load and sell it for a reduced price on the black market. Secondly, criminal groups can hijack trucks – with or without the collusion of the driver – and resell the fuel.

It would appear that the majority of hijackings occur in Lagos, Ogun, Kwara and Oyo States, with the Lagos-Ibadan Expressway being a frequent venue for the targeting of fuel tankers. Notably, as Nigeria’s fuel crisis continues, hijackings are only set to increase in order to meet the nationwide demand for fuel.

Piracy & Oil Tanker Hijacking

In recent years, piracy in the Gulf of Guinea has become prolific, with evidence indicating that illicit activity in the Gulf has overtaken that witnessed in the Horn of Africa, Somalia’s Gulf of Aden and the South China Sea.

While pirates operating in the Gulf of Aden and Somalia predominantly engage in kidnap for ransom activities, those operating in the West have also turned to hijacking tankers carrying hydrocarbons. In the latter instance, a tanker will be commandeered, its tracking devices disabled, and its cargo syphoned off onto a smaller ship in an isolated location and sold on the black market.

However, since 2015, attacks on oil tankers in the Gulf of Guinea have fallen drastically. This is likely due to the global drop in commodity prices as well as a significantly increased naval presence in the region.

Since coming to power in May 2015, President Muhammadu Buhari has initiated a crackdown on hydrocarbon theft in the hopes of increasing investor confidence in the embattled nation. Additionally, continued low oil prices are discouraging the hijacking of fuel tankers and oil theft, as the activity is now far less profitable, and illicit networks have slowly abandoned these operations and have migrated to kidnap for ransom activities like their Somali counterparts.

So while attacks on oil tankers are declining, the Gulf has witnessed an uptick in kidnap for ransom operations as hijackers seek to diversify their revenue sources. Furthermore, it is important to note that as oil prices continue to rise – potentially reaching more than $60 per barrel in 2017 – pirates may turn back to the lucrative sector of oil tanker hijacking.

Related: OPEC Cuts Send Russia’s Oil Heartland Into Decline

Conclusion

The illicit hydrocarbons trade is largely motivated by socio-economic issues in the Niger Delta. To effectively combat these illicit activities, the root of the issue must be addressed – notably the region’s poverty, lack of employment opportunities and basic infrastructure needs – issues that have been exacerbated by widespread corruption.

Decades of poor governance and high levels of corruption in Nigeria have fostered an ideal environment in which the large-scale theft of crude oil is facilitated with relative ease. The associated lack of political will to pursue good governance has also encouraged opportunism, and opened Nigeria’s foremost natural resource industry to extreme exploitation.

Although President Buhari was elected on a strong anti-corruption platform, and vowed to clean up the oil sector, he continues to face a monumental task – juggling both endemic government and industry corruption and oil thefts. He appears to be attempting to fulfil his campaign promises of fighting corruption, but decades of poor governance and entrenched corruption in both the government and the oil industry will not disappear overnight.

By Shadow Governance Intel for Oilprice.com

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