- Inside source at a black market Niger Delta refinery
- Investigative journalist with access to militants in Nigeria
- Nigeria political analyst
Everything You Need To Know About Nigerian Oil Right Now
Nigeria is currently just recovering from oil-production disruptions suffered in 2016 because of attacks on the pipeline infrastructure by armed militants operating under the name of Nigeria Delta Avengers. The attacks had caused the output of Africa’s biggest producer, usually above 2 million barrels a day, to drop at a point to under 1 million barrels daily. With oil the source of two-thirds of government revenue and more than 90 percent of export income, there were telling consequences as Nigeria slid into its first recession in 25 years in 2016.
President Muhammadu Buhari, a former military ruler who won elections in 2015, had talked tough on assuming office, threatening to deal with the militants. He canceled pipeline-protection contracts awarded to former militant leaders such as Government Ekpemupolo, better known as Tompolo, and ordered their investigation and prosecution. It is widely believed by our sources on the ground, that this move by Buhari prompted the resumption of the attacks.
Faced with a collapsing economy, Buhari sought negotiations with the militants, using back channels established by Oil Minister Emmanuel Kachikwu while he was an ExxonMobil executive, to reach out to the fighters. Then elders of the region under the Pan-Niger Delta Elders Forum weighed in and convinced the fighters to agree to a truce while they presented to Buhari the region’s demands centered around giving the locals more control over their resources, reducing military presence and initiating developments projects. Since then, the demands haven’t been met and there has been a kind of stalemate, leaving the Delta in a permanent state of unease.
Output Versus Oil Theft
Despite the relative peace of the past two years, Nigeria’s oil output has struggled to recover to previous levels above 2 million barrels per day, treading water instead in the region of 1.6 million to 1.8 million barrels daily. The major reason for this has been a booming underground industry in the theft of crude from pipelines for sale to vessels waiting offshore or to illegal bush refineries.
During a visit to the Delta region at the end of January, we sent an investigative journalist to one of these local refineries. Essentially it's an enlarged version of the traditional gin refineries common in the region. Crude oil in huge boilers containing as much as 80 barrels are heated to distill gasoline, kerosene and diesel in turns, polluting the environment in the process. All these are sold in the local black market, though there are reports of barges coming from the islands of Sao Tome and Principe to take the diesel.
A given unit is operated by about 100 people, in shifts of about 10 daily. There's usually a financier who puts up about $12,000 to set it up. Both soldiers and militants levy the operators to allow the business. The industry is so specialized that those who steal the crude supply are a different set of people to those who do the refining.
That remains a major problem facing companies with onshore operations, and the reason for repeated force majeures on major crude export lines such as the Trans Niger Pipeline and the Nembe Creek Pipeline, which supply the Bonny Export Terminal. Similarly affected is the Trans Forcardos, which was out at a point for about a year.
Ahead of this year's election, President Buhari ordered more troops into the oil region, either guarding oil installations or carrying out patrols and running checkpoints where people are searched. Being a conservative northern Muslim makes him unlikely to give up the power and control which the presidency constitutionally gives him over the predominantly Christian oil region. This is a stance that is deeply resented in the oil region, populated mostly by ethnic minorities.
Therefore, a Buhari victory means that the prospects of peace are likely to further recede, with active attacks on oil facilities likely to resume, followed by even more militarization. The implications will remain grave for investors and businesses.
It's a situation Buhari's main challenger, Atiku Abubakar of the People's Democratic Party, has moved cleverly to exploit. Though a northern Muslim like Buhari, he's an investor in Intels, an oil-service company that operates in the Onne Oil and Gas Free Zone, just outside the oil hub of Port Harcourt. Abubakar has pledged to grant a key demand of both the militants and politicians in the region, which is to cede control over oil resources from the federal to the local authorities. It is a pledge he said he would begin implementing within six months of taking office.
It's a political move so popular in southern Nigeria that it has galvanized massive support for Abubakar, giving him a good chance of beating the incumbent in a free and fair vote. If he wins and goes ahead with the plan, it will portend changes to the laws that govern the oil industry. Abubakar is in favor of selling the state oil company, the Nigerian National Petroleum Corporation (NNPC) to the public and reducing the government primarily to a regulatory role. Politically, it will meet a longstanding demand of people in the oil region, with a great opportunity for a more lasting peace. For the first time in three decades, oil companies may be able to operate in the Niger Delta without a military shield.
The vote, however, was supposed to have been held on Saturday, and has now been postponed until February 23rd.
The situation in Nigeria from the election and through the following weeks should be at the top of any oil interest radar, followed by the intensifying conflict in Venezuela, where the opposition seeks access to $3.2 billion held in US bank accounts.
Also on our geopolitical radar over the coming weeks will be New Zealand’s ban on oil and gas exploration and the locking of horns between Kenya and Somalia over a Somalia oil and gas tender for a block that ostensibly lies within Kenya’s territorial waters. We’re also still keeping a close eye on Libya’s Sharara oilfield, which has now been handed over by Haftar’s forces to yet another security force in a move intended to prompt the NOC to resume production. However, that has not yet happened and this should be seen as a negotiation between the NOC and Haftar—another move in the power end game.
Global Oil & Gas Playbook
Deals, Mergers & Acquisitions
- Encana has finalized the acquisition of Newfield Exploration, a U.S. independent with a presence across the Permian, the Anadarko Basin, and the Montney Formation in Canada. The all-stock deal valued Newfield at $5.5 billion and will make the resulting company one of the largest shale-focused players in North America. It is part of Encana’s production-boosting drive over its current five-year plan.
- Italy’s Eni and Saudi Sabic have struck a partnership deal for the development of a natural gas conversion technology to be used in the production of high added value products including fuels and methanol. The Italian company came up with the original technology but the partnership with the Saudi petrochemicals giant will advance it further and make it marketable as the oil industry doubles down on petrochemicals as an even larger revenue source for the future.
- Mitsui has bought a 20% stake in the onshore South Sakakemang block in Indonesia. The Japanese company bid for the stake in partnership with Spain’s Repsol. For Mitsui, this is the third oil and gas block acquisition in Sumatra, a major oil and gas producing region in Indonesia.
Tenders, Auctions & Contracts
- Ethiopia and Djibouti have inked a deal for the joint construction of a gas pipeline that will ship Ethiopian gas to an export terminal on the Djibouti Red Sea coast. Ethiopia has abundant natural gas resources that are currently being developed by a Chinese company, POLY-GCL. The company last year signed a preliminary deal with the Djibouti government for a $4-billion project that would involve building the pipeline as well as a liquefaction facility and an export terminal.
- Qatar Petroleum signed memoranda of understandings worth almost $2.5 billion in the United States with Baker Hughes and Schlumberger as it seeks to expand its footprint in U.S. oil and gas. The deals come on the heels of an investment decision worth $10 billion for a joint LNG project Qatar petroleum has with Exxon on the Gulf Coast.
Discovery & Development
- BHP Billiton has approved funding of $952 million for the phase 3 development of the Atlantis field in the Gulf of Mexico and drilling work at the Trion field, also in the Gulf. Atlantis is operated by BP and the Australian miner has a 44% stake in it. Additional production from the field after the completion of Phase 3 will begin next year, at a rate of about 38,000 barrels of oil equivalent daily.
- Eni has begun expanding its presence in the Middle East, shifting its focus away from Africa and to the legacy producing region. In less than a year, the Italian company inked nine deals in the United Arab Emirates, with the latest commitment of $3.3 billion for a stake in an Emirati refinery that will boost the company’s refining capacity by over a third. Eni plans to boost its production in the region to 100,000 bpd over the long term.
- Repsol announced a large natural gas discovery at the Sakakemang field in Indonesia, with reserves estimated at up to 1.5 trillion cubic feet of gas, which is equal to more than 350 million barrels of oil equivalent. However, these were preliminary estimates that will now need to be updated after the drilling results come in.
- Uganda expects to begin commercial production of crude oil in 2022, more than a decade after oil was first discovered in the country. The start of production has been hampered by disputes with oil field operators regarding taxes and royalties, as well as the absence of a pipeline infrastructure and refining facilities.
- Tullow Oil returned to the black last year, after four years of losses, booking a net profit of US$85 million thanks to higher oil prices.
- Cenovus slipped into a loss of over $1 billion in the fourth quarter of 2018 on the back of a deep discount of Canadian crude to WTI, which also lifted its full-2018 loss to $2.19 billion.
- Eni boasted a 55% jump in fourth-quarter 2018 profits to $1.65 billion, beating an analyst forecast for $1.35 billion.
- Mexico is preparing a $3.9-billion stimulus package for Pemex as investor trust wanes and ratings agencies threaten a rating downgrade.