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A Worrying Sign For Oil Markets

Oil market fundamentals are looking…

Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

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Nigerian Pipeline Bombed, Knocking Off 300,000 Barrels Per Day

A bombed pipeline could cut into oil exports from Nigeria for the next few months.

The Trans Forcados pipeline was struck by a bomb in February, causing Shell Petroleum Development Corporation, a subsidiary of the oil major Shell, to declare force majeure, as it was unable to export crude through the Forcados terminal.

The pipeline may not be repaired until May, according to head of Nigeria’s state-owned oil company Emmanuel Ibe Kachikwu. “I have been assured by Shell that in six to eight weeks, we will be back,” said Kachikwu. “The earliest the line could be back up with replacements and parts flown in [to Nigeria] is mid-May,” a source told the Financial Times. Related: The $9.2 Billion Bet Against OPEC Dominance

The Forcados terminal can export 400,000 barrels per day when operating at full capacity, so the damage is not a trivial matter. The outage could shut in around 300,000 barrels per day in production, the FT says.

The Trans Forcados pipeline is no stranger to leaks and sabotage. It is frequently targeted by oil thieves. In the past, the Nigerian government has pegged national oil theft at around 300,000 barrels per day.

The bombing could not come at a worse time for Nigeria, a country that depends on oil exports for two-thirds of its revenues. The budget has been strained and the Nigerian currency’s fixed exchange rate has come under pressure.

For oil prices, on the other hand, the supply disruption could add a bit of bullishness to the market. In the past, geopolitical flashpoints such as a pipeline bombing would add several dollars to the price of crude, but the supply overhang has muted the impact of violence and instability. Related: How Algorithmic Trading Makes Money On Energy

More problems on the horizon

While the sabotage will cut Nigeria’s oil exports in the short-term, the country faces some longer-term challenges as well. The chronic pipeline sabotage and oil theft will deter investment in new sources of production.

Moreover, the IEA predicted in a February report that Nigeria’s production would fall by 70,000 barrels per day by the end of the decade to 1.85 million barrels per day (mb/d), as expensive deepwater projects are shelved. Shell put off a final investment decision on the Bonga SW offshore project, a decision that was supposed to have been made in 2014. Even if Shell moves forward on the project, it won’t come online before 2020. A few other fields may suffer the same fate.

Low oil prices are not only scaring away deepwater drillers, but falling revenues are also making it difficult for the state-owned NNPC “to pay the foreign partners at work in Nigeria’s fields,” the IEA warned. About 60 percent of the country’s output comes from joint ventures with the NNPC. Related: Six Reasons The Current Oil Short Covering May Have Legs

Separately, a large refinery with a capacity to process 500,000 barrels per day will begin operations in a few years in Nigeria, producing refined products for domestic consumption. The IEA sees the Dangnote refinery ramping up to 300,000 barrels per day by 2021. But every barrel of crude that runs through a refinery is one less barrel exported onto the global market.

One more difficulty for Nigeria (and other African producers), according to the IEA, will be the difficulty in “marketing” its oil. U.S. “light, tight oil” (LTO) has displaced West African oil in a major way, owing to their similar characteristics. Nigeria and Angola used to export a combined 2 mb/d in oil to the U.S., a level that has plunged to just 200,000 barrels per day. Much of Nigeria’s oil must be sold on the spot market as a result, leading to unsold barrels at times.

The challenge in marketing its oil may force Nigeria to shift its sights to Asia, as well as force Nigeria to discount its oil more heavily. With oil prices so low, that simply means less revenue than it is already taking in. Europe remains West Africa’s largest market for oil exports, but if Libya were to somehow bring more oil back online – a highly speculative proposition given the political and security challenges – it would “back out” more West African oil from the market.

By Nick Cunningham of Oilprice.com




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