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Matt Smith

Matt Smith

Taking a voyage across the world of energy with ClipperData’s Director of Commodity Research. Follow on Twitter @ClipperData, @mattvsmith01

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From Theft To Piracy To Flaring To...Hope?

From Theft To Piracy To Flaring To...Hope?

Nigeria is a fascinating country, with so much potential yet so many challenges. It is the largest oil producer in Africa, and has 37 billion barrels of proven oil reserves (10th largest in the world). It is also the holder of the largest natural gas reserves in Africa. For all intents and purposes it is also a petro state, with 95% of its export earnings coming from oil, which account for 65% of its budgetary revenues.

It is also the most populous country in Africa with a population of 170 million, and is growing at an explosive rate. This growth brings with it an excess of young adult males (a ‘youth bulge’), which is considered partly attributable for the country’s social unrest, and ultimately, its terrorism.

By 2050 the population is projected to rise to over 400 million, at which point it will be the 4th most populous country in the world. All the while, energy remains at the core of the country’s challenges, from theft to piracy to flaring. But it also continues to provide something else…hope for a better future.

THEFT

Oil was first discovered in Nigeria in the 1950s, and the African nation joined Opec in 1971. Its oil production rose to peak in 2005 at 2.6 million barrels a day. At this point, militant groups rose up, most notably MEND (Movement for the Emancipation of the Niger Delta), – ironic name, yep – and a surge in violence, oil sabotage, and theft subsequently caused a 25% decline in crude output in the following years.

Although an amnesty was declared in 2009, which significantly reduced violence and oil sabotage, a rebound in output was tempered by an increase in oil theft (or ‘bunkering’). Essentially, bunkering consists of rudimentarily rupturing pipelines and siphoning the oil off into makeshift vessels.

Pipeline Vandalism in Nigeria

According to the Nigerian oil industry, 400,000 barrels a day were stolen in April 2012, while state agencies reported that thieves ruptured pipelines 4,468 times in 2011. The Minister of Petroleum Resources recently said $5 billion was spent in 2012 on pipeline repairs, while the IEA estimates $7 billion is lost a year due to bunkering. Shell, the largest international oil company (IOC) operating in Nigeria, estimates 6% of total production is lost to theft.

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PIRACY

As if oil theft was not enough to contend with, there has been a significant increase in piracy off the coast of Nigeria in the Gulf of Guinea. So much so that it is set to eclipse Somalia as the piracy capital of the world – not a title to aspire to. The International Maritime Organization (IMO) reports there were 53 piracy-related attacks in 2011, which pales in comparison to 11 in the Gulf of Guinea for December 2012 alone.

There has been such an increase in the last year as piracy has rapidly escalated from low-level armed robberies to hijackings and cargo thefts; the motive has changed from targeting the crew to targeting the cargo. Ransoms have become less attractive compared to oil cargoes.

Piracy

FLARING

Another significant challenge faced by Nigeria is that of flaring. It is ranked second in the world behind Russia for flaring the most natural gas, accounting for 11% of the total flared globally in 2010. According to NOAA, a third of all natural gas produced in Nigeria is flared due to a lack of infrastructure from underinvestment in the natural gas industry. This flaring of some 536 Bcf is estimated as a loss of $2.5 billion in revenue, according to the Nigerian National Petroleum Corporation (NNPC).

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Top 5 Gas Flaring Countries

HOPE

But let us finish on a positive note, or at least the hope of one. For the Nigerian government is looking to pass the Petroleum Industry Bill (PIB). Although the PIB was drafted well over a decade ago (and three regimes ago), there is an increasing urgency for the bill to be passed. Just last week Nigeria’s president, Goodluck Jonathan, said investment in the country’s oil industry was falling due to its delay.

Although extensive (362 sections), the key facets of the bill are to eliminate corruption, promote transparency, end natural gas flaring and environmental degradation. The goal is to create a balanced financial environment for foreign investors, while providing revenue and fairly distributing it to the regions involved.

The biggest adversary to the PIB, however, is the international oil companies, who are concerned that the planned increase to taxes and royalty fees will make operations uneconomical (aka hurt profits too much). This leaves a delicately balanced situation, for it is considered that if the issues with the IOCs are resolved, the legislative process will be expedited.

It is clear that Nigeria faces many challenges. 50% of the population does not have access to electricity. In addition, 260,000 barrels per year of oil have been spilled for the past 50 years, causing considerable environmental degradation. But amidst these hardships and depravity emerges the hope for a better future, given the riches the country has in terms of resources.

And although they may have been – and are still – grossly mismanaged and exploited through such actions as theft, piracy, and flaring, it doesn’t mean that faith shouldn’t be put in to the passing of the PIB to bring a less corrupt and more fair approach to the energy industry going forward.

By. Matt Smith




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