/ 8 May 2008

Despite price, future of Nigeria oil sector cloudy

Record oil prices should mean boom times for Nigeria’s oil industry, but rising militant violence, labour unrest and years of government neglect cast a shadow over its future.

Africa’s largest oil producer saw its two million barrel-a-day production halved last month by an eight-day strike at United States oil major Exxon Mobil and by militant attacks on pipelines and wells in the labyrinthine creeks of the Niger Delta, where most of Nigeria’s crude is pumped.

The Movement for the Emancipation of the Niger Delta (Mend), a loose coalition of militant groups, has claimed five attacks on oil facilities in just over a month, helping to drive prices to more than $122 this week.

Its stop-start campaign of violence, which has reduced Nigeria’s output by a fifth since early 2006, is poised to intensify with the treason trial next month of militant leader Henry Okah, who faces the death penalty.

”The Okah trial is going be a short-term focus for instability, but even if he were released the problem won’t go away,” said Rolake Akinola, senior West Africa analyst with Control Risks. ”It can be difficult to hold negotiations with a group that doesn’t always have a coherent structure.”

Unlike 10 years ago, when environmental and human rights issues were at the fore, the struggle in the Delta has been hijacked by criminal gangs seeking to extort money from oil firms, local authorities and the federal government.

Pipelines in the Delta are exposed and unguarded, making them easy targets for anyone with access to explosives, and local grievances often play a part in attacks claimed by Mend.

A peace process begun by President Umaru Yar’Adua last year has stalled and the most radical militant groups have vowed not to attend a forthcoming summit. Meanwhile, the government has re-armed the military in the Delta and imposed a crackdown.

Ex-patriate kidnappings, which were rife a year ago, have declined, partly due to a deal with militant leaders in two southern states, Delta and Bayelsa. But many companies have pulled out all but the most essential expatriates, leaving the restaurants of the waterfront oil town Port Harcourt deserted.

”Is the environment conducive to a long-term presence by the oil majors? The answer is mixed,” said John Ghazvinian, a US-based expert. ”Force majeure has almost become ironic. It’s supposed to be for extraordinary events but it’s become part of doing everyday business in Nigeria.”

Violence deterring companies

Smaller oil firms are already deterred from investing by the Delta’s simmering lawlessness, Akinola said. Larger rivals, beset by a lack of government funding for joint ventures and widespread oil theft, are focusing on offshore projects.

Royal Dutch Shell, the largest operator in the Delta, took a $716-million charge last year and warned that it would have to cut operations due to insecurity and lack of state funding. Efforts to slash its workforce have been blocked by powerful unions and local community resistance has made it difficult to restart about 450 000 barrels of shut-in production.

Shell’s new offshore Bonga field has helped offset losses from the Delta, while Chevron’s Agbami and Total’s Akpo fields will come on stream later this year.

But even in the waters of the Gulf of Guinea, all is not simple. Only 10% of deepwater exploration in Nigeria produces commercial results, said one senior oil executive, while demand for deepwater rigs worldwide has nearly doubled rates to $1-million a day.

Deepwater exploration costs equate to around $20 a barrel and the billions of dollars of upfront investment required to develop fields make it a risky venture. Contracts signed in the 1990s, when prices were low, allow foreign companies to avoid royalty tax until they have recovered their initial investment.

”The government is trying to modify the tax regime for deepwater exploration and if they do that, it will become much less attractive,” said the executive, noting majors like Shell ignored the last licensing round due to tougher terms.

Nigeria, sub-Saharan Africa’s largest producer, is sitting on more than 36-billion barrels of proven oil reserves. That is four times as much as Angola, the second biggest producer, but many companies are leaning toward exploration there.

”In Nigeria the approval cycle is so lengthy. It takes twice as long to get anything done here as it does in Angola,” said the executive, citing political pressure to hire costly local contractors. ”The productivity of offshore rigs in Nigeria is only around 30% of that in the Gulf of Mexico.”

State shake-up

Part of the problem is the bloated and inefficient Nigerian National Petroleum Corporation (NNPC) which holds a controlling stake in the six joint ventures which make up around 90% of Nigeria’s current export capacity.

A recent leaked report by Yar’Adua’s advisors predicted a 30% drop in production unless there was more investment by NNPC. The president has ordered an overhaul of the state company to unify the joint ventures into a national champion.

”Incorporating the JVs will be a great help. Banks right now don’t want to lend to a dysfunctional national oil company,” said the executive. ”The reform has started but it is progressing very slowly as there are a lot of interests at stake … The dogs are wrestling under the carpet.” – Reuters 2008