Worst days of Nigeria’s oil and gas industry

*An oil industry worker inspecting a flow line.

*An oil industry worker inspecting a flow line.

05 October 2016, Lagos – The third quarter of 2016, which ushered in Nigeria’s 56th independence anniversary, marked the worst days in the country’s oil and gas industry as militancy in the Niger Delta crippled production, impacted oil revenue, forcing the federal government to mull the sale of hydrocarbon assets to fund the 2016 budget. Ejiofor Alike reports

The beginning of the administration of President Muhammadu Buhari had brought hope in Nigeria’s oil and gas sector, which was crippled with crude oil theft, massive corruption, difficulty in doing business due to long contracting cycle, and uncertainty in the operating environment as a result of non-passage of the Petroleum Industry Bill (PIB).

But with his good knowledge of the industry, the early steps taken by Buhari were strong indications that he was determined to enthrone a regime of transparency, due process and clarity of terms to create investor-friendly operating environment.

The appointment of Dr. Ibe Kachikwu as the Group Managing Director of the Nigerian National Petroleum Corporation (NNPC) and later Minister of State for Petroleum was one of the early signals that the sector was heading for a turn around.
Even before Kachikwu was appointed, Buhari’s famous ‘body language’ was said to have stabilised the oil and gas industry, keeping vandals and oil thieves at bay and significantly increasing oil and gas production, which evidently raised power generation to an all-time high of 5,074 megawatts on February 2, 2016.

The country’s oil and gas production rose to close to 2.3 million barrels per day, which was credited to Buhari’s body language as no deliberate efforts were made by this administration to sustain or consolidate on the gains of the Amnesty Programme , which curbed kidnapping of expatriate oil workers and destructive attacks on oil and gas installations since 2009.
However, the first militant attack on Escravos-Lagos Pipeline carried out by the dreaded Niger Delta Avengers (NDA), followed by the bombing of the Forcados subsea pipeline, which was also claimed by this main militant group, ended the good days and exposed the impotency of the president’s body language in addressing the myriads of problems afflicting the oil and gas sector.

The first pipeline attack under this current administration occurred when the militants blew up a section of the pipeline in Warri South-West Local Government Area of Delta State.
This was followed by the bombing of the Forcados subsea pipeline by the Avengers.
With the February 14, 2016 spill on the subsea pipeline, which forced Shell to declare force majeure on February 21, the attacks by the Avengers and other militant groups impacted heavily on Chevron’s onshore facilities in western Niger Delta, Shell’s Bonny Light exports, ExxonMobil’s Qua Iboe, and Agip’s Brass River exports.

The spate of attacks wiped off production of over 700,000 barrels per day of crude oil and over 2,000 megawatts of electricity from the grid due to lack of gas to fire the turbines in the gas-fired power stations across the country.

In the eastern Niger Delta, the Aiteo Eastern E & P Company Ltd-operated Nembe Creek Trunkline (NCTL) and the Trans Niger Pipeline (TNP) are the worst affected by the attacks.
The two lines are the major pipelines used by Shell and other upstream companies operating in the eastern Niger Delta to evacuate their crude to the Bonny Export terminal in Rivers State.
The Avengers also claimed to have attacked the pipeline that evacuates ExxonMobil’s Qua Iboe, which is Nigeria’s largest grade of crude oil but the company refuted the claim, describing the damage on the pipeline as “system anomaly.”

However, the damage was so severe that the repair works have not been completed after several months and the exports of the grade has remained under force majeure.
In the western Niger Delta, the exports of Shell’s Forcados has also remained under force majeure as repair works on the damaged subsea Forcados pipeline have not been completed.
The attacks also crippled Chevron’s onshore operation in the western Niger Delta, and this affected loadings of Escravos crude significantly as the number of shipments reduced.

Dwindling oil revenues
With the renewed militancy in the Niger Delta, crude production slumped from the pre-militancy peak of over 2.2 million barrels per day to an all-time low of 1.468 million barrels per day, according to the September 2016 Oil Market Report (OMR) released by the Organisation of Petroleum Exporting Countries (OPEC).

Nigeria, Africa’s top producer of crude oil, had earlier in March 2016 lost her influential position to Angola when the country’s production dropped to 1.677 million barrels per day, compared to Angola’s 1.782 million bpd.
The latest OPEC’s OMR showed that Nigeria’s oil output fell to 1.468 million bpd in August from 1.52 million bpd in July.

The Minister of State for Petroleum, Kachikwu had revealed that Nigeria requires production of additional 1 million barrels per day to meet her 2.3 million barrels per day target for 2016.
The destructive attacks by the militants curbed 70 per cent of production from the traditional onshore and shallow water terrains.
The country’s dwindling crude oil production has impacted heavily on the 2016 budget worth N6.06 trillion, which is predicated on daily production of 2.2 million barrels per day at a price of $38 per barrel.

The oil price had fallen from the June 2014 peak of $115 per barrel to hit the bottom at $27 per barrel in January 2016.
It later hit the 2016 peak of about $51 per barrel in June 2016 and currently hovers around $44-$48.

But with the abysmal slump in oil production from the 2.2 million barrels per day budget estimate to around 1.6 million barrels per day, including condensates, the capacity of the federal government to fund 2016 budget has weakened drastically.

Proposed sale of oil and gas assets
A major development in Nigeria’s oil and gas sector in the third quarter 2016 that elicited strong reactions from individuals and interest groups is the proposed sale of oil and gas assets to revive the economy, which plunged into recession during the period under review.
The last time the country sold a stake in a joint venture was during the administration of General Ibrahim Babangida in 1993 when government sold a stake to Elf, now Total.
Kachikwu, who hitherto, was opposed to the sale of assets in the joint ventures, may have carved in to this idea due to the precarious state of government’s finances.

“We are looking at this very feverishly because the other alternative is to go mass borrowing. But there’s a limit to your borrowing cap and we are fairly close to that tipping point where you really can’t borrow anymore otherwise you can’t sustain the borrowing. The other thing to look at is your assets and rights that can be turned into cash,” Kachikwu was quoted as saying.
So, the unprecedented drop in oil earnings due to the low oil prices and militancy have forced Buhari’s economic advisers to mull a plan “to generate immediate large injection of funds into the economy through asset sales, advance payment for license rounds, infrastructure concessioning,” to help deal with the slump in crude revenue, according to the Minister of Budget, Senator Udoma Udo Udoma.
Udoma’s spokesman, Mr. James Akpandem, said the Ministry of Petroleum was working out assets that could be sold.

Africa’s richest man and President of Dangote Group, Alhaji Aliko Dangote had recommended the sale of country’s stakes in oil and gas assets, as well as offshore borrowing to raise the $15 billion needed to revive the economy.
A former Governor of Central Bank of Nigeria (CBN) and Emir of Kano, Muhammadu Sanusi II and President of Senate, Bukola Saraki also supported the asset sale, which has been heavily criticised by the organised labour and other groups.
President Buhari had said he expected the country to raise $5 billion from the Eurobond market and multilateral lenders to fund the 2016 budget.

Disruption of refineries’ operations
Despite the initial efforts by this administration to revive the refineries, the wave of militancy in the Niger Delta frustrated the efforts.
Before this present administration came on board, Kaduna and Warri Refineries had not been receiving crude oil feedstock through pipelines since 2010 because of vandalism until April 2016 when the repairs of the Escravos-Warri Pipeline were completed and the refineries started receiving crude through the pipeline.

However, less than two months after the pipeline was repaired, the Niger Delta Avengers bombed the lines and cut off crude supply to the refineries.
Despite the huge success recorded in the area of enthroning transparency, the three refineries recorded very poor performance in the past one year.
NNPC’s monthly report had exposed the poor state of the refineries, with performance averaging 10 per cent initially, which was different from the picture of robust performance earlier painted by the management of Nigeria’s three refineries.
Kachikwu had earlier given the three refineries an ultimatum of 90 days, which ended in December 31, 2015 to increase capacity utilisation to 60 per cent or risk shut down for possible maintenance.

Unpaid JV cash calls
The third quarter 2016 ended without the NNPC finding solutions for the payment of the $7 billion it owed joint venture partners in cash calls.
The corporation’s lack of capacity to meet its obligations to the JV partners had led to the accumulation of unpaid cash calls to the tune of $7 billion.
When this new administration came on board, the arrears was $6 billion and NNPC had promised to find solutions to the funding challenges in 2016.

Stability in fuel supply
Nigerians had experienced acute fuel shortages, which marred the 2015 Yuletide and 2016 New Year celebrations, despite what seemed like the best efforts of this new administration to curb fuel shortages.
During the period of crisis, the private oil marketing companies, which accounted for over 50 per cent of fuel importation, had shunned imports due to unpaid subsidy claims, forcing the NNPC to face the impossible task of bridging the supply gap created by the marketers.
The development had led to perennial crisis until May 2016 when the federal government increased petrol pump price from N86.50 per litre to N145, thus eliminating subsidy element in the pricing template.
Though the issue of subsidy has been resolved, the marketers are currently being confronted with a new challenge of lack of access to foreign exchange to fund importation, but the third quarter 2016 witnessed system stability in fuel supply.

PIB challenge
The non-passage of the PIB eight years after it was first submitted to the National Assembly has continued to create uncertainty in Nigeria’s operating environment.
Without the clarity of terms, the IOCs have continued to say that they are unable to invest because the operating environment is unpredictable.
The new administration had withdrawn the previous version of the bill, with a new plan to split the reform bill into three parts to ease the passage.

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