Oil nears $80 with slim chances for more revenue due to theft
• Nigeria partly responsible for higher oil prices yet can’t break even
• Despite amnesty, N32b security cost, average loss to crude theft, vandalism surpasses 200,000bpd
• ‘Operators cant make money, need newer security models’
Despite ongoing amnesty and other measures to address crude theft in the Niger-Delta region and over N32 billion paid between January and July on pipeline security and maintenance cost, Nigeria’s production challenges appear unabated, as frequent pipeline sabotage is expected to see the country’s average crude loss surpass 200,000 barrels a day.
This is after the country’s self-reported crude output was 1.27 million b/d in August, down from 1.44 million b/d it opened July with. The trend is expected to continue in the coming months going by the rising frequency in production disruptions due to community unrest, maintenance and leak repairs.
A shortfall in production is partly responsible for the supply challenges witnessed globally, pushing oil price to $78 a barrel. OPEC’s latest Monthly Oil Market Report (MOMR) confirmed that Nigeria pumped 1.27 million barrels per day (mbpd) last month, lower than 1.38mbpd in July.
According to the 2021 crude oil and condensate production report released by the Department of Petroleum Resources (DPR), difficulties in some oil terminals caused the decline in Nigeria’s oil output.
These losses and high cost of operations have continued to hamper the country’s earnings from oil, leaving it dependent on Value Added Tax (VAT) revenue from the states. With the present VAT controversy, the country’s earnings have become threatened, leaving the nation dependent on loans to meet its obligations.
As oil nears $80 a barrel, creating concerns for global consumers in terms of rising pump price of gas/petrol, Nigeria’s hydra-headed problems surface both at the production and export end and at the importation end.
In terms of subsidy payments, the oil rally is taking a toll on petrol consumption, with a year-to-date expense of N541.6 billion recorded between January and July this year.
Specifically, a surge in pipeline sabotage, leading to a rise in crude theft and frequent shut down of oil export terminals, is undermining the country’s capacity to earn a decent income from the oil rally, while subsidy payments, which are expected to rise in lieu of higher oil prices, have become a drain on the purse of the Federal Government.
Despite a lower quota from the OPEC+ that is below the budget benchmark for the current fiscal year, Nigeria’s production has been on the decline due to rising cases of vandalism, leading to disruptions in production.
Already, the issue of oil theft has remained a source of concern to operators who often bicker on who bears the shortfall. A recent crisis between Shell and Aiteo revealed that the Nembe Creek Trunkline (NCTL), despite the removal of over 50 crude theft points, remains undermined by several leakages and corrosion.
Growing threats by militants to renew attacks on oil infrastructure in the restive Niger Delta remain a concern.
Although the Minister of State for Petroleum Resources, Timipre Sylva, said the country’s full production capacity is closer to 2.2 million b/d, calling for an adjustment in OPEC+’s revised quota, the country has struggled to produce at its current allocation.
Sylva, according to Platts report, attributed Nigeria’s production struggles to technical problems from re-tapping reservoirs that had been shuttered to comply with the stringent OPEC+ cuts of the past 17 months and the said output could rebound to around 1.7 million b/d by November and 2 million b/d by end of the year.
“We had some issues from shutting down the reservoirs,” he said. “When you shut down a reservoir, to restart it, sometimes, there are challenges. The basis for giving us this quota was that Nigeria was in a crisis,” Sylva said. “Right now, we don’t have any crisis anymore, and we believe we can produce more.”
Nigeria’s quota, which covers only crude oil and not condensate, is 1.614 million b/d for September and is scheduled to rise by roughly 17,000 b/d each month, in line with the OPEC+ alliance’s plans to gradually ease back on production cuts implemented in the pandemic, but there are concerns about the country’s ability to meet the production demand.
At least, two of the oil majors operating in the country confirmed to The Guardian that issues of pipeline leakages are becoming frequent, despite new technologies being deployed, forcing operators to question the efficiency of the amnesty exercise and the high cost being incurred for the protection of critical national assets.
According to the sources, oil is no longer stolen at the well-heads, as vandals have become innovative and bypass the anti-ballistic pipelines to disrupt production.
Indeed, they raised concerns about the culpability of the nation’s security agencies, noting that barges of oil could not have been stolen and moved on the coastal waters without collaboration with some very powerful Nigerians.
The operators told The Guardian that crude theft is killing Nigeria’s oil business, as it is no longer sustainable for the operators. The upstream challenges have forced operators to consider divestment, adding that the protection/amnesty programme is no longer yielding results for the country but has remained another conduit for corruption going by the number of leakages and vandalisation in the region.
They noted that the ammunition being used to vandalise the pipelines should not be accessible to militants who have submitted weapons under the amnesty programme.
According to the Nigerian National Petroleum Corporations’ (NNPC) notes to the Federation Account Allocation Committee (FAAC) last month, the country recorded a total loss of 6.035 million barrels in the month of June to maintenance and leak repairs. Of the volume, over 300,000 barrels were lost due to leakages and community unrest.
The NNPC equally spent N32.56 billion on pipeline security and maintenance cost within the first seven months of this year, above the N29.6 billion budgeted for the year, reflecting a rising incident of vandalism and frequency in maintenance.
In 2019, Nigeria’s oil industry auditor, the Nigeria Extractive Industries Transparency Initiative (NEITI), released a report showing that Nigeria lost around 138,000 b/d of crude oil to theft over the past 10 years valued at $40.06 billion.
Producers have said costs continue to escalate in Nigeria due in part to attacks on facilities in the country’s main producing region, Niger Delta.
Foreign oil companies, including Shell, ExxonMobil, Chevron and Total have linked their divestment in many onshore assets to the continued oil theft, with renewed focus on gas.
Nigeria’s oil facilities have faced incessant sabotage attacks over the years while some others have aged, giving rise to frequent failures resulting in operational disruptions, high maintenance costs and revenue losses.
The NNPC in its FAAC report for April 2021, noted that products theft and vandalism have continued to destroy value and put it at a disadvantaged competitive position, as it recorded a total of 546 vandalized points between April 2020 and April 2021.
An economist and former Director-General of the Lagos Chamber of Commerce and Industry (LCCI), Dr. Muda Yusuf, told The Guardian that tackling the problem of crude oil theft calls for an immediate review of current security strategy around oil pipelines and other oil and gas installations in the region.
According to him, there should be a multi-stakeholder approach. He added that there should also be a complementary individual corporate security strategy by the oil companies, adding that more importantly, the government and security agencies need to step up on the matter.
An oil and gas policy expert, Ademola Adigun, acknowledged that the issues of oil theft are complicated and complex, adding that the concerns about transparency among security agencies are valid.
He equally added that there is the issue of mistrust and alleged collusion among operators, lack of technology and problem in the metering system.
Like the operators, Adigun noted that amnesty appears to have lost its essence in the country, adding that the programme is supposed to run for a period of time.
He, however, expressed optimism that the involvement of host communities in the Petroleum Industry Act (PIA) might help to address the issues but warned that the model for pipeline management should change.
“The big operators cannot effectively manage their pipelines. Newer models that are community-based are needed to protect pipelines. The local oil companies should be involved in pipeline protection. The big boys should divest from the pipelines and allow the smaller companies to take over. Their relationship with the communities might lead to better outcomes”, he added.
Chairman of Petroleum Technology Association of Nigeria (PETAN), Bank-Anthony Okoroafor, stated that it is tough for operators to make money with crude theft.
With technology deployed, he added that operators might have to re-evaluate evacuation strategies, and set up a special security task force funded by the industry.
“There is no single strategy but an integrated strategy could help. We also need to evaluate the pipeline surveillance contracts’ effectiveness. The most expensive option may be to bury these pipelines deeper and pour concrete on top to make it difficult to access,” he advised.
“We have two sets of losses, one coming from our products and the other coming from crude oil. In terms of crude losses, it is still going on. On average, we are losing 200,000 b/d,” NNPC managing director, Mele Kyari, had said in Abuja, according to an NNPC statement.
Kyari disclosed this when he held talks with the Chief of Defence Staff, Gen. Lucky Irabor, on ways to curb frequent attacks on pipelines and large-scale siphoning of the crude.
The NNPC chief said that while attacks on its key oil products pipeline network System 2B, mainly used to transport imported gasoline, had reduced considerably due to support from the security agencies, crude theft had become more prevalent.
Irabor had pledged to increase military support to provide maximum security for Nigeria’s oil and gas assets, according to the NNPC statement.
“It is my intention to cooperate maximally with you and to give necessary instructions to all officers in the Armed Forces,” Irabor said.