How Nigeria’s oil sector walked to a cliff’s edge

Upon his appointment as the 18th Group Managing Director (GMD) of the Nigerian National Petroleum Company (NNPC) in July 2019, Mele Kyari, set upon achieving a production target of 3 million barrels per day (bpd). For a country struggling to produce 1.4 million bpd, this seemed like an ambitious goal until you realise that the target in 1992 was to raise production to 4 million bpd.

The story of how Nigeria’s sprawling oil industry – which once accounted for the highest foreign direct investments, which was the prime career choice for many bright children and the lubricant that oiled both infrastructure and sleaze – drifted to the edge of the cliff mirrors how Africa’s biggest economy suffered a bruising fall.

“Within the past 30 years I have been in the industry, the decline I have seen in the sector year after year was caused by not putting the right people in the right places,” said Udeimoh Itseuli, a former chairman of NNPC and chairman of Dubril Oil Company Limited, an indigenous operator.

Itseuli told BusinessDay that in the early days of oil production in the 1970s when Nigerians began to acquire technical skills, those who wrote government regulations and worked in NNPC were experienced professionals with technical competence, having worked in the private sector.

Analysts say the skill level has since dropped significantly. Despite being one of the largest producers on the continent, Nigeria has no university that has built a strong research and innovation faculty to serve the oil industry.

The decline, they said, started with the influx of quacks with the ‘right connections’ or who came from the ‘right part of the country’. They were given oil wells they didn’t know how to develop and ran government agencies they were ill-prepared for.

This accounts for why the Production Sharing Contracts (PSCs) governing operation in deepwater, where most of Nigeria’s oil is now produced, provided for reviews every five years or once oil price rose above the base price of $20 a barrel, but they failed to initiate any such review for decades.

The delay in passing the Petroleum Industry Bill created decades of uncertainty during which the International Oil Companies (IOCs) began to look elsewhere, and they held back investments. This effectively shut off new discoveries, and production infrastructure was not maintained. The result is that today Nigeria cannot produce enough to meet its reduced quota from the Organization of the Petroleum Exporting Countries.

Read also: To salvage Nigeria’s oil industry, professionals must be allowed to run it – Itsueli

While Nigeria battled above-the-ground problems including instability at the helms of the poorly managed NNPC, which in a 10-year period had seven GMDs, the oil industry was experiencing an earthquake in the form of energy transition, and those running it think it is only an aftershock.

The effect of poor leadership is seen in the country’s inability to save or invest oil windfalls, protect energy assets against sabotage, making Nigeria, one of the world’s highest-cost producers.

A new wave of security threats has brought Nigeria’s energy sector to its knees, as local operators without the capacity to absorb as many shocks as the IOCs lament that crude theft has reached heights previously unimaginable.

In a season where its global peers are leveraging the current oil price of over $100 per barrel to raise quick cash to prop up their national economies, fund their budgets, and attract investments, Nigeria is hemorrhaging cash, paying wasteful subsidies on petrol, and fighting off crude oil thieves.

Ngozi Okonjo-Iweala, former finance minister, said in 2012 that Nigeria was losing about 400,000 barrels of crude oil per day, translating to over $1 billion monthly, to thieves.

A decade later, it has morphed into a heist with some companies reporting that more than 90 percent of their crude is stolen from pipelines before it reaches the terminal.

“Before, we were dealing with pocket oil thieves who were only stealing buckets of crude oil; now it’s an organised crime syndicate,” said Bolaji Ogundare, a senior executive in an indigenous oil company.

Insecurity became pervasive in the oil industry when militants operating in the Niger Delta ramped up attacks on oil fields and terminals in 2016, pushing production below 1.4 million bpd.

In response, President Muhammadu Buhari initially threatened to deal with them but backtracked and continued the presidential amnesty programme, instituted by late former President Umaru Yar’Adua in 2009.

Oil theft seems to have worsened, with sources saying it is now an industrial-scale enterprise involving well-connected government officials, security personnel, and local communities.

“How can we be losing over 95 percent of oil production to thieves? Look at the Bonny Terminal that should be receiving over 200,000 barrels of crude oil daily, instead, it receives less than 3,000 barrels,” Tony Elumelu, who owns huge stakes in Tenoil Petroleum & Energy Services, said in a series of tweets on March 17.

Nigeria’s crude oil pipeline network has collapsed completely as IOCs with a foot in the door have abandoned the maintenance of the pipeline network.

The large scale of the problem is seen in Aiteo’s decision to abandon a pipeline it acquired for $1.2bn and transport its crude by barges. Moving crude by barges adds up to about $15 a barrel, compared to the cost of moving crude by pipeline which is $2.5 a barrel.

Elumelu’s company pumps about 40,000 barrels of crude daily into the pipeline but only manages to export 7,000 barrels daily at the terminal.

The total value of Nigeria’s crude oil stolen between January 2021 and February 2022 is about $3.27 billion (representing N1.361 trillion at the official exchange rate of N416.25 to the dollar), the Nigerian Upstream Petroleum Regulatory Commission said in a presentation to the Oil Producers Trade Section, as well as the Independent Petroleum Producers Group at a stakeholders event on crude oil theft on March 24.

“The sophistication of the engineering involved points towards a high degree of sophistication and technology, as well as the distribution. I think we’ve just got to be honest and accept that this is not theft but organised criminal activity,” said Richard Laing, managing director of ExxonMobil Nigeria.

The IOCs said it would impact their ability to meet the government’s target of reducing production costs to $10 per barrel by the end of the year. Oil operators are taxed after expenses; hence, high production cost eats into tax returns.

Crude oil theft is adding a distance to Nigeria’s ability to meet the OPEC quota of 1.7 million bpd in March 2022 from its previous target of 1.70 million bpd in February and 1.68 million bpd in January.

Nigeria has not met its quota since July last year, according to data from Refinitiv, an American-British global provider of financial market data said.

According to an NNPC presentation to the Federation Account Allocation Committee meeting for March 2022, the national oil company and its partners lost over 2.2 million barrels of crude oil worth about $213 million, based on February’s average Brent price of $97.

Austin Avuru, the founding MD of Seplat Energy Plc, has called for a state of emergency in the Nigerian oil and gas sector. “There has to be a deliberate policy-driven return to the traditional onshore/shallow water terrains,” he said while calling on the government to match slogan with action.

Beyond oil theft, operators say court judgments awarding billions of dollars to communities further place a strain on oil companies when these leaks are now often caused by sabotage.

Many are unaware that a judgment debt against the oil companies means that the Federal Government, which has a 60 percent stake in joint venture operations, will pay the greater share, said Itsueli.

These problems have forced the IOCs to divest from onshore and shallow-water assets. NNPC’s demand for preemption rights, even though it is poorly managing its current assets, is expected to add a new dimension to the problems.

“The future will belong to independent producers, with IOCs leaving onshore assets; now is the time for Nigeria to incentivise them to turn the situation into an opportunity,” said Adebowale Adeniyi, senior manager, Oil, Gas & Power Group at Andersen Tax.