Nigeria’s oil output has fallen the lowest in over a decade at a time some analysts are forecasting a $200 per barrel oil in the face of surging demand on account of Russian aggression and underinvestment due to climate concerns.
Already, Nigeria is shedding its position as Africa’s top oil producer, multinational oil companies are fleeing onshore fields, final investment decisions on oil projects which started over a decade ago have stalled, sabotage of oil infrastructure have worsened and fuel subsidy payments are eroding government revenue as never before.
The Nigerian government response has complicated matters. Under Buhari’s administration, the subpar quality of policy making and execution, inability to read the energy landscape, an obsession with litigating the past in phantom corruption fights, and a lack of pragmatic, business-oriented approach to resolving sticky situations have denied Nigeria benefits from rising prices today and build for tomorrow.
In 2016, crude oil prices crashed below $30 per barrel on account of a global recession. In Nigeria, sabotage from Niger Delta militants roiled the sector and other countries were implementing smart policies like Egypt who began a phased removal of fuel and electricity subsidies, the Nigerian government hemmed and hawed and failed to remove subsidies or deal with foreign exchange challenges.
In the face of rising oil prices, last year, in just the first six months of the year, subsidies have gulped about N2 Trillion. Data from the NNPC shows that the state oil company continues to be handicapped in meeting its remittance obligations on account of subsidy obligations.
In 2021, Nigeria lost on average about 200,000 barrels per day of oil output and a report published by Analysts at Wood Mackenzie in April, detailed how two of the country’s most prolific oil infrastructure became prime targets for criminals.
The report revealed that Shell’s Bonny and the Brass oil pipeline system owned by the upstream Joint Venture (JV) between Eni, NPDC and Oando, were facing systemic crude oil theft as attacks shifted from the west to the east.
“The scale and sophistication of crude thefts suggests an organised operation on an industrial scale,” said analysts at Wood Mackenzie.
The report stated that theft and vandalism hit Shell’s Bonny pipeline system the hardest leading to the declaration of force majeure at the Bonny terminal in March 2022 due to a drop in crude output.
The Bonny oil pipeline system, the largest pipeline network in the Niger Delta and transports oil, water, and associated gas from the eastern and central delta to the Bonny oil and gas terminal. Its terminal, situated on Bonny Island, 48 kilometres southeast of Port Harcourt, is the biggest in Africa with a capacity to process and export 1.25 million barrels per day (b/d) but operators like Heirs Holdings report losing over 70 percent of the crude oil passing through the pipeline.
Sabotage of crude oil pipelines is a key reason driving the multinationals away from the Niger Delta which translates to huge revenue loss to Nigeria, the government is keen to stall the exit of multinationals and are placing obstacles on their paths.
The state oil firm says that many of the oil and gas assets divested since 2012, were not properly decommissioned and will increase scrutiny over new deals. On ExxonMobil’s plan to sell its 40 percent stake in its Nigerian onshore assets, the NNPC said that it should have the right of first refusal over any sale as a joint venture partner.
However, analysis of the NNPC joint Operating Agreement with oil companies by analysts at Wood Mackenzie found that since this is share sale rather than an asset sale, NNPC lacks pre-emption rights.
“Because this is a corporate acquisition, NNPC has no rights to pre-empt a deal under the Joint Operating Agreement (JOA), which governs the JV. This means that ministerial consent would be the only hurdle remaining,” the note said.
The deal has stalled anyway because the President who doubles as minister of Petroleum Resources has withheld ministerial assent required for the deal to proceed.
Now Shell is facing another challenge completing its divestments. It was set to receive two final offers for its onshore oil and gas fields in Nigeria by Heirs Oil and Gas Ltd. and ND Western Ltd vying for Shell’s 30 percent stake in the joint venture, which operates assets in the Niger Delta and nearby offshore areas.
Shell’s stake was valued at $2.3 billion by energy consultant Wood Mackenzie Ltd. last year, assuming a long-term oil price of $50 per barrel. However, with Brent trading at around $121, the stake is likely worth much more.
Shell announced its intention last year to sell the stake, saying its long-term energy transition strategy was incompatible with Nigerian operations prone to spills and theft. Ben van Beurden, Chief Executive Officer, Shell Plc, told shareholders in May that a significant increase in sabotage in recent years had resulted in a state of near-lawlessness that the company couldn’t control.
However, legal disputes about an oil spill in Port Harcourt have stalled the deal. On June 16, Nigeria’s supreme court had asked Shell to comply with a high court ruling which barred the oil major from any asset sale in Nigeria until a decision is reached on the dispute over a 2019 oil spill is resolved between the company and a community in the oil-rich Niger Delta.
“Shell welcomes the Nigerian Supreme Court’s decision to hear the appeal of the Shell Petroleum Development Company of Nigeria Ltd (SPDC) in this case,” the London-based company said in a statement sent to BusinessDay on Thursday.
Due to Nigeria’s inability to quickly reform the fiscal and regulatory framework of its oil and gas sector, several projects have stalled with multinational oil companies pushing to future dates final investments decisions.
In Nigeria, several oil and gas projects including the 120,000bpd Zabazaba-Etan project; 140,000bpd Bosi project; 110,000bpd Uge project and 100,000bpd Nsiko deepwater project; 1billion barrel Owowo field development await final investment decisions.
Rather than devise pragmatic solutions to get these projects off the ground, the Nigerian government is chasing shadows. This is seen in the time and resources devoted to fighting the Malabu oil deal and suing Morgan Chase for damages. The government is spending a fortune paying lawyers to litigate the past while the future is blowing right past it in a stunning display of lack of vision competence.
Russia’s war with Ukraine has provided prepared nations with an opportunity to make a pile of money based on supply gaps in Europe but gas-rich Nigeria with over 209 trillion cubic feet of gas cannot find enough for its citizens to cook their meals.
Analysts say Nigeria needs to begin full implementation of its petroleum industry law, engage professionals to run the sector and execute smarter policies like full deregulation of the downstream sector to have a fighting chance of reaping the benefits of its vast resources before the world completely moves away from oil.