Summary
Throughout the year, Nigeria’s oil sector has been caught in a cycle of sporadic attacks and fitful negotiations to resolve local grievances and restore peace — and oil production — in the Niger Delta. The Niger Delta Avengers militant group announced the week of Nov. 14 that they had attacked three pipelines leading to the Bonny export facility in Bayelsa state. Two weeks earlier, an offshoot of the Movement for the Emancipation of the Niger Delta (MEND) struck the Trans Forcados pipeline, which had recently been repaired after a bombing in February knocked roughly 200,000 barrels per day in production offline. These and other attacks have been devastating for the country’s oil production, which has rarely surpassed 2 million bpd over the past few years, having peaked at 2.65 million bpd in 2005. But militancy is just one of many problems for Nigeria’s oil industry. Until the country can address the institutional and structural challenges facing its upstream energy sector, it can expect more of the same stagnation, even if oil prices and security improve.
Analysis
On assuming office in May 2015, Nigerian President Muhammadu Buhari vowed to solve the problems in his country’s oil industry. He proposed to restructure the Nigerian National Petroleum Corp. (NNPC), the country’s state-owned energy firm, overhaul the regulatory structure and make the notoriously corrupt energy sector more transparent and accountable. (Buhari’s predecessor, Goodluck Jonathan, used Nigeria’s oil and natural gas industry as a vehicle for patronage, rewarding his constituents in the Niger Delta at the rest of the country’s expense.) To effect these changes, the president took control of the oil and gas industry and put an oil industry veteran, Emmanuel Ibe Kachikwu, at the helm of the NNPC, later appointing him deputy petroleum minister in November 2015.
Stalling Reforms
The initiatives saw some success early on; Kachikwu replaced several top executives at the NNPC and consolidated some of the company’s units. But progress has since stalled. After nearly eight years in the making, Abuja had to split the Petroleum Industry Bill — a comprehensive piece of legislation aimed at overhauling the oil sector — into smaller bills to pass it in December 2015. The resulting legislation omitted some important provisions of the original, including changes to taxation, royalties, contract structure, and oil and gas distribution across the country.
Furthermore, though Buhari and Kachikwu initially agreed on the need to restructure the NNPC, their policy priorities have diverged. Kachikwu hopes to privatize more of Nigeria’s oil industry while streamlining NNPC operations to make the company more like a commercial oil firm. The president, on the other hand, wants to keep the country’s resources under state control to ensure that the resulting revenues reach his support base in northern Nigeria. As a result of these irreconcilable differences, Buhari removed Kachikwu from his post at the NNPC in August and appointed one of his close supporters, Maikanti Kacalla Baru, in his stead. Now, Kachikwu, who is still Nigeria’s deputy petroleum minister, must work with Baru to decide how to restructure the NNPC and the industry, taking into account the conflicting demands of various stakeholders.
Deeper Problems
The national oil company’s finances are a good place to start. A handful of joint ventures between the NNPC and international or indigenous private firms account for roughly one-third of Nigeria’s oil production, mostly onshore or in shallow water. But the NNPC has amassed $8.5 billion in debts on these ventures through cash calls, a mechanism where a partner firm finances joint projects on the company’s behalf in exchange for a share of future crude production. Earlier in November, the NNPC announced that it had reached a settlement with five international oil companies — Royal Dutch Shell PLC, Chevron Corp., Eni, Exxon Mobil Corp. and Total SA — to reduce its debt from more than $6 billion to $5 billion. As part of the agreement, the companies also agreed to use a new financing structure, including an escrow account that the NNCP’s partners could draw on.
Abuja hopes that settling its cash call debts and implementing a more sustainable financing model will boost investor confidence in Nigeria, paving the way for increased oil and gas production down the road. Even aside from its shaky finances, however, Nigeria is a difficult place for international oil companies to do business. Most international oil companies are turning their attention to deep-water developments, a problem area for Nigeria’s oil sector. The contract model currently in place for these types of projects was developed in the 1990s, long before deep-water oil production became commonplace. As a result, the terms of the contracts favor foreign investors — at least for now. Earlier drafts of the Petroleum Industry Bill proposed to increase the royalty rate from zero to as much as 50 percent, depending on the price of oil and level of production. Until the country’s regulations become clearer, international oil companies may be reluctant to sign contracts in Nigeria. Meanwhile, Abuja is in the process of suing six international oil companies for nearly $12.7 billion for allegedly exporting oil from the country illegally under the Jonathan administration. Regardless of whether the companies are at fault, the lawsuit highlights the challenges that Nigeria’s legal environment creates for international oil firms.
Although Buhari has tried to reduce the incidence of issues such as billing disputes and bribery with his reforms, he has had little success. After nearly 18 months in office, the president is facing opposition from all sides, including from members of his own party who have accused him of excluding them from the decision-making process. Despite Buhari’s intentions for Nigeria’s oil and gas sector, his reforms meet resistance at every turn — from militants and leaders in the Niger Delta, from the petroleum workers unions, and from the political establishment. At the same time, the country’s financial problems, compounded by low oil prices, have left Buhari without the capital necessary to win over his many opponents. The last year has demonstrated yet again that reforming Nigeria’s oil sector will be a long and laborious process. In the meantime, the vital industry will continue to languish.
Source: Â Stratfor