Troubled waters: Nigeria’s oil militants take their fight beyond the delta

Wanted: a hero to save Nigeria’s oil industry. The successful applicant should be as at home fighting speedboat-riding militants on the high seas and arresting international oil thieves as they are outwitting slow-moving bureaucrats. Success would liberate a flood of Nigerian crude to cushion the world economy from the impact of runaway oil prices. Failure could push energy futures in the direction of $200 a barrel.

Nigeria, once one of the more reliable of the big oil producers, saw its output fall to 1.5m barrels a day last month – its lowest in 20 years – after gunmen staged an unprecedented raid on Royal Dutch Shell’s Bonga deep-water oil vessel. “Our next visit will be different as the facility will not be spared,” the raiders warned in an e-mail after shooting in the air and forcing a five-day production shutdown. “The oil companies and their collaborators do not have any place to hide.”

With crude prices hitting records above $140 a barrel, the industrial-scale smuggling of oil from the Niger Delta is providing networks of criminals and militants with more cash for weapons and training than ever before. A less spectacular but equally serious threat is giving western majors almost as much cause for concern as the sortie against the Bonga. In Lagos, the commercial capital, executives describe a near-paralysis in government decision-making that is blocking investment vital for the industry’s long-term health.

Nigerian officials insist that big offshore developments due to come onstream shortly will help the industry bounce back and achieve their target of 4m b/d by 2010. But unless Nigeria’s leaders not only improve security but also start approving a host of stalled projects, analysts say, there is a risk that production will struggle to rise much beyond half that level. “In the past 10 years, I have never seen so much uncertainty over Nigeria,” says Will Rowley, director of analytical services at Infield Systems, a data analyst. “When you consider the lost value, there’s a sense of total bewilderment.”

What happens next in Nigeria matters more for the global economy, oil majors and Nigerians themselves than arguably at any time since Shell shipped the country’s first cargo of crude oil half a century ago. Nigeria pumped 2.9 per cent of the world’s daily crude production last year, but a global lack of spare production capacity means its performance has a disproportionate impact on prices.

Gone are the days in the 1990s when the country consistently broke its Opec quota, fuelling a global supply glut that dragged prices down to $9 a barrel. A decade later, the situation is reversed: Nigeria’s rollercoaster production is the biggest wild card for global energy markets. When Saudi Arabia agreed to pump an additional 200,000 b/d at a meeting in Jeddah last month to ease the pain on importers, the impact was muted by the Bonga raid, which had shut in the same amount just a few days before.

With the world’s energy companies finding it increasingly tough to replace dwindling reserves, Nigeria is perhaps the most striking example of how insecurity and underinvestment can keep oil in the ground, no matter how rampant global demand. The US, in particular, has become increasingly reliant on Nigeria as a spare fuel tank for its economy. Last year, Nigeria and Angola together exported more oil to the US than Saudi Arabia. Nigeria’s sweet, light crude is far easier for American refineries to handle than its Saudi or Venezuelan equivalents.

Natural gas has enhanced Nigeria’s strategic significance further. The country already supplies 10 per cent of the world’s liquefied natural gas and Europe is banking on Nigerian supplies to reduce dependence on Russia.

For Nigeria’s 140m people – a fifth of Africa’s population – hydrocarbons are more important than ever. Crude exports account for more than 80 per cent of government income and almost all foreign exchange earnings. Surging revenues have fuelled a boom in the banking sector in Lagos and enticed foreign investors. But they have also highlighted regional divisions over the sharing of wealth that have at times threatened to tear Nigeria apart.

After independence in 1960, the lure of petrodollars spurred both coups and the secessionist Biafra civil war as elites representing Nigeria’s big communities fought for power. Now, demands from leaders in the Niger Delta for a greater share of income from their oil, coupled with their failure to rein in the militants sabotaging production, are fuelling growing resentment elsewhere. Politicians in the northern savannah, which depends on oil income to supplement an economy based largely on farming, are particularly frustrated.

Umaru Yar’Adua (left), the president and son of a royal northern clan, who took power in May last year, has pledged reform to reverse the decline in the energy sector. Nigeria’s 36.2bn barrels of oil reserves are four times bigger than Angola’s. But Angola’s fast-growing industry pumped more oil than its bigger brother for the first time in April. Mr Yar’Adua’s ponderous style has earned him the nickname “Baba go-slow” after the Lagos traffic jams, but he has no time to lose.

A sense of crisis gripped much of Nigeria’s oil industry even before 2006, when a campaign by Niger Delta insurgents shut in almost a fifth of production, which had stood at about 2.5m b/d. At the same time, giant new deep-water developments seemed to symbolise hopes that the industry could reinvent itself in the sanctuary of the sea. The illusion of safety ended at 3am on June 19, when news reached Shell executives in Lagos that their huge Bonga facility, located about 120km offshore, had been targeted by raiders. Shots fired from speedboats forced staff to turn off the taps temporarily.

Such commando-style feats represent a transformation in the nature of the conflict from the days when Ken Saro-Wiwa, the late writer and Niger Delta activist, led peaceful protests against pollution and political marginalisation before being hanged by the ruling junta in 1995. Now, a violent insurgency is fuelled by the massive theft of crude oil, a multi-billion dollar business giving many militants, politicians and officers in the security forces an interest in maintaining a constant state of insecurity.

Kidnappings of expatriate oil workers have largely ceased after peaking before elections last year. But measures that help prevent Texan oilmen being spirited away to mud huts in remote creeks while their bosses negotiate ransoms have increased industry costs.

Dele Cole, a prominent politician and businessman from the delta, wrote in the Financial Times last week that Nigeria probably loses $4bn-$18bn a year to the illegal oil trade, masterminded by international cartels. On a bad day, he says, as much as 500,000 barrels’ worth vanishes. “Imagine,” he wrote, “this is a ‘global business’ run from mosquito-infested swamps, turning over $20m a day.”

Mr Yar’Adua’s plan to address the Niger Delta’s woes hinges on holding a summit to gather militants, elders and leaders from across the wetlands to map out a way to settle their many conflicts. No date has been set and, to some in the delta, the initiative appears designed merely to mask a failure by government and oil companies to tackle the poverty that fuels local anger.

The Movement for the Emancipation of the Niger Delta, the insurgent group that attacked Bonga, has refused to attend Mr Yar’Adua’s planned meeting unless the government releases Henry Okah, a militant leader charged with treason and gun-running. A ceasefire has held for the past week, but only just.

While the security outlook remains volatile, the industry is also worried about a lack of investment in new projects. Executives at western majors, while reluctant to speak on the record, say Mr Yar’Adua’s reform process is creating so much uncertainty that approvals for new schemes have slowed to a virtual standstill. “The general feeling is that things are in suspended animation,” says Tam Brisibe, chairman of the committee on upstream petroleum in Nigeria’s House of Representatives.

The biggest question mark hangs over the president’s plans to transform the state-owned Nigerian National Petroleum Corporation into a national champion to rival Saudi Arabia’s Aramco or Brazil’s Petrobras. In a country where oil blocks have in the past often ended up in the hands of presidents’ friends, there is a widespread consensus that the industry has generally not been managed in the public interest.

Emmanuel Egbogah, a presidential adviser on energy, says reform will soon speed up decisions. “It is not as bad as it may look,” he adds. “I agree that there may be some air of uncertainty but I am working hard to see that these issues are removed and solved so the industry can move forward majestically.” Certainly, western majors would like nothing more than a streamlined NNPC, partly because the company perennially fails to meet its share of development costs for joint ventures in the Niger Delta.

In May, Nigeria overcame its aversion to taking on debt from the majors and agreed to borrow a combined $6.1bn from Shell, ExxonMobil and Total to tackle arrears and fund new work. But in the same week, the government handed Shell and Exxon-Mobil a bill for $1.91bn after reviewing contracts signed in 1993 covering Bonga and another deep-water field. “The new terms aren’t as good,” says Ann Pickard, Shell’s top executive in Africa. “That’s why majors aren’t going in.”

A power struggle between Mr Yar’Adua and his predecessor Olusegun Obasanjo, who still occupies a senior position in the ruling party, has clouded the picture further. The National Assembly has launched an inquiry into the running of the NNPC, while the oil ministry is auditing an auction of exploration rights held just before Mr Obasanjo stepped down.

Yet despite the attack on Bonga, Chevron is starting up a giant facility at its deep-water Agbami field, which could add close to 250,000 b/d to production. Total’s similar Akpo project should provide a further boost approaching 225,000 b/d after it starts in about six months.

By some projections, Nigeria could be pumping more than 2.5m b/d by mid-2009, if – and it is a big if – lost output returns in the Niger Delta. But with every delay, Nigeria’s potential will remain the global oil industry’s greatest mirage.

OBSTACLES MEAN SHELL FACES A HIGH-COST FUTURE

All the big international oil companies are struggling uphill in their quest for growth.Royal Dutch Shell’s problems in Nigeria make its climb steeper than most, writeMatthew Green and Ed Crooks

Shell’s worldwide oil and gas production has been falling for six successive years. There is a good chance that decline will extend into next year as well. The obstacles Shell faces in Nigeria are helping push the company towards heavy investment in unconventional resources such as Canada’s oil sands. It is a costly strategy that will pay off only in the next decade.

Nigeria remains Shell’s second biggest territory for oil production, after the US. Growth from offshore projects has offset lost production onshore and the net decline since 2005, before the latest flare-up in violence, is just 60,000 barrels a day. That is less than half the fall in the output from Shell’s North Sea oilfields over the same period.

But if an international oil company is to have a future, it needs to grow in resource-rich countries such as Nigeria, to make up for the inevitable decline in mature regions such as the North Sea. Shell is still struggling to restore the production it lost after a wave of attacks hit its operations in the Niger Delta.

Its onshore unit in the country is Shell Petroleum Development Company, in which Shell has 30 per cent and the state-owned Nigerian National Petroleum Corporation has 55 per cent. That joint venture lost 477,000 b/d of output during a spike in militant violence in early 2006. By last month, 350,000-400,000 b/d of production remained shut in, according to Mutiu Sunmonu, the managing director of SPDC. Shell has declined to give precise figures for how much output it has restored in the delta since early 2006.

Ann Pickard, Shell’s regional executive vice-president for Africa, told the Financial Times in mid-May that she had been making “very good” progress in restoring lost production in the western delta, focus of the insurgents’ campaign in 2006. But a spate of attacks on pipelines in the east of the delta earlier this year has eroded much of the gains.

SPDC has also suffered output losses due to the NNPC’s failure to pay its share of exploration and development costs.Ms Pickard says that in 2007, for example, SPDC’s budget was slashed from an initial $6.6bn (£3.3bn, €4.2bn) to just $2.7bn because of a shortfall in the government’s contribution. In May, Shell agreed to lend the government $3.1bn as an interim measure to plug the funding gap, of which $1.1bn was earmarked for spending on investment projects that had been stalled by a lack of funds.

The slow pace of government approvals for work plans has, however, raised questions over how quickly the loan will bring progress on the ground.

In the face of those funding problems and the threat of increasingly determined militant attacks hitting offshore facilities again in the future, the best Shell can hope for in Nigeria may be to sustain oil production at around its current level and gain some growth from its liquefied natural gas projects.

That means the company will increasingly have to look elsewhere and rely on high-cost production such as the Canadian oil sands and the Pearl project in Qatar to convert natural gas into liquid fuels.

Investing in those projects means Shell has the industry’s biggest capital spending programme, at a planned $28bn-$29bn this year. But the benefit of that investment will be slow to show through. Colin Smith of Dresdner Bank says: “We do not expect production to start recovering until 2010. Shell is investing heavily but it will take a long time for those investments to have an effect on its output.”