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Published On: Fri, Oct 31st, 2014

Night is arriving in Nigeria

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diezani-allison-maduekeBy Gary K. Busch

As Nigeria prepares for its next Presidential election all eyes are fixed on the competition for political and economic power encompassed by several challenges. The ongoing battle with Boko Haram continues to ravage the Northeast and a resurgence o. f pirates and militants have created new unrest in the South. The Army and the Northern elites have been shown to be sponsors of Boko Haram and have profited from the sales of Army equipment to the dissidents by its leadership. Corruption has reached a new high in Nigeria, with revelations of diversions of US$20 billion from the NNPC over the last eighteen months; a $US 6.8 billion siphoning of money from the fuel subsidy; and a desperate effort to move billions of dollars parked by the NNPC and its overseers in overseas banks to avoid the pressures by the new U.S. FATCA rules which force banks to declare the real owners of the accounts. It is election time so vast sums of cash have to be moved around to ‘settle’ those who need to be ‘settled.’

Bad as that might sound it isn’t something new or special. Nigeria has been like that for decades. What is new, and is the most disturbing for Nigerians, is that these vast sums looted from the Nigerian people are never going to be replaced as the engine of Nigerian prosperity, the oil and gas industry, is slowly fading away and losing its role as a key exporter of crude and LNG to the world market.

One of the reasons for the difficulties facing Nigeria is the increase in the U.S. production of shale oil and gas. By 2020, the U.S. is expected to produce more gas than it needs. The oil and gas companies are making ready more than fifteen new export shipping terminals, sufficient to export a full third of current domestic LNG consumption around the world. More than a half-million gas wells are operating in the U.S., a 50% increase since 2000, according to the Energy Information Administration In 2000, shale gas was 2 per cent of the U.S. natural gas supply; by 2012, it was 37 per cent. EIA says the U.S. has 300 trillion cubic feet of gas in proven reserves and potentially ten times that amount in unproven reserves, much of which is in shale deposits. By comparison, the U.S. currently consumes about 25 trillion cubic feet of natural gas annually. If current trends continue, EIA estimates, the U.S. will be producing more gas than it consumes within the next seven years.

Indeed, the U.S. reserves of shale gas are probably a gross underestimate. Oil companies have found that there are vast entrapped gas reserves underneath the current shale gas formations. The Utica Gas play lies beneath the huge Marcellus field. The Marcellus Shale captured public attention when leasing and drilling activities began pumping billions of dollars into local economies in 2004. Now, just a few years later, the Marcellus Shale is being developed into one of the world’s largest natural gas fields. However, what geologists have found shows that the Marcellus is only the first step in a sequence of natural gas plays. The second step is starting in the Utica Shale which is found below the Marcellus Shale find.

The price of natural gas is dropping and, when exports of U.S. gas get on stream, it is likely to stay low. The situation for Nigeria’s oil industry is even worse than the problems of U.S. shale gas expansion. At its peak (in February 2006), the US imported 1.3 million barrels per day (mb/d) from Nigeria. By 2012, Nigeria was selling only 0.5m b/d, but was still one of the top five suppliers to the US. In early 2014 this tailed off to around 100,000 b/d and, in July 2014, Nigerian oil exports to the U.S. stopped completely. Now, Nigeria has stopped selling oil to the U.S.

Despite this Nigerian OPEC production quota has not dropped as four Asian countries have expanded their Nigerian purchases. China, India, Japan and South Korea, have been responsible for the consumption of about 42 percent of Nigeria’s crude oil export in the first eight months of this year. Forty-two per cent or 819,000 b/d of Nigeria’s crude oil output was taken up by them. The biggest of all was India which imported Nigerian oil during January-August 2014 by 37 percent above a year ago; and average of almost 367,000 b/d.; China has expanded its Angolan crude imports, partially relieving the pressure on U.S. reduction of Angolan imports.

The major problem for Nigeria in relying on these Asian consumers is that they are very price-conscious and volatile. With new oil finds in Uganda, Somalia, Mozambique, Kenya and elsewhere in East Africa the competition for supply to Asia will be much harder to sustain. Nigeria, as a relatively high cost producer is vulnerable and further away.

Another problem with the increased supply of U.S. shale oil is also the type of oil required. The high-grade, low-sulphur ‘sweet’ crudes of Nigeria are very similar to the oil produced in U.S. shale oil extraction. When these U.S. shale oils reach the world market as a result of increased U.S. exports of crude this will have a major impact on reducing the premia charged by Nigeria for its sweet crudes. This reduction of the premia, in addition to the reduction in the price of crude oil in general, hovering around the US$80 per barrel mark, is making Nigerian crude uneconomic. The Nigerian costs of production are relatively high as there are ‘social costs’ which must be added to the costs of extraction and transport.

These ancillary ‘social costs’ include the loss of almost 150,000 barrels a day of oil (7%) which is stolen from the system. This ‘bunkering’ of oil is the organised thievery of oil from pipelines and in transit which are taken away to other countries for sale; often smuggled by tanker across the border or shipped in small vessels to refineries like those in Abidjan, where the crudes are refined. This is a long established practice and a favourite revenue earner for many high-ranking Nigerian politicians, naval officers and civil servants. The oil which is ‘bunkered’ usually belongs to one of the major oil companies who have to add the cost of producing this lost bunkered oil to the total costs of production, raising the average cost.

Producing countries like Saudi Arabia and other Middle Eastern producers are less affected by the expansion of U.S. shale gas as their crudes are heavier and are useful for producing a larger quantity of the ‘bottom end of the barrel’ products in refining. In the winter, in North America, the mottom end of the barrel’ increases in value as cold weather requires heating oil. The top end of the barrel’ is better in summer because more gasoline is produced by refining (often ‘straight-run’ as opposed to ‘cracked’ oil) and provides a greater netback of lighter fractions by refining shale oil instead of Nigeria crude.

Another ‘social cost’ is the disruptions of normal production and safety levels by militant groups like MEND and its associates. The Federal and State governments diminished this problem by ‘settling’ the militants with high levels of payments to their organisations as a recurring cost and by expanding ‘social programs’ in the areas where they operate to offer jobs, training and recruitment fees to local power brokers. All of this has to be factored in as a cost of production. The sum of Nigeria’s production, transport and social costs have pushed real costs to almost US$ 102 a barrel. This is uneconomic in today’s market. That is why the ‘world’’s major oil companies, Shell, ExxonMobil, Chevron ad Total are divesting themselves of Nigerian assets and concentrating their investments outside Nigeria.

However, the greatest cost to Nigeria which makes the system uneconomic is the crisis in Nigeria’s refining industry. Crude oil needs to be refined before it can be used. Nigeria’s refining capacity is more than a joke, it is a national disaster. There is an almost total failure of the refining capacity controlled by the outstandingly inefficient Nigerian National Petroleum Company (NNPC). Nigeria’s theoretical total refining capacity is 445,000 barrels per day in local refineries installed in three stages between 1965 and 1989. A modest capacity of 35,000 bpd was installed in Port Harcourt in 1965 amid the political turmoil which led to the Biafra War in 1966. This was expanded to 60,000 bpd in 1971 preparing for the post-war oil-led economic boom. This was the period that saw an eight-fold crude production increase from 1969 to 1974.’


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