Energy & Mining

The Delta Skelter

Oil prices surged to two-year highs of more than USD60/barrel in early November 2017 after vast Saudi purges led markets to believe that Crown Prince Mohamed Bin Salman’s consolidation of […]

Oil prices surged to two-year highs of more than USD60/barrel in early November 2017 after vast Saudi purges led markets to believe that Crown Prince Mohamed Bin Salman’s consolidation of power in the world’s second-largest producer would strengthen the young leader’s hand in leading OPEC to make further production cuts. Though Nigeria was generously excluded from the OPEC plus Russian cuts that went into effect in November 2016 and were renewed again on November 30, 2017, it will benefit in the meantime from Brent crude sales of USD62/barrel, more than double the abominable USD28.55/barrel that bottomed out at in January 2016, which coincided with Nigeria’s worst recession in decades.

Thought to have the world’s 11th-largest oil reserves, the combination of low prices and repeat attacks on Nigeria’s oil infrastructure by the Niger Delta Avengers plunged production from 2.2 million bpd to barely 1.4 million in mid-2016, the lowest rate for Africa’s largest producer and biggest economy in a quarter century. Since then it has rebounded, beginning 2017 at 1.7 million bpd and finishing the month of July at 2.03 million bpd, making Nigeria the 14th-largest producer in the world.
Yet, even in the darkest days of 2016, Nigeria’s struggling petroleum industry received two boons from the international “petroleum“ community: in June 2016 Nigeria signed USD80 billion in energy-related deals with China, covering everything from the rehabilitation of older facilities and refineries to the construction of new pipelines, and the decision by OPEC in November 2016 to exempt the country from that body’s planned production cuts of 1.2 million bpd to total OPEC output of 32.5 million. The only other OPEC member excluded from the cuts was Libya, divided and in the throes of a vicious civil war since 2011.
For a country that relies upon petrodollars for 90% of its hard currency, the past two years have seen Nigeria plunge into its worse recession in generations. As such, President Muhammadu Buhari has not been shy about reaching out to Beijing. First securing USD6 billion in infrastructural loan pledges on a visit to China in April 2016, in June Nigeria’s state-owned oil company NNPC reached agreements with 38 separate Chinese firms, including oil giant Sinopec and weapons-maker Norinco, to upgrade the country’s energy infrastructure. Ironically, and tragically, Africa’s largest oil producer already imports most of its fuel because its refineries are too run down.
Elected in March 2015 in no small part based on promises to reform NNPC and bring transparency to the country’s most profitable and notoriously corrupt industry, Buhari’s administration promised since 2015 to break up the 40-year-old, loss-making NNPC into 30 smaller “profit-making“ companies. In May 2017, it finally began to act on said promises by bringing the much-awaited Petroleum Industry Governance Bill to the upper house, where it duly passed and was later ratified. The bill will break up NNPC into three smaller commercial entities, namely the Nigeria Petroleum Assets Management Company, National Petroleum Company, and Nigeria Petroleum Liability Management Company. Two additional bodies, one regulatory (the Nigeria Petroleum Regulatory Commission) and one fund (Petroleum Equalisation Fund), will ensure that distribution and compliance among the three commercial bodies are legal, seamless, and timely.
Crucial to the country’s mission of building up a much stronger separation of powers, the bill would also transfer the rights to grant, renew, amend, or revoke all exploration and drilling licenses to the aforementioned regulatory body, a power previously in the hands of the oil minister, more often than not a political appointee.
As part of a much broader effort to instill accountability, transparency, and profitability into the outfit, the bill also calls for its partial privatization over time, with 10% to be divested upon ratification of the bill and 30% within a decade. This figure falls in line with those of other oil-rich states: though Saudi Arabia is only talking about floating 5% of Saudi Aramco, Russia divested 19.5% of Rosneft while Norway’s Statoil sold the public a 23% stake.
For a process that began in 2000 and was thrice rejected in 2008, 2012, and 2015, the bill’s passage will be far from seamless. It still needs to go before the president’s desk, and given the precarious state of the his health, even this last push might not prove as easy as once imagined. Though the bill passed the Senate on May 25, Buhari’s concurrent 103-day stay in a London hospital played no small part in delaying the bill’s transfer to the lower house.
In the meantime, the state has no time to lose in pressing forward with much-needed infrastructural works. In May, the NNPC awarded USD949 million to the China Petroleum Group Engineering Co., Ltd (CPGE) to build the 617km Ajaokuta-Kaduna-Kano pipeline from Kano in the far north of the country to Ajaokuta, some 240km south of the capital, Abuja. The contract is thought to represent 80% of the pipeline’s total construction costs.
Yet, just as things were starting to look up, the Niger Delta Avengers (NDA) announced on November 3 that they were halting a ceasefire put in place in August. After the NDA’s incessant attacks brought the nation’s output to historic lows in 2016, this announcement was not welcome news. In a statement to oil companies, the militant group warned that contrary to its zero-casualty tactics of last year, the coming year’s blows would be, “brutish, brutal, and bloody.“ The region has not seen an attack since January.
When it comes to natural gas, however, things are looking brighter. In June, Shell announced it would henceforth place more emphasis on natural gas than oil exploration and development in the country. In September, the Nigerian firm Shoreline Energy announced it had reached a USD300 million agreement with Shell to develop and distribute natural gas in and around the commercial capital of Lagos (principally the districts of Victoria Island, Ikoyi, Lekki, and Epe), under which Shell would receive exclusive rights to sell natural gas in said environs for 20 years, the country’s priciest and most sought-after by a stretch.
For a country thought to hold the ninth-largest gas reserves in the world, some 187 trillion cubic feet, the deal is a boon to both firms and the capital alike. It is also a step in a familiar and friendly direction for booming cities struggling to balance their electricity needs without relying too much on coal, diesel, and more polluting fuels. As the African country with the largest natural gas reserves, the largest economy, and some of the most severe power shortages, scarcely has there been a better time for investment in the exploration, development, sale, and distribution of the stuff. As it stands, more than half the population has no access to electricity.
Even for those with access, it is often scarce and wildly inconsistent. Of the 12.5GW of installed generation capacity, the country is thought to have typically only 3,500-5,000MW available. Though most of the country’s power sector was nationalized in 2013, the national monopoly grid operator Transmission Company of Nigeria is sorely dilapidated and could not function if it were to run at its presumed full capacity. This has led to a Balkanizing effect in which various companies set up their own makeshift regional grids. The time for an overhaul of the country’s national grid could not come soon enough.

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