The Fuse

Nigeria Oil Supply Outages Continue to Support Oil Prices 

by Nick Cunningham | July 21, 2016

 

For much of 2016, attacks from militants in the Niger Delta have disrupted oil operations in Nigeria, cutting into the country’s supply.

The NDA have successfully carried out a range of attacks against oil platforms, pipelines and production wells over the past several months. Few companies operating in the country have been spared; Chevron, Royal Dutch Shell, Eni and ExxonMobil have all seen their oil infrastructure attacked by the NDA.

In February the Niger Delta Avengers (NDA), a militant group demanding sovereignty and control over oil wealth in the region, received international attention when it attacked a major underwater pipeline, forcing Shell to halt shipments from the Forcados export terminal, one of Nigeria’s largest. The attack single-handedly knocked 300,000 barrels of oil production per day offline.

The NDA have successfully carried out a range of attacks against oil platforms, pipelines and production wells over the past several months. Few companies operating in the country have been spared; Chevron, Royal Dutch Shell, Eni and ExxonMobil have all seen their oil infrastructure attacked by the NDA.

February was also the month that international oil prices hit their lowest level in years, but shortly after the Forcados attack, oil prices began to rise. Along with the wildfires that temporarily idled 1 million barrels per day (mbd) of oil production in Canada, the Niger Delta Avengers played a major role in the four-month price rally that saw WTI and Brent move from $26 per barrel to $50 per barrel by June.

Nigeria plunged into crisis

The emergence of the NDA came after newly elected President Muhammadu Buhari backed away from a 2009 deal between his predecessor and militants in the Niger Delta, which saw payments flow to former fighters in the region to ensure peace. The 2009 deal ended years of conflict, and militants were paid to protect pipelines instead of attack them. But President Buhari’s decision to end that arrangement last year has reignited a very familiar battle for control over the nation’s oil wealth.

The Forcados attack in February was probably the most substantial in terms of disrupted supply, but a barrage of attacks on oil infrastructure have followed in the intervening months.

In May and June, multiple attacks by the NDA blew up a platform and oil wells operated by Chevron. Italian oil company Eni was forced to declare force majeure on its Brass River in May after an attack on its pipeline. The Avengers struck the Forcados pipeline again in June. And so on.

As of June, Nigeria had lost 500,000 to 600,000 barrels per day of oil production, vaporizing about $30 million of daily revenues for the country. The Nigerian government had already seen its oil revenues cut in half by the collapse of oil prices, but the loss of a substantial portion of its production has pushed the country into a state of crisis. Oil accounts for about 70 percent of the government’s revenue.

nigeria

The crunch on the economy meant falling cash reserves for the central bank, making its defense of its currency peg untenable. A shortage of dollars led to a scarcity of imported goods, putting the economy into a deeper hole. The attacks from the NDA have also hit some natural gas infrastructure, which has led to blackouts, crippling Nigeria’s economy further. Long fuel lines have spread across the country, outraging Nigeria’s population.

The IMF forecasts that Nigeria’s GDP will fall by 1.8 percent this year, the first recession more than two decades. The estimate is all the more staggering given that in April the IMF projected 2.3 percent growth for 2016. In June, the central bank loosened its exchange rate a bit. As of July 21, the naira had dropped to its lowest level on record.

Short-lived ceasefire

The supply disruptions in Nigeria appeared to be on the mend in June following a ceasefire between the NDA and the government. Nigeria restored between 100,000 and 140,000 barrels per day in June, bringing output back up to 1.5 mbd. Several quiet weeks allowed oil companies to make repairs to several key pipelines. Shell Nigeria lifted its force majeure on Bonny Light, a crude variety that had been offline for several months.

However, the ceasefire was short-lived and came to an abrupt end when the NDA carried out fresh attacks in early July. They hit several of Chevron’s manifolds, which are gathering points for oil and gas. They also claimed they carried out attacks against ExxonMobil, although the oil major denies that their Que Iboe pipeline was hit.

The conflict has become thornier for the Nigerian government because it appears that militant groups not affiliated with the NDA have joined the fight, hoping to profit off of any potential forthcoming payoff from the government to stop the violence. President Buhari recently said that his initial objective in opening up dialogue with militants is to “try to know how many of them there are.”

There is little prospect of a resolution. The government is not interested in another amnesty agreement, and probably does not have the revenue to pay for one. President Buhari also has his hands full with Boko Haram in the North and a growing separatist sentiment in the southeast. All the while he is scrambling to fix a rapidly deteriorating economy.

Oil prices

In its June Oil Market Report the IEA credited the large supply disruption of about 500,000 barrels per day in the Niger Delta for part of the recent oil price rally. The outages helped to slash the global surplus in oil production, narrowing the supply overhang and boosting prices. With news that some pipelines had been repaired and production back online, the IEA wrote in its July OMR that crude oil prices fell from their June highs “as a partial recovery in Nigerian and Canadian production piled on pressure.” And with Shell lifting force majeure on Bonny Light, “buyers are starting to regain confidence in supply.”

In its June Oil Market Report the IEA credited the large supply disruption of about 500,000 barrels per day in the Niger Delta for part of the recent oil price rally.

Comments from Nigeria’s oil minister Emmanuel Ibe Kachikwu in June also helped to push down oil prices. He told Bloomberg that production had climbed from a low point of 1.3 mbd earlier this year to between 1.8 and 1.9 mbd by the end of June. He also hoped that production would rise back to 2.2 mbd in July as more repairs reached completion.

But the latest attacks suggest such a scenario is unlikely. Data is hard to come by, but while Nigeria was able to boost output in June, production is almost certainly back down again. A force majeure remains in place for Brass River and Forcados, two other oil streams from the Niger Delta.

The shortfall in oil production has forced Nigeria to tap its strategic stockpiles in order to prevent export revenue from falling too far. Bloomberg reported that Nigeria’s oil inventories fell by 78 percent in the six months through May 2016, dropping to just 2.2 million barrels. With little left in the storage tanks, Nigeria might soon see exports fall, further eating into government revenues. That, of course, could put upward pressure on global oil prices just as before.

The oil markets have turned their attention to the glut of refined products around the world, which is weighing on crude prices. But if .5 mbd of Nigerian oil production or more remains offline, the global surplus will shrink much quicker than many expect.

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