The Fuse

Nigeria’s Uncertain Road to Recovery

February 07, 2017

Guest Post by Matthew M. Reed | @matthewmreed

Matthew M. Reed is Vice President of Foreign Reports, Inc., a Washington, DC-based consulting firm focused on oil and politics in the Middle East.

Nigeria’s fortunes have waned lately, but the country is still Africa’s number two oil producer and a top global LNG exporter—despite recent setbacks. Over the last two years, crude oil production has fallen 25% due to the resurgence of militant activity in the oil-rich Niger Delta. OPEC’s secondary sources put the country’s output at about 1.5 million barrels per day (mbd) at the end of 2016, down from just shy of 2 mbd in early 2015.

Nigeria’s fortunes have waned lately, but the country is still Africa’s number two oil producer and a top global LNG exporter—despite recent setbacks.

These steep declines and Nigeria’s questionable production outlook prompted OPEC to give the country a free pass on a quota when it reached its historic supply pact on November 30. Libya was the only other country not bound by the agreement to restrain output. But together the two African producers have the potential to raise production quickly and substantially if their luck turns around. If one or both recovered in the first half of 2017, it would compromise the OPEC deal which became effective for six months starting January 1. Libya is defying the odds at the moment, but Nigeria less so.

Nigeria’s oil sector has long been dysfunctional. Crude production peaked at 2.44 million b/d in 2005 but fell to 1.8 million b/d in 2009 when militants last caused havoc in the oil patch. For years, oil output has been handicapped by theft and smuggling. Local individuals and gangs tap pipelines in remote areas and then sell the crude or refine it in very basic “bush” refineries. Spills are unavoidable and the Delta’s sensitive ecosystem suffers for it. Other more influential smugglers use their connections to sell stolen crude on international markets, either by hawking cargoes or topping off tankers. The scale for this “white collar” smuggling is much larger and more lucrative. Estimates vary but volumes lost from theft typically fall into the 150-250 thousand b/d range. (To what extent these losses are captured by widely used data is debatable).

Threats from Boko Haram, widespread corruption

Besides today’s costly oil disruptions, the government is preoccupied with the ISIS-affiliated Boko Haram in the north and sectarian strife elsewhere. Corruption is endemic. In 2016, Nigeria was ranked 136 out of 168 countries rated by Transparency International’s corruption index. President Muhammadu Buhari took office in 2015 promising to make corruption a priority. He started by dismantling the amnesty program, dating back to 2009, which literally bought peace in the Niger Delta by buying off militants who threatened oil infrastructure there.

Besides today’s costly oil disruptions, the government is preoccupied with the ISIS-affiliated Boko Haram in the north and sectarian strife elsewhere.

The plan all along was for the amnesty payments to be discontinued after 2015. But perhaps more importantly, influential ex-militant leaders lost fortunes when the Buhari government revoked contracts which paid them to protect facilities. Starting in the summer of 2015, right after Buhari took office, security forces were deployed to guard facilities instead. The move made financial sense, since it saved the government considerable money, but politically it was a disaster. Among the biggest losers of Buhari’s corruption crackdown was Government Ekpemupolo, also known as Tompolo, who was a top leader of the Movement for the Emancipation of the Niger Delta (MEND) in the 2000s. The last time Nigeria’s oil industry came under attack, MEND and Tompolo were to blame.

In December, Nigeria’s Economic and Financial Crimes Commission charged Tompolo with 40 counts related to money laundering and other shady dealings. His bank accounts were frozen accordingly and he went into hiding thereafter. The first wave of devastating attacks against Nigeria’s oil sector happened only a few weeks later. The sequence of events raised eyebrows but Tompolo swears he has nothing to do with the saboteurs. The most active and dangerous militants, for their part, have mocked his attempts to mediate between the government and the new generation of militants; they insult him as an out-of-touch old man.

Niger Delta’s problems persist

Complicating Buhari’s crackdown are long-standing ethnic and economic tensions. His predecessor, Goodluck Jonathan, oversaw the amnesty program for five years as president. While Jonathan was a southerner from the Delta heartland who at least was viewed as sympathetic to Delta interests, Buhari is a northerner, which inspired some anxiety in the south. Many in the Delta have come to view Buhari’s campaign against corruption and government waste as a vendetta, in no small part because the country’s presidents typically use their influence to enrich their favored regions and factions. Jonathan’s defenders claim he was no different in this respect.

Before he lost the general election in March 2015, Jonathan had been warned by militants that ending the costly stipend program would unleash a new wave of mayhem. This might not have been the case if conditions in the Delta improved during his tenure. But other amnesty programs promising jobs and skills training never met expectations. By all accounts, the Niger Delta of 2017 is no different than it was in 2009: infrastructure is lacking; youth employment prospects are dim; living standards are poor; and the environment is toxic in many places. When President Buhari went ahead with cutting stipends, he effectively terminated the only successful aspect of the deeply flawed amnesty program. Some 30,000 ex-militants went from collecting $200+ a month to collecting nothing.

Avengers threaten production

It wasn’t long after the amnesty deal unraveled that a new militant group arrived on the scene. The Niger Delta Avengers launched their first attack in February 2016—shortly after payments were cut off and Tompolo was charged. Using a team of divers, they sabotaged the Trans Forcados pipeline, costing the country some 250 thousand b/d in lost production. (The line is still down and may not be open for months yet.) For a time last year, output was throttled by militancy and technical issues, creating a perfect storm that slashed oil and condensate production by 800 thousand b/d.

It wasn’t long after the amnesty deal unraveled that a new militant group arrived on the scene, the Niger Delta Avengers.

The Avengers are new but their grievances are very familiar. They echo old complaints articulated by MEND and non-violent community groups in the Delta. “We are being oppressed, pushed to the wall on various fronts, which is why we have picked up the challenge to be the outlaws this government will have to contend with till daily production of oil is reduced to zero in the Niger Delta,” they said in one of their earliest statements. “We believe that Nigeria can practice true federalism where our resources will be controlled by us and used for our own good. The reverse is the case today, where the goose that lays the golden egg is killed along with the egg.”

Again and again throughout 2016, the Avengers hit pipelines and facilities, forcing international oil companies to halt operations and withdraw work crews. Eni, Chevron and Shell were all impacted to various degrees by the renewed militancy problem. President Buhari responded by announcing new military operations with names like “Operation Crocodile Smile” and “Operation Delta Safe,” but negotiations were not pursued until late last year. A summer lull, widely referred to as a ceasefire despite its shakiness, only lasted until the Avengers felt negotiations were hopeless. As 2016 dragged on, they took credit for more attacks in September, October, and November. Meanwhile, peaceful Delta leaders also expressed confusion over the government’s lack of engagement. MEND, albeit defunct, withdrew its support from Buhari last month. The group blamed him for not following through with talks.

Three obstacles made it very difficult for talks to gain momentum. Firstly, it was never entirely obvious who spoke for the Avengers; they established themselves early on as the primary threat to Nigeria’s oil industry but new militant groups popped up in their wake. Some of those might even be virtual in that they exist only online. Secondly, countless politicians, ethnic leaders and ex-militants jockeyed to establish themselves as intermediaries between the government and the new generation of militant groups, even though none claimed to have a direct line to the Avengers. Finally, the government was inclined to pursue military solutions rather than dialogue. Not long after a delegation of Delta leaders met with President Buhari in the capital in November, the government dismissed those leaders as useless because the Avengers struck within days of the talks. And so it was back to square one.

‘Logistics issues’ in the Delta

From time to time, the government in Abuja announces that monthly stipends have been paid or will be soon. In August, officials blamed “logistics issues” and the central bank for delays. But then last month officials said that overdue payments for August and September 2016 had finally been paid. This month officials again promised to reinstate the amnesty payments. Excuses and extended delays haven’t inspired confidence. The Avengers, among others, issued more threats in January indicating that the payments are too little, too late. And so it seems more fundamental political disputes might need to be resolved before the oil sector is safe again.

For the U.S. today, Nigeria’s production woes aren’t a cause for concern like they would have been ten years ago.

Up to now, President Buhari has stuck to his guns and his tough guy talking points. His Vice President, Yemi Osinbajo, toured the Delta last month. He told the crowds who came to greet him that their future was bright and President Buhari was eager to help. Of course, this wasn’t the first time the central government promised progress and development. Specifics are lacking and no formal negotiation process is underway.

Little reason for optimism

For the U.S. today, Nigeria’s production woes aren’t a cause for concern like they would have been ten years ago. Back then, the U.S. imported about 1.1 mbd from Nigeria, which amounted to 10% of total U.S. crude imports. The sharp decline in imports since then is a direct result of the shale revolution as it displaced light sweet Nigerian crude. Even so, Nigeria’s predicament is still a major factor in the global supply-demand balance. Thus, its potential impact on prices can’t be dismissed going forward.

Two paths for a Nigerian oil recovery are plausible. Either the government reinstates the amnesty program, reviving production sooner, or talks resolve the crisis at some later date.

Unfortunately, there’s little reason for optimism so long as there is no sustained dialogue focused on Delta issues. At least the appearance of dialogue could have the effect of protecting the industry while talks run their course. But President Buhari isn’t rushing to achieve reconciliation, even though the insurgency remains a potent threat–unchecked by military operations up to now, and sworn to disrupt production.

Reviving the amnesty program for good may not be an option if it’s seen as giving into blackmail. A recent military crackdown on the illicit oil trade also risks turning more people against the government, possibly empowering militants. Local leaders have called for the “bush” refineries to be legalized. That’s probably asking too much, but the demand speaks to the dependency of desperate locals. “The refinery is the only job I can find to feed my family,” one refiner told Reuters last week.

Two paths for a Nigerian oil recovery are plausible. Either the government reinstates the amnesty program, reviving production sooner, or talks resolve the crisis at some later date.

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