By 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 the North-South,
Muslim-Christian and military-civilian fissures in Nigerian society.
The
ongoing battle with Boko Haram continues to ravage the Northeast and a
resurgence of 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 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 reviewing 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.
This
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 ‘bottom 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.
It
took another eight to nine years before the Warri and Kaduna Refineries were
commissioned (within a year of each other) with capacities of 125,000 bpd and
110,000 bpd respectively, coinciding with the 1979/80 upstream production peak.
Production was again on the upsurge when the most modern of the three
refineries was commissioned in Port Harcourt in 1989 with a capacity of I50,
000 bpd.
The timing of these investments was very significant as they coincided
with major increases in crude oil revenue accruing to the Federation. It was
the Government's intention to plough back revenue surpluses in order to further
add value, cater for domestic needs and conserve foreign exchange. In 1988
there was the addition of a polypropylene and carbon black unit in Warri and a
linear Alkyl Benzene unit in Kaduna.
The
problem for Nigeria is that these refineries barely function; refining less
than 24% of their capacity if they work at all. They are aged and decrepit and
in desperate need of maintenance. Vast sums have been spent on maintaining them
but they still do not function although the contracting maintenance companies
have done rather well out of these maintenance contracts.
It defies belief but
the Kaduna Refinery was deigned to handle much heavier crude than is produced
in Nigeria. For years the refinery has actually imported large quantities of
suitable paraffinic based crude oil from Venezuela, Kuwait, Oman or Saudi
Arabia to be refined in Nigeria
Periodically,
as political pressures increased new refinery tenders were issued. The local
Nigerian companies who won the tenders for this could not attract overseas
firms willing to co-operate with them, nor have they been able to raise the
capital needed to perform these tasks. These provisional licenses to establish
private refineries were awarded in 2002.
There were eighteen indigenous oil
companies awarded these but none of them were able to get foreign technical
partners and the required funding for the projects. These licenses were
removed. There have been several repeated failures to build new refineries or
maintain the old. That is why the Nigerian Government has adopted a different
method of obtaining refined products.
In
2009 and some of 2010 these refineries operated at their lowest levels of
between 0 and 30 per cent of capacity, and led to the country importing about
85 per cent of its fuel needs. By early 2011, operational capacity increased
slightly but the country still required product imports to meet domestic
demand.
So, in its wisdom, the government said that they estimated the domestic
market required the refining of 445,000 barrels a day of crude to supply the
local market. They would deliver these barrels of oil at the domestic price for
crude to major international companies like Trafigura and Glencoe who would
export the crude oil from Nigeria and import the refined products back to the
country. This was arranged by the Oil Minister, President Obasanjo who was doubling
up his roles in defiance of a Constitutional inhibition on holding two office
of state.
When
these refined products reach Nigeria they were handled by local oil traders.
The list of these traders is very revealing; as a substantial number are linked
to ex-Presidents Babangida and Obasanjo or their immediate circle. Obasanjo
didn't waste his time in immersing himself in that part of the industry.
His
son and the sons of some of the other politicos operated the fuel import
business into Nigeria. To assist them the government paid the local traders a
subsidy, a ‘fuel subsidy’ to keep the market price down for local consumers.
These were substantial sums.
This
was a high reward for keeping the price subsidised; in recent years the range
has been 400% to 550%. When the government tried to remove the subsidy from the
fuel this would have made the heavy extra payments the responsibility of the
consumers, not the government and has been a bone of contention on a regular
basis. As recent parliamentary report showed that in the last two years the oil
traders had siphoned off US$6.8 billion for fuels they supplied and often
didn’t supply to the market.
What
the National Assembly overlooked is that the Nigerian government ships barrels
of oil to be refined for the Nigerian markets and imports PMS (motor spirit)
diesel and kerosene back to Nigeria at prices equivalent to world market
levels. What is missing from the accounts is the rest of the barrel.
Oil
refining means using a fractional distillation column to refine different types
of oil products based on their boiling point.
So,
if the traders bring back to Nigeria the gas oil, gasoline and kerosene, what
happens with the remaining parts of the refined oil products? If the crude oil
exports of the 445,000 barrels a day are only bringing back to Nigeria the PMS,
kerosene and diesel, where is the value for the rest of the barrel? Who has the
money for the butane, propane, residual oils, asphaltenes, etc. which are an
inevitable result of the refining process? These favoured exporters of oil not
able to be refined in Nigeria are getting the oil at source at a considerable
discount. Including shipping costs to the US Gulf the net cost is under $30.00
a barrel.
They are shipping back PMS, kerosene and diesel at the world price
for these products. Right now the price of fuel in Nigeria is more than the
price of similar fuel in Texas made from Nigerian crude. The sale of the rest
of the barrel is not being returned to Nigeria as cash or additional product.
As these represent, even with the best of cuts of the fractioning column,
slightly more than half of the value of the barrel this is a tidy profit for
those who are in the subsidy business. As this crude no longer goes to the U.S.
the traders are looking for other co-operative refineries. These sums have
never been accounted for to the Nigerian people.
The
shift in Nigeria’s oil revenue from the U.S. to Asia will be sustained for a
while, but at the lower price of crude of today’s market. However, as the U.S. begins
to export its crude worldwide (the U.S. is a lot closer to China and Korea than
Nigeria is) and East African plays come on stream Nigerian oil will come under
severe pressure. The Ebola epidemic is likely to delay the expansion of oil
developments in places like Liberia, Guinea, Sierra Leone, Ivory Coast and
Ghana as it will be difficult to recruit enough workers willing to go to these
areas until the epidemic is controlled. That might give Nigeria some breathing
space.
However
it is clear that night is falling on Nigeria. It has failed to use its treasure
to build an infrastructure (roads, schools, houses, electrical power, refining)
so desperately needed when it had money; or diversified its economy to include
agriculture, mining and processing of it many minerals. How it will do so when
money is short is a big question.
The rentiers of Nigeria’s wealth are buying
up properties all over the world, especially in London. They know when it will
be time to get out. The key to Nigeria’s lack of preparedness has been the
impunity in which these rentiers operate. Until now there have been few
consequences for bad behaviour and corruption. Unfortunately as the economy
contracts the innocent will suffer with the guilty.
It
is too late to change and no election in 2015 will address any of the real
problems of the country. This time the military can be of no help as they are
among the country’s biggest problems. If there will be a coup it will be a
sergeant’s coup whose first victims will be the army officers who have betrayed
them. “God dey, no condition is permanent”.
Dr.
Busch is a international trades unionist, an academic, a businessman and a
political affairs and business consultant for 40 years.
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