How oil sector crumbled, pushing Nigeria to brink of recession

Crude oil production levels in Nigeria, Africa’s one time largest producer, has fallen to between one million and 1.2 million barrels daily, wrecked by militancy and the more fundamental element of the failure of government policies over the years, according to several oil industry sources.

Of the figure, about 200,000 barrels daily is committed to repaying Nigeria’s rising infrastructure debt owed China, BusinessDay has learnt.

Government officials have put out misleading output figures lately but production data gathered from senior officials of oil producing firms paint a more desperate picture for Nigeria and explains why the country’s finances have collapsed in such a calamitous way with dire consequences for foreign exchange reserves and its ability to continue to meet the foreign exchange requirement of the economy.

While government ministers blame the crisis on the resurgence in militancy, no one is telling the people the truth about how the country and its officials managing the oil industry consistently failed to achieve Nigeria’s daily oil production targets even before renewed militancy in the Delta.

BusinessDay learnt that while it is true that the surge in militancy in the Niger Delta is the immediate cause of the sharp fall in oil production in Nigeria, persistent government oil policy failure and the imperial attitude of government oil ministers and directors of the Nigerian National Petroleum Corporation (NNPC) in their dealing with the oil companies, really prepared the stage for today’s crisis.

Senior Nigerian officials in the oil industry say when the militants fired the first shot in the Niger Delta on February 5, 2016, Nigeria was hopelessly unprepared because of the resulting underinvestment over the years.

As complaints against the government handling of the oil industry mounted during the Jonathan administration, government officials responded with a distraction they created by putting forward a bogus industry bill PIB which had no chance of scaling legislative scrutiny.

After about a decade lost half hearted pursuit of the passage of the PIB, the latest is that the bill will now be broken into three but analysts say many of the urgent barriers against raising production levels can be resolved  by administrative means without a new law.

The key issues holding down the industry at a time when others around the world are expanding,  include Nigeria’s resort to unilateral action when disputes arise, government’s failure to meet cash call requirements, the unduly long contract cycle in Nigeria -the time it takes the NNPC to approve oil contracts (Angola has a 5-6 months contract cycle but Nigeria’s is at a woeful average of 30-36 months), the absence of competitive fiscal incentives, loss of confidence in the NNPC as a viable partner because of its persistent failure to meet its financial obligations, the loss of confidence between the government and its JV partners and the non-resolution of oil lifting dispute in the PSC operations which began to rear its head in 2007.

Because Nigeria has failed to prioritise spending to cover its joint venture commitments, today it owes the oil firms about $7bn in unpaid cash call arrears.

Unable or unwilling to continue to meet up the shortfall in government contribution, the oil firms have continued cut their spending drastically and in some instances, as much as by half, hurting production capacity and search for new oil fields.

In turn, Nigeria’s oil rig count has fallen from a high of 22 to a mere five today.
BusinessDay leant that the government has also been taking unilateral decisions to the anger and frustration of its joint venture partners.

In separate legal actions, the joint venture partners dragged Nigeria to various arbitration courts and Nigeria lost in all cases. However, instead of settling the matter, the oil companies worry government will seek to use local courts to side-track the decision of the arbitration courts.

The situation is said to have worsened during the tenure of Diezani Allison-Madueke who operated largely as an empress, but the situation has yet to improve significantly  under President Muhammadu Buhari as the Petroleum Minister and Ibe Kachikwu as his Minister of state.

Industry sources say former minister Allison-Madueke did not even bother to answer to queries from the oil companies or agree to meetings with them while she held sway, but on March 31, 2016, Kachikwu wrote a note to the CEOs of Chevron, Shell, Exxon Mobil, Agip and Total, suggesting guidelines for the resolution of issues like cash call arrears, lifting disputes and setting up a joint teams for reconciliation.

While the industry called this a good first step, no one is so naïve as to believe that this will be enough to restore hope. Despite the huge debt government owes the IOCs, its officials have yet to show the humility of a chronic debtor which Nigeria has become and this has meant that the oil firms are moving their capital away from Nigeria to other destinations in the world with an even more desperate competition for investment dollars.

Sources tell our reporter that most of the current production of just above 1 million barrels daily, about 700,000 barrels is coming from production sharing contract, PSC fields in deep water with output in the more lucrative joint venture concessions where output has fallen by 50% in the last ten years.

According to BusinessDay analysis, whereas government gross take from PSC operations under a $50 a barrel price regime is as low as $17 a barrel, Nigeria gets as high as $27 per barrel of crude oil at a $50 price in a JV setting.

The money government gets is made up of profit share, taxes, royalties, as well as Niger Delta Development Commission (NDDC) levy. The balance of about $3 per barrel in a $50 a barrel price regime goes to the IOCs after deducting cost of production of a barrel which today stands at an average of $18.

This helps to explain why Nigeria’s finances have crumbled in such a calamitous way recently, with dire consequences for the nation’s foreign exchange reserves and its ability to continue to meet the foreign exchange requirement of the economy. The 2016 federal budget was predicated on an oil output level of 2.2m barrels a day.

Dethroned earlier this year as the biggest producer on the African continent, Nigerian oil output suffered another massive decline in July after it began to fall in February, following the attack on oil installations in Escravos and Forcados.

While Nigeria’s government has resumed payments to former militants and is trying to establish talks in order to bring an end to the attacks, no apparent progress has been made with the Niger Delta Avengers, the group that has claimed the majority of pipeline bombings. The number of such groups is increasing, BMI Research said Thursday in a note.

“The growing number of militant groups in the Niger Delta makes the chances of a settlement between the government and militants increasingly slim, compounding our view that oil production will underperform its potential,” the analysts said. BMI forecasts average production for 2016 of 1.7 million barrels a day.

Supplies from Qua Iboe, the country’s biggest crude grade, and Forcados are likely to remain disrupted through August, the IEA said.