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.