Low Oil Prices, Militancy Mar Buhari’s First Year

With the upsurge in attacks on oil and gas installations plunging Nigeria’s oil production to a 20-year low, and low oil price environment, Ejiofor Alike writes that there was little or nothing to celebrate in the country’s energy sector during President Muhammadu Buhari’s first year in office

With his sound knowledge of Nigeria’s oil and gas industry as a former Minister (then Commissioner) of Petroleum Resources, President Muhammadu Buhari started on a good note after the May 29, 2015 handover, by putting in place measures to open up the sector and enthrone a regime of transparency, due process and accountability in an industry that was hitherto run in an opaque manner.

Before the Minister of State for Petroleum, Dr. Ibe Kachikwu came on board first as the Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), public perception and audit reports showed that the state-run oil company was ridden with corruption.

Buhari inherited massive corruption, unresolved issues of inadequate funding of joint ventures, perennial scarcity of petrol, weak local refining capacity, long contracting cycles and other intractable challenges.
The NNPC was run like a cult with most of its crude oil lifting contracts, crude SWAP arrangements, offshore processing agreements and other contracts involving the corporation shrouded in secrecy.

With the public’s lack of access to relevant information, most of the information on NNPC’s financial and operational activities was based on speculations.

Even key government functionaries such as a former Governor of Central Bank of Nigeria (CBN), who ought to know, were denied access to relevant data on the company’s financial activities, thus leading to dangerous speculations and unsubstantiated allegations of massive corruption.

Having realised and publicly-admitted that over 80 per cent of the problems in Nigeria’s oil and gas sector revolve around the corporation, Buhari’s administration embarked on measures to sanitise the institution and open up its books for public scrutiny.

With the raft of measures introduced in 2015, NNPC was able to gradually restore the confidence of local and foreign investors in the sector.

Buhari’s ‘body language’
Even before Kachikwu was appointed, Buhari’s famous ‘body language’ was said to have stabilised the sector, sending vandals and oil thieves into exile and boosting oil and gas production.
This administration initially enjoyed honeymoon as there were no attacks on oil and gas infrastructure within its first seven months in office.

This success was, however, credited to President Buhari’s body language and not that his administration put any sustainable measure in place to curb vandalism.

Due to lack of deliberate policy on the part of Buhari’s administration to consolidate on the gains of the Amnesty Programme of the late President Umaru Yar’Adua, this administration’s honeymoon ended with the first militant attack on Escravos-Lagos Pipeline, followed by the bombing of the Forcados subsea pipeline.

The first pipeline attack under this current administration had occurred when suspected ex-militants blew up a section of the pipeline in Warri South-West Local Government Area of Delta State.

The attackers reportedly blew up the gas pipeline at three different points -Opudebubor, Okpelama and Kpokpo area, Chanomi Creek and Sahara, behind Chevron Nigeria Limited.

Upsurge in militancy
After the first attack on Escravos-Lagos Pipeline, the Forcados subsea pipeline was bombed by a new militant group, which identified itself as Niger Delta Avengers (NDA).

With the February 14, 2016 spill on the subsea pipeline, which forced Shell to declare force majeure on February 21, the bubble has since burst, with the country currently losing over 2,000 megawatts of electricity and over 600,000 barrels of crude oil per day to militancy.

This has plunged the country into darkness in recent weeks after the February 2, 2016 peak generation of 5,074 megawatts.

Shell had confirmed that its diving teams, which inspected the export pipeline reported extensive damage that was consistent with the application of external force, an indication that it was an act of sabotage and NDA later confirmed this fear.

Hopes of early improvement in power supply were dashed after Kachikwu revealed that the repairs on the NPDC’s pipeline could last up to May 29, 2016.

The country is currently losing about 300,000 barrels per day due to the bombing of Forcados pipeline that conveys Forcados grade of crude oil to the over 400,000 barrels per day Forcados Export Terminal.
Sabotage also forced Shell to declare force majeure on exports of Bonny Light grade of crude oil due to a leak, which led to the closure of the Nembe Creek Trunkline (NCTL).

Aiteo-operated NCTL and the Trans Niger Pipeline (TNP) are the two major pipelines in the Eastern Niger Delta that transport crude oil production from SPDC, Aiteo and third parties in their Eastern operations to the Bonny Export Terminal in Rivers State.

Shell declared force majeure on Bonny Light exports effective 12:00hrs Nigerian time, May 10, 2016, following a leak that led to the closure of Nembe Creek Trunk line for repairs by the operator, Aiteo Eastern E & P Company Ltd, the company said.

Though Aiteo ruled out sabotage, the company lost about 75,000 barrels per day to 78,000 barrels per day to the incident, which was believed to be an act of sabotage.

Chevron Nigeria Limited has also suffered spate of attacks in its western Niger Delta operation in recent weeks.
Following the spate of attacks on its facilities, the company evacuated non-essential staff from its installations in the western Niger Delta, including the Escravos Export Terminal.

After an earlier attack on the company’s Okan Field, which affected the production of significant volumes of crude, the militants also struck at Makaraba and Otunana fields, disrupting the flow of crude oil production.
With the attacks on Chevron facilities, the force majeure declared by Shell on Bonny Light exports due to a leak on the Nembe Creek Trunkline, as well as the weekend force majeure declared by ExxonMobil on exports of Qua Iboe, following the damage on a pipeline by a drilling rig, Nigeria’s crude exports slumped to 20-year low of about 1.64 million barrels per day.

Disruption of refineries’ operations
Before this present administration came on board, Kaduna and Warri Refineries had not been receiving crude oil feedstock through pipelines since 2010 because of vandalism.

Since 2010, marine vessels were used to transport crude oil to the two refineries until April 2016 when the repairs of the Escravos-Warri Pipeline were completed and the refineries started receiving crude through the pipeline.
However, less than two months after the pipeline was repaired, the Niger Delta Avengers bombed the lines and cut off crude supply to the refineries.

Despite the huge success recorded in the area of enthroning transparency, the three refineries recorded very poor performance in the past one year, despite the huge promises made by the new administration.
NNPC’s monthly report exposed the poor state of the refineries, with performance averaging 10 per cent in 2015, which was different from the picture of robust performance earlier painted by the management of Nigeria’s three refineries.

Kachikwu had earlier given the three refineries an ultimatum of 90 days, which ended in December 31, 2015 to increase capacity utilisation to 60 per cent or risk shut down for possible maintenance.

“The reality is that the refineries as of now are not yet working because if you do give me 60 per cent performance one week and the next week I am down to zero per cent performance, the average you have done is 30 per cent. The average performance of the refineries right now is 30 per cent based on the continuity basis as that is the fact and that is the reality. Now, is it anybody’s fault? Not really. What we need to do is say which of those refineries can work in the short term? Which ones do we need to shut down and do proper maintenance to get them to a position where they can actually compete,” Kachikwu had told THISDAY.

NNPC’s restructuring
Despite the intractable challenges, the appointment of Kachikwu was the strongest signal that Buhari was determined to break away from the past and re-write the history of the corruption-ridden corporation.
Immediately on assumption of office, Kachikwu initiated monthly publication of NNPC’s financial results and a raft of measures targeted at personnel restructuring to enhance transparency and competitiveness of Nigeria’s operating environment.

As a cost-cutting measure, he commenced the restructuring of the corporation and also ordered a forensic audit of the NNPC.
He also divided the Pipelines and Products Marketing Company (PPMC) into three portfolio companies that will manage the refineries, pipelines and supply of petroleum products.

Kachikwu had also unveiled what he called a three-pronged process in the restructuring of the corporation and told THISDAY recently that the restructuring was only 25 per cent completed.

So, for the first time in the history of the NNPC, the corporation began a monthly publication of its financial and operational reports in 2015.

In one of the measures initiated by this administration to ensure cost reduction and strengthening of operational efficiency across the value chain, this administration had cancelled the contracts for crude oil deliveries to Warri, Port Harcourt and Kaduna refineries due to what he described as the exorbitant cost and inappropriate process of engagement.

The NNPC also in 2015 terminated the controversial Offshore Processing Agreements (OPA), entered into in January, 2015 with three companies, namely- Duke Oil Company Inc., Aiteo Energy Resources Limited and Sahara Energy Resources (Nig) Ltd.
At the end of an open, competitive bid, 21 local and foreign companies clinched the 2015/2016 crude oil lifting contracts.

Unpaid $7 billion cash calls
This administration has marked one without the NNPC finding solutions for the payment of the $7 billion it owed joint venture partners in cash calls.
The corporation’s lack of capacity to meet its obligations to the JV partners had led to the accumulation of unpaid cash calls to the tune of $7 billion.

Though Kachikwu promised to find solutions to the funding challenges in 2016, it is not yet clear how he intends to achieve this as the debt, which was $6 billion when he came on board is now about $7 billion.

Fuel scarcity/partial deregulation
Nigerians experienced acute fuel shortages for the greater part of the past one year after one of the perennial acute fuel shortages had erupted immediately after the April general elections. The scarcity almost marred the 2015 Yuletide and 2016 New Year celebrations, despite what seems like the best efforts of the NNPC to curb fuel shortages.
With the private oil marketing companies, which account for over 50 per cent of fuel importation shunning imports due to unpaid subsidy claims, the NNPC was faced with the impossible task of bridging the supply gap created by the marketers.

Even when the subsidy payment was made through a 2015 supplementary budget, the marketers were confronted with a new challenge of lack of access to foreign exchange to fund importation, hence the fuel scarcity persisted.
Though the NNPC directly intervened using its own foreign exchange, working with the Central Bank of Nigeria (CBN) to give $200 million to some marketers but Kachikwu told THISDAY that the intervention was “just a drop in the Ocean”.

The scarcity of foreign exchange forced the federal government to partially deregulate the prices of petrol, increasing the pump price from N86 to N145 per litre.

Drop in crude oil prices
When Buhari took over on May 29, 2015, the price of crude oil was on a free fall from the June 2014 peak of $115 per barrel until it hit the bottom at $27 per barrel in January 2016, down from $31 in December 2015
As Iran prepared to bring additional 1.5 million barrels per day to the market in 2016 after international sanctions against the country had been lifted, concern that the price volatility, which was initially caused by the impact of Shale oil/gas and the additional inventory in the global market, could worsen heightened.

However, the loss of production of 4 million barrels per day as a result of the wildfires in Canada’s oil sands, militant attacks in Nigeria, unrest in Libya, and a near economic meltdown in Venezuela more than offset Iran’s additional inventory and boosted the recovery of crude prices.

The recovery of crude oil price was boosted by the loss of production of 4 million barrels per day as a result of the wildfires in Canada’s oil sands, militant attacks in Nigeria, unrest in Libya, and a near economic meltdown in Venezuela.

Even though the price has rallied around $50 per barrel, militant attacks, which plunged Nigeria’s output to 20-year low has posed potential threat to the implementation of Nigeria’s 2016 budget, which is predicated on oil price of $38 per barrel.

Drop in gas supply to power plants
With President Buhari’s first seven months of honeymoon without sabotage of oil and gas pipelines, the year 2015 witnessed improvement in gas supply to power generating plants.

NNPC’s initial report also showing that the plants consumed about 139 billion cubic feet (bcf) of natural gas, out of the 934 bcf produced in the country within the first eight months of the 2015.

On daily average, the gas-fired plants received an average of 656 million standard cubic feet per day (mmscf/d), to produce an average of 2,843 megawatts (MW) of electricity per day, thus contributing an average of 84.8 per cent generation capacity to the country’s overall daily power generation volume.

Improved gas supply for power generation peaked on February 2, when power generation hit 5,074 megawatts.
But after the February subsea bombing of the Shell-operated Forcados Pipeline, generation has continued to nose-dive as sustained attacks by the militants have crippled gas supply to the thermal plants.

Delay in prosecuting oil thieves
Despite the repeated threats by President Muhammadu Buhari to arrest and prosecute oil thieves, he has ended his one year in office without any high profile arrest or prosecution of oil thieves.

In July 2015, when he visited the United States, President Buhari said the United States would help trace and recover funds from the sale of about 250,000 barrels of oil that was stolen daily in Nigeria.

Buhari had reportedly told an audience of Nigerians in Washington that the United States and other developed nations were helping identify accounts where money had been deposited, adding that the federal government will prosecute the suspects.

He stated that some former ministers sold as much as one million barrels of crude oil a day.
“The amount involved is mind-boggling,” Buhari said. “A lot of damage has been done to the integrity of Nigeria with individuals and institutions already compromised.”

Buhari had also during the visit asked the United States’ President, Barack Obama to help locate and return $150 billion believed to have been stolen by corrupt officials.

“The fact that I now seek Obama’s assistance in locating and returning $150 billion in funds stolen in the past decade and held in foreign bank accounts on behalf of former, corrupt officials is a testament to how badly Nigeria has been run,” he wrote. “This way of conducting our affairs cannot continue,” he had said.

President Buhari had also at a meeting with President Xi Jinping of China on the sidelines of the 70th United Nations General Assembly held in New York, stated that the prosecution of those who misappropriated the revenue of the NNPC under the past administrations would commence soon but was not specific on when the trial would start and those who have been indicted.

“The prosecution of those who misappropriated the NNPC’s revenue under past administrations will soon commence,” he had said.
But one year into his four-year tenure, this administration has yet to commence the much-publicised prosecution of oil thieves.

PIB challenge
President Buhari has also ended one year without any significant progress in the passage of the Petroleum Industry Bill (PIB), even after this administration has split the legislation into four parts for easier passage.

The non-passage of the PIB eight years after it was first submitted to the National Assembly has continued to create uncertainty in Nigeria’s operating environment.
Without the clarity of terms, the IOCs have continued to say that they are unable to invest because the operating environment is unpredictable.