The Fuse

Low Prices Force Nigeria to Restructure State-Run Oil Company

by Matt Piotrowski | March 10, 2016

OPEC member Nigeria has taken a major step in improving its country’s energy sector by restructuring its state-run oil company. The move is significant since the Nigerian National Petroleum Corp. (NNPC) has a longstanding history of corruption. Re-organization of the NNPC is a step in the right direction, but the beleaguered petro-state is nowhere near achieving stability, ridding itself of frequent supply disruptions, and growing production again.

The NNPC is now contending with monthly losses of $15 million, and the revamp will include a “lean” central headquarters with four autonomous business units, including upstream, downstream, gas and power, and refining companies.

The changes are designed “to introduce accountability, transparency and probity in the management of the NNPC and the Nigerian Oil and Gas Sector,” the company said on Twitter. It added: “This restructuring will transform us from a loss-making corporation to a commercial and viable business entity that will profit Nigerians.”

Re-organization of the NNPC is a step in the right direction, but the beleaguered petro-state is nowhere near achieving stability, ridding itself of frequent supply disruptions, and growing production again.

President Muhammadu Buhari, who was elected last year, has been adamant about reform since he took office. The government restructuring is much needed, given the country’s fiscal gaps and NNPC’s horrid past, which fully came to light earlier this decade when consultancy KPMG performed an audit on the company that revealed some of the extent of the corruption. Among the findings were that the company repeatedly violated numerous rules, fleeced taxpayers, over-deducted funds in subsidies, and committed repeated fraud. There were also questionable actions when it came to awarding production contracts, allocating crude oil to buyers, and failing to follow procedures when importing refined products. Simply put, corruption has been deep and rampant. For instance, between 2007 and 2009, the amount of over-deducted funds in subsidy claims totaled 28.5 billion naira, or more than $140 million.

In addition to structural corruption throughout the rest of the government, low oil prices mean that the poor quality of life for the country’s population is unlikely to improve soon. Nigeria relies on oil and gas for roughly 95 percent of its exports, meanings it’s highly vulnerable to price fluctuations and its industry will have a hard time shaking malfeasance. Transparency International, a non-profit that tracks corruption on a country-by-country basis, ranks Nigeria 136 out of 168 in its index. Life expectancy is at just 51 years, while the literacy rate is only 61 percent. The outlook is bleak. ­

Instability from ongoing violence

Nigeria, the top oil producer in Africa and the holder of the largest amount of natural gas reserves on the continent, has daunting challenges in managing its oil and gas production and persistent violence surrounding it. Most recently, Shell announced force majeure in February on one of the country’s main export terminals, Forcados, due to a pipeline spill. The terminal could be shut until April, affecting .25 million barrels per day (mbd). For years, local groups have attacked oil and gas infrastructure as a way to attempt to sabotage profits and get their share of the wealth, and violence forces oil companies to call force majeure on a regular basis. Due to the unrest in the country and threats to oil workers, many IOCs—with Shell being the most active in Nigeria —have reduced staff, complicating current and future investment. During 2004-08, when oil prices were rallying from around $40 to $147 per barrel, the attacks and resulting force majeures contributed to price volatility. Although there are still random outages in Nigeria and overall production is underperforming, the global oversupply and high crude inventories allow traders to pay less attention to disruptions in the West African country, at least for now.

It’s not just local violence against pipelines that the government has to keep in check. Oil theft is rampant in the country, causing further instability and taking away from government revenue. In early 2013, according to a report published by Chatam House, roughly 100,000 bd “vanished,” a figure that doesn’t include what might have been stolen at export facilities. The pipeline system, meanwhile, is very old, bringing about spills from both sabotage and deterioration. Pollution of air and water in the Niger Delta, a densely populated region where there is estimated to be roughly 38 billion bbl of crude reserves, has been problematic for some time and significantly reduces the quality of life for impoverished locals.


Deepwater projects are in doubt

Nigeria’s main growth is expected to come from deepwater production, but many of the projects are unprofitable at current price levels, while other factors are also causing delays. This is, of course, bad news for a country that has seen volatility in its total output over the years. In 2005, Nigeria’s oil output peaked at 2.5 mbd, but fell to 1.8 mbd in 2009, and despite rebounding, it is now back to the weak levels seen before the turn of the decade. The rig count has fallen by a quarter since 2013.

As of last year, there were plans for some 1.1 mbd of capacity from deepwater projects to come online from 2018 into next decade. But a majority of the projects, all of which will be operated by IOCs, have not reached final investment decision (FID). With oil prices so low, it is likely the projects will either be delayed further, or canceled. Shell recently said it delayed FID on its .225 mbd Bonga South West and Aparo development, Nigeria’s largest deepwater project. But it’s not all bad news: Exxon last year started production at the 65,000 bd Erha North Phase 2 project ahead of schedule and under budget.

The delayed or canceled projects in Nigeria are part of a global trend with oil prices low and many schemes now uneconomic. The lost supply, combined with annual demand growth, is likely to bring a deficit in coming years.

Nigeria, the biggest OPEC loser from shale

While a host of problems from corruption and mismanagement has undermined Nigeria, so has bad luck. Every producer is suffering, but Nigeria felt the pinch of the boom in light tight shale oil even before global prices crashed in mid-2014. The country’s market share in the U.S., the world’s top consumer, began to dry up in 2011 with the ascendency of shale oil. U.S. crude oil imports fell from .983 mbd in 2010 to just 58,000 bd in 2014.


Nigeria produces light, sweet crude, similar to the grades in the Bakken and the Eagle Ford. With the rise of shale oil, U.S. refiners, particularly those on the East Coast, haven’t needed to import light, sweet oil from abroad. Over the past couple of years, high volumes of unsold Nigerian cargoes led to the massive oversupply in the Atlantic Basin.

Last year, the daily average remained weak despite U.S. crude output falling. However, volumes from Nigeria picked back up to .125 mbd in December, the highest monthly total since April 2014. It’s unclear if the rebound is a blip or a trend of more reliance on West African crude now that U.S. shale production is declining, albeit at a slow pace.

With Nigeria getting pushed out of the U.S market, it has had to try to muscle its way deeper into Europe. In 2014, it managed to sell some 45 percent of exports to Europe, according to Energy Information Administration (EIA) data, no doubt helped by the fact that fellow OPEC member Libya has been seeing major outages.


While Nigeria has been able to tap the European market, it is making only minor inroads into Asia, where its top customer is India. Asia’s biggest consumer, China, imports barely any volumes from Nigeria, preferring to take barrels from Opec’s other West African member, Angola. China’s refiners prefer Angola’s heavy, sweet grades over what’s produced in Nigeria. In fact, China has diversified its imports with purchases from Latin America instead of buying from Nigeria. Since it is virtually getting shut out of both the U.S. and Chinese markets, Nigeria will continue to struggle to sell its crude.

Breaking old habits

It’s no surprise that a petro-state like Nigeria has gone through so much pain as a result of the price collapse. The situation has turned so bad that the OPEC member has looked to the World Bank for a loan to ride out the low-price environment. Even if the country’s economic fortunes turn around, it still has to deal with ongoing corruption. That will be no small task. The NNPC reforms are a good first step. More will, of course, be needed.