Why the share price is weakDwindling International Interest in Nigeria's Onshore Oil Fields
October 10, 2013 | 1442 GMT
Summary
An illegal oil refinery that was destroyed by Nigerian forces at Nembe Creek in the Niger Delta on March 22.
Supermajors continue to sell onshore investments that are in sensitive areas in the Niger Delta, but a wider sell-off of other Nigerian hydrocarbon assets is unlikely. The Financial Times reported that a consortium led by Royal Dutch/Shell has put four blocks in the eastern Niger Delta region on sale as well as the Nembe Creek Trunkline pipeline, which connects those blocks to the Bonny export terminal. The report follows an internal review by Shell of its eastern Niger Delta assets, which account for about a third of Shell's energy assets in Nigeria, as a result of increased crude theft and pipeline damage in the region. Subsequently, on Oct. 10, Shell had to shut down the Trans-Niger Pipeline due to leaks caused by theft and pipeline damage for the third time in four months, highlighting the severity of disruptions in the region.
Onshore production problems -- due to both technical factors and militancy -- will remain as the Niger Delta continues to lose significance in Nigeria's oil industry. But Shell's sales of assets, as well as sales by Chevron and others, do not represent a complete loss of interest by multinational oil companies. Indeed, the blocks on sale represent a very small fraction of Nigeria's overall production, and most blocks previously sold are undeveloped. Instead, the sales suggest that several of the aging and now lower producing fields are no longer worth the effort of dealing with the associated political and security problems. At the same time, reduced investment in onshore production should continue as the sector in general faces declining output. In the long term, this will reduce the ability of Niger Delta politicians and militants to influence Nigerian politics.
Analysis
Nigeria has been an oil producer since 1958, when Shell brought the Oloibiri oil field online. Over the next 15 years, Shell's operations in Nigeria blossomed, and more major international oil companies, including ExxonMobil, Gulf Oil and Texaco, followed suit.
The Slow Decline of Nigeria's Onshore Production
Initially, most of Nigeria's oil production was onshore (75 percent in the 1970s), before shallow offshore production began to overtake onshore production in the 1980s and 1990s. The next step in the industry's evolution was the emergence of deepwater hydrocarbon production in the late 2000s. With many of the onshore fields in terminal decline, Nigeria's onshore production has fallen to about 25 percent of total production, the smallest share of the three.
Niger Delta Oil Fields
Other problems have plagued onshore development since the beginning. The Niger Delta region is home to many different ethnic groups and, as the name implies, is a swampy river delta with communities that are remote and accessible only by river transport. Pollution from oil production, pipeline damage and flaring natural gas, as well as the perception that the wealth produced on their land was not getting back to the communities, contributed to social unrest among these communities. As a result, tension between oil producers and national oil companies on one side and the delta communities on the other has been a constant problem, culminating in the execution in 1995 of Ken Saro-Wiwa, an Ogoni activist who led a protest campaign against Shell, and more recently the militant campaigns of groups such as the Movement for the Emancipation of the Niger Delta.
In addition, bunkering and crude theft have become chronic problems, leading not only to stolen oil production but also damaged pipelines. Shell has declared force majeure on oil exports several times in 2013 in order to repair pipelines. An estimated 100,000 barrels of crude are stolen through illegal bunkering each year. (Only a handful of African countries even produce that much crude.) Considering that another 100,000-150,000 barrels per day are lost when production stops for pipeline repairs, onshore production in Nigeria has become unattractive in some parts. These problems were a minor nuisance when onshore production was strong, but as the fields age, it is becoming no longer worth the effort. As a result, supermajors have been exiting onshore projects for several years.
Since 2010, Shell, Total and others have sold 13 oil blocks, mainly to Nigerian companies. Chevron is in the process of selling five more blocks, and in addition to the four revealed Oct. 9, Shell is selling four other blocks. (Interestingly, one of the fields in the most recent announcement is the Oloibiri field -- the one that started oil production in Nigeria.) ConocoPhillips is also selling its Nigerian assets to a Nigerian company.
But while companies are selling assets that are located onshore, there has been no loss of interest in Nigeria's deepwater blocks, or even those onshore or close to the shore that are still producing at high levels.
Nigerian Ownership
During the 20th century, the supermajors produced essentially all of Nigeria's oil, but this began to change in the early 2000s as the new civilian government came under pressure to increase Nigerian activity in the sector. Then-President Olusegun Obasanjo set aside 251 onshore fields, dubbed "marginal oil fields," containing an estimated 2 billion barrels of oil reserves, to be auctioned off to Nigerian companies. Many of the fields had low reserves, limited access to existing infrastructure, complex geology or lower-quality crude. These characteristics made them unattractive for multinational oil companies but in some cases more economical for indigenous producers, which received tax breaks.
Nigeria's Geographic Challenge
This led to the emergence of several indigenous oil companies, some of which had success as contractors for the majors. Some, such as Oando PLC, which is purchasing ConocoPhillips' assets, have developed into integrated oil companies. The Nigerian National Petroleum Corporation has also expressed interest in buying the supermajors' shares in some blocks.
One question that has arisen is whether the Nigerian firms possess the technological skills to maintain production levels at the aging fields and the technically challenging marginal fields. Oil recovery methods have grown more complicated and expensive, and the firms do not have the same amount of experience at maintaining production at aging fields that multinational oil companies have. These firms also have less access to the necessary capital, but government incentive programs have made some of the marginal fields economical.
Long-Term Issues
Even if Nigerian oil companies are operating the blocks, theft is not necessarily discouraged. Abuja has taken many steps to limit illegal bunkering, but bunkering in Nigeria is a sophisticated operation. To make matters worse, many Nigerian politicians are complicit in stealing crude. The pipelines are also remote and surrounded by small creeks and other geographic features that make surveillance and security difficult. The Nigerian military has had some success destroying illegal refineries, but most of the stolen crude is smuggled out of the country.
Most of the issues complicating onshore oil production do not have solutions. Reviving production onshore seems unlikely, making the offshore industry -- which is plagued by its own problems -- vital to the future of Nigeria's oil and natural gas industry. The country's Petroleum Industry Bill, a sweeping overhaul of its regulatory environment, is stuck in political gridlock and is unlikely to pass within the next year or two. Shell and other majors are very interested in making large investments to develop deepwater fields, which are largely unaffected by any of the problems onshore, but have limited their investment because of the uncertainty surrounding the future regulatory environment.
Delayed investment has already resulted in a drop-off in deepwater oil production, and the prospects of onshore projects making up the difference are bleak. With the gradual move of production toward more offshore projects, the Niger Delta's most powerful lever to exact political gains will diminish. Niger Delta militants, backed by politicians, were able to secure Goodluck Jonathan's presidential bid in 2011 by applying what amounts to a veto, threatening to shut off a third of the country's oil production. Over the next two decades, that ability will weaken.
Some losses will likely be seen in oil revenue over the next five years due to reduced investment in deepwater fields and declining or disrupted onshore production. At least for now, Nigeria's budget is set with projected oil prices much higher than they are presently, meaning financing is not yet a serious concern. But in the longer term, if the problems persist, Abuja's ability to maintain some of its subsidies and social programs could be limited.