By Sopuruchi Onwuka
The steep fall in Nigeria’s oil export volumes and revenues has stoked simmering debates over massive production losses in the petroleum industry where worsening security situation in the operating environment translates to waning guarantee of investment recovery.
Valuechain reports that last August, the 1.826 million barrels per day (b/d) production quota assigned to Nigeria by the Organization of Petroleum Exporting Countries (OPEC) remained the highest amongst African producers but with 1.4 million b/d production including condensate, the country continued to fail in meeting the quota for several months in a row.
Industry operators and service companies that provide independent accounting mechanisms for multinational oil firms insist that total output of physical barrels from the nation’s deepwater operations approximate a million barrels per day on average.
Thus, it has become obvious that third parties that parasite on the operations of the industry are sucking the system dry. What is not obvious is the level of complicity and culpability to the production theft syndicate which, according to the experts, cannot successfully manage large volume stealing without a smoothened pathway. Another stark reality is those huge losses in the petroleum industry have left Nigeria dry at a time of revenue windfall for other producing nations.
Low returns from the export market have resulted in weak foreign exchange reserves, weakening local currency at the exchange platforms and high cost of imported goods. The Minister of Finance, Budget and Planning, Mrs. Zainab Ahmed, who continues to offer explanations on the nation’s worsening debt, blames the falling revenue on the petroleum industry.
She reaffirmed to journalists at a recent international conference in New York that Nigeria spends all its crude export revenues on subsidizing local consumption of petrol alone while the Group Chief Executive Officer of NNPCL, Mallam Mele Kyari, declares that the country consumes about 70 million liters of petrol every day.
Both Ahmed and Kyari have declared separately at different events that the consumption capacity of the Nigerians that commute on petrol only takes just a fraction of the imported petrol; explaining a more worrisome seepage of subsidized petrol across Nigeria’s borders into neighbouring countries.
Thus, from both the export and import ends of the petroleum industry, the volume of declared leakages are so massive that the general economy, which the petroleum resources are supposed to support, is in a parlous state. It is palpable even in the streets that Nigerian economy is currently rolling downhill, mustering a pile of debts that have triggered alarms in the local and foreign credit markets.
In the domestic front, inflation has taken galloping leaps and exacerbated hardship among large population as the high cost of production has forced enterprises to shrink down and reduce staff strength. In addition to this troubling situation, is the fact that unemployment rate has reached disturbing levels.
The country’s economic turbulence and the accompanying impact on the people have sparked debate about the performance of agencies and institutions that operate the critical sectors of the economy. The situation also raises appraisal questions over the management dexterity of the country’s current political leadership and its technocrats who man institutions that form pillars of the economy.
With the economy in dire straits and the current administration’s excessive borrowing to run huge federal overheads, the petroleum industry which is the strongest pillar of the economy is also battling severe and destabilizing crisis.
From industry operations, through regulations and asset management to fiscal management, the administration of the country’s hydrocarbon continues to raise accountability questions that dominate unending debates.
And accountability questions in the industry take aim at multiple points. Wellhead and flow station output figures hardly tally with volumes reaching the terminals. There are accountability issues among players that flow production through common pipelines. There are accounting discrepancies between operators and government partner agencies such as security and export/import terminals gatekeepers. And there are acute accounting shortfalls among torchbearers in the sector.
Accountability issues in downstream drain upstream revenues
In the downstream, serious accountability questions also sustain arguments over the protracted moribund state of the nation’s four refining plants, disputed import figures, subsidy calculations and management of fiscal provisions. Following acute plunge in oil export revenues and sharp spikes in the volume and cost of imported petrol, there has been a spate of loud national outcry over figures that many consider outlandish. In the downstream fuel market, which is fronted to be the drain on upstream revenue lines, the NNPCL is struggling with push-backs from other players in the market overall figures it has advanced to justify huge import expenditure on petrol.
Chairman of Major Oil Marketers Association of Nigeria (MOMAN), Mr. Olumide Odeosun, is stringent on the call on NNPCL and the Nigerian Midstream and Downstream Regulatory Authority (NMDRA) to liberalize petrol imports and make the import transactions visible and transparent just like it has done in other deregulated products like diesel, aviation fuel, lubricants, cooking gas and other refinery products. The group which operates more retail outlets in the country than all other market players put together calculates its daily sales at less than 18 million liters of petrol per day.
The Organized Private Sector (OPS) comprising chambers of commerce, manufacturers and small business operators calculate national petrol consumption at about 32 million liters per day.
The President of Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN), Comrade Festus Osifo, made it clear at a conference in Lagos that the income level of majority of Nigerians cannot afford the volume of fuel consumption claimed by NNPCL.
Osifo who is also the President of Trade Union Congress (TUC) of Nigeria reiterated the position of the organized labour that all the country’s refineries must be up and running at significant capacity before the market would be commercially deregulated. He stated the decision of the workers’ unions to prevent government agencies from transferring the cost of their inefficiencies to the poor Nigerian masses.
He listed the cost of inefficiency at the refineries to include, huge cost overruns on maintaining the dead facilities and keeping staff of the companies redundant for years. He noted that the state of the refineries has robbed the economy of ancillary business opportunities that would have enhanced the economic status of host communities and engage the youths in legitimate endeavours.
Besides the premium motor spirit which is in accounting contention, Comrade Osifo noted that neglect of the nation’s refineries is also taking massive import tolls from total importation of all fuels from government and private players in the market. He said that the refineries would have saved the country huge cost currently incurred on importation of aviation fuel, lubricants, diesel, fuel oils, cooking gas and many more refinery products that are currently imported from countries that buy Nigerian crude.
He wondered why NNPCL has left its refineries moribund for years and took the advantage of sole importer of petrol, excluding other products which do not come with the advantage of subsidy benefits including the currently scarce aviation fuel. He agreed that liberalization of petrol imports would make the transactions transparent and the subsidy claims verifiable.
Comrade Osifo maintained that the petrol import business is cordoned off for NNPCL for purpose that is not open to the public stakeholders. He said that workers’ unions would continue to cooperate and support NNPCL on the ongoing refinery rehabilitation in order to enable the country reclaim the full benefits of midstream processing operations.
Also drilling holes in the petrol import claims of NNPCL, the Comptroller General of the Nigerian Customs Service (NCS), Col. Hameed Ali rtd. had declared to an investigation committee of the National Assembly that logistics and facilities for fuel handing at the nation’s import quays have not accounted for volumes that correspond to claims by the NNPCL that Nigeria consumes about 70 million liters of petrol alone on daily basis. And given that all petrol consumed in the country is imported, the testimony by customs, an agency that supervises goods imported through ports forms solid pointers to the physical reality on ground even though the nation’s national oil company has insisted that the figure is factual and they are ready for any forensic audit to be carried on their books.
An independent industry analyst who commented on the subsidy claims by the government noted that one of the most important points missed in the argument remains the role of the 445,000 barrels of crude oil per day allocated for swap deals by NNPCL. He noted that if the volume of crude allocation is efficiently traded for petrol alone, the country should not be spending additional dime on additional importation.
“Everybody including the NNPCL is saying that the 650,000 barrels per day Dangote Refinery should saturate the local market and feed the entire West African market. That means that 445,000 barrels per day should be superfluous for just the Nigerian market.
“How can you tell me that you are spending every dime we earn from crude oil at a time of high prices on importing just one refinery product? Who will believe that? What that means is that total Nigerian crude production is insufficient to meet internal needs if you factor in all other products.”
Since the call for accountability from the National Assembly started receiving inputs, NNPCL is yet to get support from any stakeholder to justify claims of significant N4.0 trillion in annual subsidy on just one refinery product consumed in the country.
Production losses attributable to illegal refineries
What has become clear also is that the supply crisis and the rising pump prices of fuels in the country provide strong incentives for illegal refineries that parasite on upstream operations of the industry in the Niger Delta.
Whereas crude oil theft started long before the return of democracy in 1999, stolen volumes were limited to illegal export which relied on micro logistics, thin market and furtive buyers.
Deregulation of middle distillate fuels in the domestic market and associated jumps in the retail prices of diesel and fuel oils have provided strong incentives for modular and artisanal refineries in the country. While the well-regulated modular refineries operated by lean asset players rely on own upstream operations for refinery feedstock, artisanal refiners provide strong market incentive for stolen crude oil.
The global oil demand surge after coronavirus pandemic and associated strong prices at the export market, coupled with the high retail price of products in the domestic ‘black’ market was attractive for local artisanal refineries which incidentally formed the only market for all crude oil thieves in the industry. The high prices of products provided strong incentive for more illegal refineries to spring up across the pipeline routes in the Niger Delta, providing stronger opportunity to steal more for export.
Thus, output from upstream industry operations `is frittered by thieving syndicates that feed illegal artisanal refineries that produce mainly substandard diesel that sells in the domestic market, and also by others that feed global black market for crude oil and condensate. Both syndicate groups wreak havoc on the operations of licensed producers whose investments are currently under serious threat.
It must however be pointed out that production losses attributable to illegal refineries are just an appendage of what has become industrial-scale stealing of oil in the upstream petroleum industry. This can be viewed from the words of Richard Kennedy, the Managing Director of Chevron who described crude oil theft in Nigeria as an organized crime.
Mr. Kennedy said that there is the need not to confuse the agitations of host communities of oil-producing areas with the spate of crude oil theft being carried out in the area.
According to documents sighted at the NNPCL, Nigeria attained production level of 2.7 million barrels per day by 2007 when Nigeria signaled the Organization of Petroleum Exporting Countries (OPEC) of its intention to take greater supply responsibility in the export market within the group’s band limits.
The country’s target was to attain production capacity of 4.0 million barrels per day by 2010 in line with approved development programmes both onshore and offshore. The projections ruled the consciousness of players just before insecurity became a sustained trend in the industry’s operating environment.
Analyst at SBM Intelligence, Mr. Cheta Nwanze, stated in a report that Nigeria has failed to meet set production target because of security concerns.
Sabotage, indiscriminate attacks worsen oil industry woes
Violence which erupted from failing relationship between some IOCs and their host communities in the Niger Delta rapidly escalated into a pan-industry menace following indiscriminate attacks on production facilities as community militants sought revenge. More attacks led to more oil spills, more environmental pollution and more anger against the companies.
UN backed recommendations for the cleanup of the pollution in Niger Delta has since stalled, rekindling the anger of the communities in the region and worsening oil industry sabotage. This sabotage has led to fall in production despite new oilfield developments and commissioning in the conventional and deepwater terrains. Production from other joint venture operations onshore Niger Delta has also followed similar pattern.
Security concerns associated with crude oil stealing, industry pundits have pointed out, have cast a gloom on investments in the nation’s hydrocarbon industry, stalled exploration efforts and accelerated investment recovery by foreign companies seeking to exit the country.
Physical operating climate has continued to get increasingly hostile and aggressive, leading to the decision by the companies to give up operations onshore Niger Delta.
Shell and partners have since 2008 intensified divestment of commercial interests in assets it hitherto operated as host community hostilities escalated. Shell, Total and Eni have since the period concluded divestments collectively valued at over $12 billion onshore Niger Delta. Other companies like ConocoPhillips, Statoil, Petrobras and Chevron have also divested Nigerian assets in the period.
“It’s is like when you have caused damage in your landlord’s house and you want to pack your property and leave,” a branch leader of PENGASSAN explained.
He also pointed out that the major players are quitting onshore operations majorly because production losses associated with thieving syndicates are getting increasingly complicated and complex as government agencies trade allegations.
The allegations sound plausible upon revelations that the volumes of liquids stolen in Nigeria surpass total export capacity of some countries. The industrial scale of crude theft also employs robust logistics facilities and employs technically honed personnel.
From the saga of thieving MT African Pride which disappeared from the custody of Nigerian Navy to recent revelations by the Navy that NNPCL surfaced with documentation after a vessel allegedly bearing stolen crude oil was arrested while sailing away; the story of crude oil stealing in the country is rife with insider collaboration.
The discrepancies and altercations leave crude oil accountability at the nation’s export terminals very complex. And harmonization of export figures among operating companies, security agencies, tax agencies and regulators has remained difficult to achieve, leading to differing figures at OPEC, NNPC, Nigerian Upstream Petroleum Regulatory Commission (NUPRC) and the Central Bank of Nigeria (CBN).
Figures at OPEC and other multilateral agencies do not reflect the actual Nigerian reality. Figures declared by foreign multinational oil firms with operations in Nigeria trickle-in in stranded forms at different times, only providing pointers and no complete picture. Thus, there is no visible spot in the industry where actual production and export figures could be verified.
What is certain however is that financial accruals to the government have taken a dive. Official figures showed that Nigeria’s total oil earnings in the second quarter of the year stood at meager N1.23 trillion or 39 percent of projected N3.123 trillion for the period. And, as usual, Finance Ministry blames vandals and thieves feasting on the petroleum industry.
The paltry oil revenue in the second quarter of the year casts a grim picture of what has become of the Nigerian petroleum industry. And it casts grimmer fiscal picture of the overall economy in the immediate term.