If $60 oil can not save you, then you are in bad shape. No, I am not talking about some of the U.S. shale producers, but Nigeria and its struggling oil industry.
Depending on who you ask, Nigeria needs prices somewhere between $130 and $140 to balance its fiscal budget. The path to those prices in 2021 seems unlikely, but after seeing prices go negative last year, let us not shut the door on anything just yet.
Unless Nigeria is banking on a long-term price above their breakeven, they need to implement systemic changes to lower their costs. Not only could this allow the country to balance its budget at a lower price point, but it would also give Nigeria the ability to invest more money back into their country, which is desperately needed.
Who is in control?
Like most nations, the government in Nigeria has a large amount of control over the oil and gas industry. It is beyond the scope of this piece to break down where the lines are drawn, but in countries where the government wants to keep its hand in the cookie jar, the government should also receive a slap on the wrist when things go awry. This is not to say that the private sector companies have no responsibility; rather, it is to point out that if the government has the political resolve and uses its political capital properly, it could clean up much of the mess.
A seat at the table, but…
Before discussing how Nigeria can reduce its cost, it is important to understand its place in the market and OPEC. If the United States, Saudi Arabia or Russia want to drive the price of oil up or down, these countries have the ability to do just that. Nigeria’s 2 million barrels per day (bpd) is something the country should be proud of. Still, to put that in perspective, the Saudis voluntarily cut 1 million bpd to balance the markets earlier this year. They will likely put it back on the market sooner rather than later. Two million bpd is not an irrelevant amount, but it is not significant enough to influence OPEC’s decisions.
A cautionary tale for Nigeria is Venezuela. Their oil industry has crumbled over the past few years, and the market has picked up the barrels that Venezuela has shed without having a price shock.
Nigerian oil has been an important part of the oil industry, but without the ability to influence the market, it needs to focus on maximizing every barrel of oil it produces.
Plug the holes
If Nigeria hopes to lower its cost, it has to find a way to stop crude oil theft. According to one report, the country lost an estimated $41.9 billion in revenue between 2009 and 2018. This works out to about 150,000-250,000 bpd or $11 million a day in losses. Nigeria’s budget for 2021 is $35.6 billion, and according to the most recent data, they are losing 200,000 bpd to theft. If the current prices hold, that would be $4.5 – $5 billion in losses or almost 15% of their budget in 2021.
Both the private sector and the government have tried to protect their assets in the country. In 2019, Royal Dutch Shell subsidiary Shell Petroleum Development Company announced it would use specialized cameras attached to helicopters on its daily patrol flights to identify where theft was occurring. Earlier this week, Nigeria announced it would use its military resources to protect its most valuable commodity. These are just two recent examples. There are many more that could be cited. Despite myriad efforts to ensure the pipelines flow unhampered, it seems that the country still loses 200,000 bpd.
Stopping the theft is one issue. There is also the toll of perpetually fixing the infrastructure from the illegal taps. When the initial infrastructure is put in place, it is done so with the presumption that it will function for many years. Each time the pipelines, wellheads, etc., are repaired, it creates stress on the surrounding parts of the infrastructure and will ultimately shorten their life expectancies. This, of course, results in higher costs across the board.
Who is responsible for the theft?
There are multiple parties to blame for this issue, and we have to start with the government. They are in control of the oil industry, its security and the assurance that the profits are spent wisely. Good government policy should maximize profits from the industry and use said profits to spur on job growth when it invests back into the economy.
With an unemployment rate of 27%, which has more than doubled since 2016, many Nigerians are left to fend for themselves. Putting the ethics aside for a moment, when people need to feed their families, they will do what it takes to get that done. It is unlikely that average citizens are figuring out how to illegally tap a pipeline and get it to market without government or industry officials’ help.
The United States stands apart from the rest of the world by allowing its citizens to own the subsurface minerals. Practically speaking, this creates wealth for the owners of said minerals and ownership of the oil and gas industry. Juxtapose this with Nigeria, where the only people in the industry making real wealth have minimal ties to those impacted the most by the theft.
While oil loss causes budgetary problems for the country, it also impacts local farmers who have to deal with damages caused by oil spills. Rightfully looking for compensation, these farmers are left with little recourse if the government does not compensate them.
In January, a Dutch court sided with the farmers in a suit against Shell Nigeria. Shell argued that sabotage, not negligence, was the cause. “We continue to believe that the spills in Oruma and Goi were the result of sabotage. We are therefore disappointed that this court has made a different finding on the cause of these spills and in its finding that’’ Shell’s Nigeria unit is liable, Shell said in a statement. “Sabotage, crude oil theft and illegal refining are a major challenge in the Niger Delta.”
The Shell issue raises several questions. If Shell knows its pipelines will be sabotaged, what level of protection is the company expected to install and prevent it from happening? Should the government regularly provide additional security? How do you ensure that the farmers are properly compensated for the damages to their property?
Unweaving a web
The issues highlighted today are macro. Even when pointing to a specific example, the points highlighted lack the nuance to solve all of the problems involved. The key takeaway is that Nigeria’s oil and gas industry is a reflection of its economy. The government has to root out corruption in its ranks to begin tackling these issues. Corruption has been a staple of Nigerian politics for years. The large multinational companies doing work in Nigeria are not without their own faults as well. Sadly, the ones who suffer from all of this are the people in Nigeria. If Nigeria is going to lower its costs, then it has to partner with its citizens. The government needs to be able to generate wealth, not just jobs, from this lucrative industry. Job growth will spur on innovation and will cut down on oil theft as the citizens will have more ownership of the industry, not just a mere part of it.
If Nigeria or its oil industry wants to thrive, it has to take this challenge seriously. Just like lower break-even prices result in better returns for private companies, in Nigeria, they could lead to lower unemployment, a more stable economy, and a future where oil theft is mitigated by the stakeholders, namely Nigerian citizens.
About the author: Ryan Ray is the CEO of War Room Media and a proud member of the Board of Advisors for the George H.W. Bush Foundation for U.S. China Relations.
