COLUMN | Nigeria teeters on the edge as oil production collapses, boats sink and the currency plunges [Offshore Accounts]
For all of my lifetime, if you had asked which country was the largest oil producer in Sub-Saharan Africa, the answer would have been Nigeria. For five decades, the country has been West Africa’s oil and gas powerhouse, its largest producer, the region’s most influential voice at OPEC, and the country where, typically, the most rigs would be drilling offshore in the whole of West Africa.
Number two and falling fast
When we last wrote about Nigeria in 2019 (here), the country was producing 1.7 million barrels of oil a day. Today it produces less than a million barrels, and has been surpassed by Angola as Sub-Saharan Africa’s largest oil producer. Nigeria’s current production is around half of its OPEC quota and around half what it was producing in 1990!
Indeed, despite its own falling production, Angola was second only to Libya in oil production in all of Africa in August of this year, missing out on the top spot by 20,000 barrels a day. Algeria produced more than a million barrels of oil a day to take the number three slot in the continent, and push Nigeria down to number four.
Nigeria usually earns more than 80 per cent of its foreign currency from oil sales, and with crude prices high after the Russian invasion of Ukraine, you would expect the country to be booming.
Naira falling fast
Low oil production means that there are far fewer dollars coming into the treasury, which has led to a scarcity of hard currency in a country that imports just about everything except crude oil and natural gas. Financial Times reported (here) that Nigerian currency has depreciated almost 25 per cent against the dollar on the black market since the start of the year.
The naira officially trades at NGN421 to the dollar, but central bank currency shortages mean that dollars simply are not available at the official exchange rates. In order to obtain dollars, you can go what used to be called the black market of illegal money changers, where more than NGN700 will buy you a dollar.
Nigeria’s non-oil export earnings in 2021 were US$8 billion whereas it made US$33 billion from crude oil sales. With such low production, its entire model as a petrostate is broken.
Emirates suspends service due to currency turbulence
The currency crisis was brought into stark reality in August when Emirates Airlines announced it would suspend flights to and from Nigeria from September due to the fact that its sales revenues in Nigeria were trapped and could not be remitted out of the country in hard currency. Informal reports suggest that the UAE-based carrier had over US$80 million stranded in the country when it took the decision to announce the suspension to pressure the government.
Finally, last month, Emirates did resume flights to Lagos when the central bank released US$265 million to the foreign airlines, although the aviation industry reports that another US$199 million remains to be remitted to their foreign bank accounts.
If Sheikh Mohammed of Dubai is struggling to remit dollars out of Lagos, what hope do foreign ship owners and oilfield services companies have?
Sugar not so sweet, illegal rice
Everywhere you look in Nigeria, there is evidence of dysfunction. Huge dysfunction.
The country produces less sugar today than in 1990 (here), and the government in Abuja hands out quotas for the import of sugar to some of the country’s richest men and largest companies, which control the trade.
It’s not clear to me why the government needs to set quotas as to who can import sugar, other than to stimulate corruption and create monopolies. While Nigeria produced 41,478 tonnes of sugar in 1990, the figure fell to 38,597 tonnes of domestically produced sugar in 2019. Over the same period, imports rose “astronomically” from 603,000 tonnes to 1.6 million tonnes.
In order to stimulate national self-sufficiency, the president of Nigeria, Muhammadu Buhari, banned the import of rice. Rice production in Nigeria has increased, going from just over two million tonnes in 2007 to 5.6 million tonnes in 2018, but unfortunately, this falls far below the needs of a growing and sometimes hungry population. So, it is estimated (here) that between one and two million tonnes of rice are illegally smuggled into Nigeria every year.
Petrol subsidies cripple government finances
In a country where 40 per cent of the population lives on under US$1 per day, you would think that the government would be targeting the poorest of its people with subsidies. Instead, the former colony appears to be an inspiration for Britain’s own prime minister Liz Truss and her handouts to the rich.
Nigeria subsidises petrol (gasoline to our American readers). This means that Nigerian car owners enjoy among the cheapest fuel in the world at around 40 US cents per litre, cheaper even than in Saudi Arabia, the United States, and the UAE. Hint: those countries produce much more oil than Nigeria. And car owners aren’t amongst the poorest of the poor in Nigeria.
The higher the oil price, the bigger the gap between the subsidised petrol price and the price that the government must pay on the open market.
The cost? Nigeria will spend an estimated US$9.6 billion on petrol subsidies this year, about two per cent of Nigeria’s entire gross domestic product and almost 10 times the budgeted amount!
This is nuts. But as with every part of Nigeria’s broken system, vested interests benefit.
Kids ain’t leaning nothing
Education in Nigeria is in crisis, too (here). For the last eight months, over one and a half million students studying for degrees in Nigeria at government-funded universities have been shut out of their classrooms due to a strike by the Academic Staff Union of Universities. Last Friday, the court of appeal ordered an end to the strike, but it is unclear whether the lecturers will heed the judgement (here).
The problems start much earlier, however. The UN Children’s Fund estimates 18.5 million Nigerian children aged five to fourteen are not in school, more than anywhere else in the world. In a country with a population of over two hundred million people, and a fertility rate of over five births per woman, this is nothing short of disastrous.
More than 80 per cent of children who enroll in schools drop out after the age of 14 before completing high school. Teenage pregnancy rates are high and early marriages are very common, especially in the impoverished north of the country, which is also impacted by an Islamist insurgency where jihadis deliberately kidnap school girls, believing that secular education is a sin.
A survey by the Pew Research Centre in 2019 found that 45 per cent of adults in Nigeria said they planned to try to emigrate within five years, the highest number by far of any country where the survey was conducted. Since Nigeria has over two hundred million people and a population that the CIA reckons could hit 392 million in 2050, this is a significant problem. Around 41 per cent of Nigerians are under the age of 14.
Emirates is going to need to increase its flights if even a fraction of those intent on migrating are able to leave.
Boat sinks after hitting collapsed bridge
It is a powerful and tragic metaphor for the wretched state of contemporary Nigeria. On Friday, 76 Nigerians lost their lives when a grossly overloaded boat capsized. The motor boat was carrying 85 passengers fleeing flooding from the Niger River in the town of Ogbaru in Anambra state.
The boat suffered engine failure three minutes into the journey, and strong currents in the river then smashed it into the ruins of a collapsed bridge, causing the vessel to roll over, throwing the passengers into the flood waters, which had covered many houses up to roof level.
Thoughts and prayers from the useless president
Nigerian President Muhamaddu Buhari expressed sadness at the deaths (here).
“He also directed the relevant agencies to check the safety protocols on the vessels plying the waters to ensure their river worthiness,” according to the local media. The international media barely mentioned the story. The chances that any of the relevant agencies will attempt to raise maritime and riverine transport safety is laughable.
President Buhari has been one of the worst leaders Nigeria has ever seen. He didn’t execute his enemies, like the murderous military dictator and inveterate crook Sanu Abacha did in the 1990s, but that is a pretty low bar. Polls of Nigerians on social media have voted Buhari as the worst president Nigeria has ever had since the return to democracy in 1999 (here).
In 2023, Buhari will stand down and an election to replace him will be held in February. Whoever takes over will face a tough challenge. Inflation is already running at 20 per cent, and two weeks ago Nigeria’s central bank raised interest rates to an all-time high of 15.5 per cent to attempt to bring prices under control. The election also puts pressure on Nigeria’s foreign exchange reserves as politicians hand out dollars to their supporters. Politics in Nigeria, more than anywhere is all about the money.
The offshore sector lies at the heart of that challenge. If Nigeria can fix its offshore sector, it can fix its government finances, and its economy.
FPSO Trinity Spirit loss symbolises the problems
Unfortunately, the Anambra boat sinking comes as only the latest tragedy in Nigeria’s long decline in marine and offshore standards.
President Buhari has done nothing to encourage investment in the country’s vital oil and gas sector. Instead, neglect, decay, and procrastination rule the day, as international oil companies are deterred from investing by punitive taxes, a completely rotten bureaucracy, and a policy of “indigenisation,” which sees key assets plundered by greedy, short-term local “big men.”
In February the FPSO Trinity Spirit blew up in a catastrophic series of explosions on the Ukpokiti oil field in block OML 108, near the Niger Delta. As we reported (here), the production ship then caught fire, broke in half, and sank in shallow water while still ablaze. Seven crew members died and 50,000 barrels of oil were spilled as a result of the disaster.
The vessel was a converted 337m LOA VLCC originally built in 1976 as the Conoco Independence at Ishikawajima Harima Heavy Industries (later renamed IHI Corporation) in Japan, and converted by Conoco in 1997 to an FPSO named Independence with 1.7 million barrels of storage capacity and around 30,000 barrels per day of oil production capacity. Conoco deployed the FPSO to the Ukpokiti field, which comprises five oil wells and one injector well. OML 108 also contains the Kunza oil discovery, but this was never developed.
This FPSO was no spring chicken. Conoco Energy Nigeria held a 40 per cent interest in the field as technical advisor. However, Conoco relinquished its stake in the block in 2004, and transferred it to the local Nigerian company Shebah Exploration and Production Company that same year. Shebah took ownership of the FPSO and was still operating the field in 2022, when the explosion occurred.
Only Shebah was bankrupt and in receivership at the time, and had invested nothing in the field for years, or the FPSO.
Substantial corrosion and rapid wastage
As early as 2002, Conoco had discovered that the FPSO’s hull was experiencing rapid wastage. Substantial corrosion had also been identified in the bottom shell plate of the cargo tanks, which was fixed with an in situ repair using two steel plates bonded to a compact polyurethane elastomer core, to avoid taking the ship to dock or perform hot works that would interrupt the production of the field (here).
The Nigerian Upstream Petroleum Regulatory Commission (NUPRC) has promised to investigate the cause of the explosion, but so far, eight months later, there are no interim findings, and no evidence of any action can be seen. The NUPRC website is here.
Maybe I can give the commission some clues: perhaps look at the condition of the FPSO and the maintenance performed since Conoco quit operatorship 18 years ago, and investigate why the unit’s inert gas system was out of service?
Indigenisation has been a disaster in Nigeria, with politically connected individuals taking over oil and gas fields with minimal competency, minimal safety standards, and minimal investment. The country needs foreign investment in new exploration and production, not crony capitalism and state plunder.
Shebah’s neglect epitomises the problem.
The rest of the region powers ahead
Again, the parallels with Nigeria’s neighbours are not flattering to Abuja. Hit hard by the lower oil prices since 2014, other countries in the region have ramped up efforts to encourage investment in oil and gas so that new discoveries wil reverse declining production.
Cote d’Ivoire has announced massive discoveries by ENI in deepwater, and Saipem was promptly awarded the FPSO contract for the Baleine field ealier this year.
Angola extended of TotalEnergies’ deepwater blocks, and the French major promptly awarded a massive subsea tieback contract to McDermott for the Begonia deepwater development, and issued a letter of intent to Bumi Armada for a new FPSO for Cameia-Golfinho, aiming for first production in 2026. TotalEnergies already operates four existing FPSOs in Angola.
Also in Angola, ENI announced that it would be moving ahead with a second phase of its Agogo development and awarded the FPSO contract for that project to Malaysia’s Yinson.
In Senegal, BP and its partners move ahead with the development of phase two of its massive gas project there.
Every country in West Africa that has offshore oil and gas production has done more to stimulate exploration and development activities than Nigeria. Even Equatorial Guinea, for goodness sake, which just announced that Vaalco could progress with the development of Venus Field!
Law and order, Port Harcourt and Calabar edition
Nigeria is so badly governed that much of its existing oil and gas production is stolen from pipelines. Rather than being sold to generate taxes for the government and returns for the oil and gas companies, it is nicked.
Hundreds of thousands of barrels a day are believed to be syphoned off from pipelines with officials turning a blind eye to the problem. Indeed, the Nigerian Navy was forced to deny that its officers paid bribes to be posted to the oil-rich Delta area (here).
Osifo goes on the attack
The National President of Petroleum and Natural Gas Senior Staff Association of Nigeria, Festus Osifo, told the Nigerian Senate Committee investigating oil theft that personnel of the Nigerian Army and Navy deployed to Niger Delta bribed their way to be posted there so they could benefit from the massive stealing.
“I can authoritatively inform this committee that men of the Nigerian Army and the Navy pay their superiors to be posted to Niger Delta,” Mr Osifo said. “Even when the former Commander of the Amphibious Brigade in Port Harcourt was removed, many of the men in the command resisted being posted out due to the ‘lucrative nature’ of their operational areas.”
The local newspapers are full of cases of “tinpot” refineries in the Niger Delta region, hidden in creeks and mangrove swamps. There are accounts of a major gas pipeline being attacked by a hacksaw, of widespread accidents causing explosions and oil spill pollution, and of pumping stations where no crude arrives to pump because it has been diverted.
As a result, the Niger Delta is un-investible for international oil companies. They have sold out of their acreage there, as it is simply too much hassle, too unsafe, with massive law suits against them for pollution often caused by the oil thieves damaging pipelines and infrastructure, endless demands for payments for security from the Nigerian armed forces, and a tax system that legalises state-backed embezzlement.
That leaves deepwater, where the majors do have existing high-volume production projects, though even these are threatened by pirates and armed militants.
But again, the greed and incompetence of the Nigerian state has stymied new developments for decades. Nigeria in its current state of misgovernment is just not an attractive place to invest.
Bonga South West Aparo is a case in point: a US$10 billion deepwater FPSO project featuring a 43-well subsea production system, which should be 150,000 barrels per day. Unfortunately, the project has been pending sanction for fifteen years by Shell and its partners.
Fifteen years! Even as Nigeria’s production falls off a cliff. Earlier this year, Shell announced that it was again delaying sanction on the project until 2025 or later, so first oil may be delayed until 2029, or later.
Nigeria doesn’t lack oil and gas in the ground, but it lacks the political stability and good government needed to get it out.
Is it too late to fix the country?
Enough. Nigeria has millions of capable, intelligent citizens. Around 16,000 Nigerians were granted high skill visas to work in the UK last year alone.
Unfortunately, Nigeria’s institutions are broken. Fixing the country requires radical reform. The presidential election of 2023 needs to inaugurate effective leadership and institutional reform.
Hope dies last.
The CIA World Factbook data for Nigeria is an excellent read. It can be found here.
The Pew migration survey of 2019, which asked people in 12 different countries about their intention to migrate, can be found in full here.
You can view the catastrophic aftermath of the explosions that ripped apart the FPSO Trinity Spirit here.
The Nigeria media is full of details on oil theft. Some examples are here: