Shell’s payment of $4.32 billion to the Nigerian government in 2017, despite the closure of the 400,000 barrels per day capacity Forcados Oil Terminal, has clearly demonstrated the potentially huge earnings in Nigeria’s oil sector if security challenges are fully addressed, Ejiofor Alike reports
Insecurity of crude oil and gas pipelines in the Niger Delta has remained a major risk peculiar to Nigeria’s operating environment, which has continued to drive the costs of oil and gas projects in the country above the global benchmark.
With persisting incidents of criminality, kidnapping, onshore and offshore piracy, as well as vandalism of oil and gas assets, Nigeria has become a high-risk environment where individual operators are forced to provide their own security with its attendant cost premium, which falls outside the companies’ direct sphere of influence.
Other cost drivers such as overregulation, bureaucracy and absence of infrastructure have compounded the problem of insecurity to drive the costs of oil and gas projects in Nigeria above global average.
According to a study by the Oil Producers Trade Section (OPTS) of Lagos Chamber of Commerce and Industry (LCCI), insecurity in the Niger Delta created a Nigeria-specific cost premium for the petroleum sector, with operating costs and projects costs significantly higher than in other countries by as much as 100 per cent.
In the OPTS report titled: “Nigeria Cost Premium and Drivers: Petroleum Sector,” the producers had stated that they spent five times more on security than their global peers, with a large chunk of expenditure on security services such as escort vessels, convoys and guards.
The report added that the companies also rely on costly transportation options for personnel and goods, such as helicopter transport and aviation as a result of the insecurity of Nigeria’s waterways, resulting in a cost premium of between 15 per cent and 65 per cent for operating costs, and 35 per cent and 100 per cent for costs of projects.
“Operational costs are impacted by incessant militant attacks and sabotage, illegal bunkering, piracy, kidnapping and armed robbery. In June 2016, production dropped to its lowest level in 20 years following a series of attacks on petroleum producing assets, including the Forcados pipeline, Escravos 24-inch gas pipeline, and Qua Iboe export line,” said the report.
The report added that security incidents fuels unforeseen costs and losses such as unplanned expenditure for emergency repairs arising from attacks and vandalism, as well as deferral of production and loss of income for the government and the operators as a result of disruption of operations.
On average, the report said about 400,000 barrels of oil equivalent per day was deferred in 2016 as a result of security challenges.
However, with the efforts pioneered by the Vice President, Prof. Yemi Osinbajo and the Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, there has not been any major attack on crude oil pipelines by the Niger Delta militants since November 2016 when the Niger Delta Avengers last bombed the Forcados pipeline.
But the security environment in the oil and gas-producing region has remained volatile with day-to-day crude theft continuing unabated.
In its 2018 briefing notes, Shell Petroleum Development Company (SPDC) also identified insecurity in parts of the Niger Delta as a major challenge, stressing that the security situation remains volatile in the region.
Despite the absence of major attack since 2016, Shell still recorded a loss of about 9,000 barrels of oil a day in 2017 to crude oil theft, which is more than the approximate 6,000 barrels per day in 2016 but less than 25,000 bpd in 2015.
The number of sabotage-related spills in 2017 also increased to 62 compared to 48 in 2016 but less than 94 in 2015.
According to the oil major, the increase in 2017 can in part be explained by the militant-induced shutdown of the Forcados export terminal in 2016, which reduced opportunities for third party interference.
Indeed after three sabotage incidents in 2016, beginning with the subsea bombing of the Trans-Foracdos Pipeline by the Niger Delta Avengers in February, 2016, the operations at the SPDC’s Forcados Oil Terminal (FOT) was disrupted until late May 2017 when repairs to the export pipeline were completed.
Apart from the attack on the Forcados pipeline, the facilities operated by both indigenous and international oil and gas companies were also vandalised by attacks and other illegal activities such as crude oil theft.
This led to lower oil and gas production in 2016 particularly for oil producers and a loss of revenue for the federal government and disruptions to gas supply to power electricity for industry, businesses and public-sector services.
Huge revenues in oil and gas sector
Apart from the shutdown of Forcados export terminal, sabotage-related oil spill incidents in SPDC’s facilities also rose to 62, from 48 recorded in 2016, according to Shell’s Sustainability Report 2017
However, the volume of crude oil spilled fell to 1,400 tonnes, from 3,900 tonnes in 2016
Also, Shell’s operational spills in Nigeria rose by one to nine in 2017, but the volume of oil spilled fell to 100 tonnes from 300 tonnes in 2016, according to the report.
The report further revealed that theft and sabotage account for 90 per cent of the oil spills in the Niger Delta.
But despite these gloomy pictures of insecurity in the Niger Delta, the Royal Dutch Shell Plc paid $4.32 billion to the Nigerian Government in 2017, representing an increase of 19 per cent from the $3.64 billion the oil giant paid in 2016.
The Shell’s Sustainability Report 2017 showed that the $4.32 billion paid to Nigeria was the highest paid by the oil giant to any government in the 29 countries covered by the report.
Shell said the report includes payments to governments made by Royal Dutch Shell plc and its subsidiary undertakings.
The company however, added that payments made by entities over which Shell has joint control are excluded from this report.
The report also excludes payments related to refining, natural gas liquefaction or gas-to -liquids activities.
The multinational oil firm said in the report that out of the $4.32 billion paid in 2017, $3.197 billion was paid to the Nigerian National Petroleum Corporation (NNPC) for production entitlement.
The payments include production entitlements, which are the host government’s share of production in the reporting period derived from projects operated by Shell.
Production entitlements also include the government’s share as a sovereign entity or through its participation as an equity or interest holder in projects within its sovereign jurisdiction (home country).
The payments also include taxes paid by Shell on its income, profits or production, which include resource severance tax, and petroleum resource rent tax, including those settled by a government on behalf of Shell under a tax-paid concession.
The report also showed that crude oil theft from pipelines of Shell Petroleum Development Company (SPDC) increased by 50 per cent, to roughly 9,000 barrels per day (bpd) in 2017 from 6,000 bpd in 2016.
The report further added that SPDC also “made $10 million available” in 2017 to help set up the Hydrocarbon Pollution and Remediation Project (HYPREP), a government-led body to clean up contaminated sites
Despite the enormous security challenges, the oil giant to pay $4.32 billion to the Nigerian Government in 2017, which represents 19 per cent increase from the $3.64 billion paid in 2016.
Apart from the Forcados attacks that impacted Shell’s production, other oil giants also suffered production and revenue losses as Chevron’s Escravos 24-inch gas pipeline, and ExxonMobil’s Qua Iboe export line were also heavily impacted.
The payment of $4.32 billion by Shell in the face of insecurity of assets and manpower were clear indications that the country would have earned much higher from the international oil companies (IOCs) and the Nigerian independent producers if the security challenges had been tackled.
Targeting zero oil theft
To boost crude oil production and revenues accruing to the Nigerian government, the various tiers of government, host communities and the operating companies should collaboratively tackle insecurity to achieve zero oil theft.
Although, the 9,000 barrels per day lost to theft by Shell in 2017 was an improvement to the 25,000 bpd lost in 2015, the loss of production to theft by producing companies is largely peculiar to the Nigerian operating environment.
Indeed, the federal government and the companies have made a lot of efforts to curb destructive attacks on oil and gas assets, as well as personnel but crude oil theft has continued unabated.
To the Managing Director of SPDC and Country Chairman of Shell Companies in Nigeria, Mr. Osagie Okunbor, the companies will only experience a relief when crude oil theft is reduced to zero.
“In terms of volume, it is correct to say that it has come down but 9,000 bpd is still too much. So, we have to keep the pressure on until we get to a stage where all the oil remains in the pipeline until it gets to the terminals,” he said.