Is Nigeria turning the corner?

Nigeria was a nasty mess at mid-year. The insurrection in the Niger Delta had drastically cut the country’s crude oil production and caused it to lose pole position among African oil producers. Now, much to my surprise, the country may be turning the corner, with the delta insurrection on the decline and oil production on the rise. If Nigeria’s oil production continues to increase, it could dampen crude oil prices and put the country on the wrong side of the Organization of the Petroleum Exporting Countries (OPEC).

Based on International Energy Agency (IEA) data, Nigeria’s oil production slipped to 1.68 million barrels per day in July 2009, 46% below its total capacity (including 500,000 bpd of shut-in), compared with 1.7 million bpd for Angola. Nigeria’s onshore production had fallen to levels not seen since the 1960s.

Since the end of 2005, militant groups under the umbrella of the Movement for the Emancipation of the Niger Delta (MEND) had conducted a campaign of kidnappings, oil thefts and attacks on oil infrastructure in the Niger Delta with the stated aims of protecting the environment and increasing the producing states’ share of oil and gas revenues

In May 2009, the Joint

Militant groups in the Niger Delta have targeted multinational oil firms.

Military Task Force launched the largest operation in at least a decade to squash a militant group associated with MEND in the Port Harcourt area. At the same time, the federal government launched a new amnesty program calling for militants to abandon their fight in return for pardons for past crimes and cash payments.

I was skeptical that the Nigerian government’s carrot-and-stick approach to quell militant activity in the Niger Delta would pay dividends. The federal government had shown little inclination to be drawn into substantive discussions on issues underlying the crisis or to allocate a greater share of oil wealth to the states where it is produced.

In recent months, Nigeria’s president Umaru Yar’Adua, the architect of the amnesty, personally invited a number of rebel leaders to Abuja to persuade them to lay down their arms and approved US$1.34-billion in federal funding to build roads, hospitals and schools in the Niger Delta region.

More important, on Oct. 18, the federal government announced a plan to transfer a 10% stake from the holdings of the Nigerian National Petroleum Corp., the state oil company, directly to the delta communities.

Assuming the Nigerian parliament passes it, this initiative is a brilliant move for two reasons. First, it bypasses corrupt state (and federal) politicians. Despite the nine oil-producing delta states receiving an extra 13% of oil revenues under Nigeria’s constitution, the majority of the people in the region live in abject poverty – taking in less than one U.S. dollar a day.

According to the World Bank, most of Nigeria’s oil and gas wealth has been siphoned off by 1% of the population. Between US$300-billion and US$400-billion of oil revenue has been stolen or misspent by corrupt federal and state government officials since independence in 1960.

Second, this initiative divides the interests of the delta people from the criminal gangs that “bunker” oil. Although MEND declared an indefinite ceasefire on Oct. 25, with its most important leaders accepting the amnesty, some of the groups under its umbrella are no more than criminal gangs. According to The Economist, about one-tenth of the oil produced in Nigeria is stolen from pipelines through industrial-scale theft operations.

Based on IEA data, Nigeria’s oil production rebounded to 1.9 million bpd in October, 80,000 bpd above its OPEC quota. If the country’s production of light sweet oil continues to increase, it could put downward pressure on premium benchmark prices and cause friction within OPEC.

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