Nigeria recorded the highest crude oil loss in the last 18 years with an average of 245 million barrels of oil “going down the drain” in 2016.
Statistics from the latest audit report of the Nigeria Extractive Industries Transparency Initiative (NEITI) revealed that the huge loss was occasioned by several factors including pipeline vandalism and reduced funding for various Joint Venture (JV) cash call obligations.
Oil depletion in aging fields and specific technical challenges also contributed to the crude oil losses.
In 2016, crude oil produced was 659.13 million barrels, the only year production fell below the 700 million barrels mark since 1999.
The amount represented a 15.13 percent drop from the 776.66 million barrels produced in 2015 and a 14.62 percent drop from the 772 million barrels produced in 1999.
It also means crude oil produced was a meagre 4.47 percent of the 14.7 billion barrels realised between 1999 and 2016.
The amount was made up of production from all sources and various arrangements the Nigerian National Petroleum Corporation (NNPC) entered into.
The production arrangements include JVs (between NNPC and 15 different oil companies, through production sharing contracts (PSCs), service contracts (SCs), sole risk operators (SROs), marginal field operators (MFOs).
Crude oil theft and sabotage
According to the NEITI report, between March and December of 2016 alone, Nigeria suffered crude oil loss that averaged 130 million barrels.
About six different force majeures were declared in the country in 2016, with Shell Petroleum Development Company (SPDC) accounting for three out of that number.
In February of that year, SPDC had to shut down the subsea 48-inch Trans-Forcados Pipeline in Warri, Delta state, after it was bombed by Niger Delta militants.
The terminal remained shut for seven months, affecting several oil companies injecting into it.
Nine companies including Seplat, Panocean, and Waltersmith had to shut down production for 147 days.
Shell also declared force majeures on the Bonny Terminal twice in that same year, after leaks were discovered on the Nembe Creek Pipeline.
Between July and August 2016, Nigeria Agip Oil Company (NAOC)/Eni closed operations on its Brass terminal after an attack on the Ogbaimbiri – Tebidaba Pipeline.
On two occasions, Mobil Producing Nigeria Unlimited (MPNU) also declared force majeures after damages occured on the Qua Iboe Terminal loading system.
As a result of these various incidents, the NEITI report said losses from crude oil theft and sabotage increased by a whopping 274 percent– from 27 million barrels in 2015 to 101 million barrels in 2016.
This was aside losses due to deferment, which was rose by 65 percent from 87.5 million barrels in 2015 to 144 million barrels in 2016.
The losses from crude oil theft, sabotage and deferment in 2016 sums up to 245 million barrels.
Issues with JV cash call funding
Although Nigeria survived the slump in the global oil market experienced between 2008 and 2009, it did not cash in on the record high prices in 2011 that ranged between $110 to $120.
Hence, it could not escape the recession brought about by reduced oil prices in 2016.
Yearly average price of crude oil per barrel was $43.73 in 2016 as against $52.5 in 2015 and an all-time high of $111.26 in 2011.
With the fall in prices oil revenue reduced consistently. Revenue accruing to the federal government dropped from $68.44 billion in 2011 to $24.79 billion in 2015.
It dropped further to $17.05 billion in 2016, representing a 75 percent and 31 percent decline from 2011 and 2015 revenues respectively.
Thus, poor funding for the JV cash call account led to a downtime in this production arrangement which used to be the foremost contributor to the sector, with 289.17 million barrels in 2016 as against 656.67 million barrels in 2006.
Conversely, production under the PSC arrangement, which are solely funded by the International Oil Companies (IOCs), rose by about 700 percent over the same period– from 159.24 million barrels in 2006 to 324.07 million barrels in 2016.
“The inability of the government to meet cash call obligations due to dearth of funds in 2016 made it difficult for JV operators to effectively run their operations. The total cash call liability in 2016 stood at $385,116,744.11,” the NEITI report read.
Following a new cash call arrangement in 2016, the report said all cash call liabilities for indigenous JV operators before that year was settled in November 2018.
Technical challenges and depletion in ageing fields
The routine maintenance of some production pumps in various oil fields caused production shutdowns in 2016.
According to NEITI, out of the 71 Oil Mining Licences (OMLs) in production, only 30 produced above five million barrels in 2016.
Some of the losses were linked to “shrinkage and terminal adjustment” which led to evaporation and drainage in the terminals during the process of separating of water and sediments from the crude meant for export.
The report also said there was a steady decline in production from ageing fields whose reserves are depleting.
It said this was a “normal occurrence” as operators had no option but to resort to artificial lift mechanisms to produce from such fields.
The way forward
Detailed recommendations were presented to give attention to the numerous issues that almost placed the economy on standstill in 2016.
As regards crude oil theft and sabotage, NEITI recommended that the NNPC should ensure proper surveillance using “land based and aerial satellite photography and geo-phones trenched pipelines.”
It also made a case for the restoration and updating of the vast pipeline network in the country.
On the JV cash call funding, the report said the National Petroleum Investment Management Services (NAPIMS)–the agency in charge of cost administration on the JV assets– should operate on the tenets of transparency and accountability to avoid the abuse of funds.
NEITI said there should be full implementation of the new JV self -funding model agreed between the NNPC and IOCs.