Nigerian oil output has slumped to over 20-year lows largely due to the rise in militancy in the oil rich Niger Delta and this is likely to impact the country's total output for the next three to six months, analysts told S&P Global Platts this week.
All eyes will now be on the effectiveness and the handling of the military and government response in resolving the issue, which appears to be at a critical juncture.
Attacks on Nigeria's oil facilities have risen in the last five months following years of relative calm, after a 2009 amnesty halted a spate of attacks on oil installations.
The alarming rise in attacks on oil facilities now means Nigeria is no longer Africa's largest oil producer, and this is largely due to a new militant group emerging in the region calling itself Niger Delta Avengers.
The recent Nigerian production outages, which have largely been linked to the attacks in the Niger Delta, have impacted approximately 800,000 b/d of the country's total production capacity of 2.2 million b/d, according to S&P Global Platts estimates.
Production of Nigeria's key export grades like Qua Iboe, Forcados, Bonny Light and Escravos have all been recently affected.
Nigeria's minister of oil for state, Emmanuel Kachikwu said Monday the country's oil production has declined to 1.4 million b/d from around 2.2 million b/d at the beginning of the year due to the wave of attacks on production facilities in the Niger Delta.
Kachikwu told lawmakers of the House of Representatives that the nearly 40% drop in oil production severely affected government revenue, which made it impossible to continue to fund the subsidy on imported gasoline, according to reports on state television.
"Because of the incessant attacks and disruption of production in the Niger Delta, as I talk to you now, we are now producing about 1.4 million b/d," Kachikwu said speaking at the House of Representatives in Abuja. "We were at 2.2 million b/d but we have lost 800,000 barrels."
PRODUCTION OUTAGES
Forcados production has been down since February this year after a sabotage on a subsea export pipeline, and repairs on this pipeline are unlikely to be completed until at least July, according to traders.
Meanwhile, Bonny Light and Escravos production have been impacted in the last two weeks due to further attacks.
Nigeria's largest and most popular crude export grade, Qua Iboe, is also on force majeure due to a technical problem on the pipeline a week ago, which means more than one-third of the country's production has now been affected.
This could not have come at a worse time for Nigeria, whose economy is already crippled by low oil prices and a lack of foreign exchange in the country.
Oil exports account for around 80% of the Nigerian government revenue and about 90% of its foreign exchange earnings.
"Nigerian output outages are part of a wider problem," Ehsan Ul-Haq, principal consultant at KBC said. "Lower oil revenues are leading to the breakdown of the social support system and more attacks by rebels."
Analysts said they expect a short- to medium-term impact on output of around six months. But the manner in which the Nigerian military responds to this threat will ultimately be key.
Dolapo Oni, head of energy research at Ecobank, said this trend was unfortunately expected after last year's election victory of President Muhammadu Buhari against Goodluck Jonathan, who comes from this oil rich region.
"Now I do not think it is a trend that will remain for a long time. They will provoke a heavy-handed response from the government, which if not properly handled could further alienate the Niger Delta region from the center," Oni added.
"I expect a short- to medium-term impact on output. However, I think they have succeeded in unsettling some of the oil companies and these have evacuated a lot of staff in the region," Oni said.
But some analysts have remained wary that military confrontation would lead to an immediate solution.
"The government has issued orders to the military to deal decisively with the militants. However, we have gone through that route before," Adeola Adenikinju, an oil analyst and professor at the University of Ibadan said.
"My outlook is that if there is recourse to the military option, and then the risks, uncertainty and the costs of operation in the Niger Delta may continue to escalate in the short to medium term," he said.
MILITARY RESPONSE
Nigeria's military high command have already responded by arresting some rebels believed to be members of the new Niger Delta militant group, the military said Monday.
"Let me assure you that the military will continue to do its best to guard strategic facilities and provide security to lives and property," a military spokesman said in a statement.
Militants also bombed, on May 13, Chevron's Makaraba oil pipeline, which cut another 25,000 b/d output last Friday, according to sources. Chevron has declined to comment on the latest attack.
Militant unrest in the Niger Delta in 2006-2009 cut Nigeria's oil production by more than a quarter to around 1.6 million b/d before a government amnesty helped to restore relative peace to the region and allowed output from the West African country to rebound.
"Genuine grievances must be addressed, the pipeline communities and other stakeholders must be brought to negotiating table, there must be increasing use of technology for preventive and remedial measures," Adenikinju said. "I also feel the Amnesty conditions could be negotiated and save the country the costs of military engagement," he said.
But other analysts said the government will have to find a right balance of military action and political maneuvering.
"If the government commences with extensive deliberations and discussions with the communities, leaders and region, followed by a careful increase of security presence in the region, they might minimize the risk of giving the militants what they want," added Oni.
Analysts said one key difference in the attacks seen in the last few months has been the focus by militants on destroying oil infrastructure rather than siphoning crude oil, which was previously more popular.
The threat to Nigerian oil output in the short term could be further exacerbated after Nigerian senior oil workers' union Pengassan said last week it might be forced to direct its members to withdraw from oil fields and production platform if the security situation in the Niger Delta worsened.
Pengassan's move came on the heels of a warning by the Niger Delta Avengers, which issued a two-week ultimatum last week to oil firms operating in the Niger Delta to close down their operation and evacuate their staff or face further attacks.
"While we leave security issues to the government to deal with, the safety of all oil workers is our priority. We are evaluating all threats currently and shall take the appropriate actions when necessary," union official Lumumba Okugbawa said in a statement.
